Capital Corner: GSE’s finish 2021 well-positioned for strong start to 2022

Ending the fiscal fourth quarter of 2021, the government-sponsored enterprises represent a significant factor in multifamily financing, competing with other debt options on both fixed- and floating-rate business. While FHA/HUD continues to work through a long loan processing queue, our team has been working to identify portfolio refinance opportunities for existing FHA-insured properties.

Moving into 2022, new allocations will allow the GSEs to continue to compete and be a reliable financing source for borrowers. There is some hope that the lending cap will increase, especially for the core mission-driven business, but our expectation is that their volume will be at least equal to 2021.

Freddie Mac
Business continues to be brisk at Freddie Mac with weekly new deals under application averaging $1.25 billion. We expect that to be the case for the next 30 days as Freddie continues to monitor their cap of $70 billion. With that said, Freddie’s cap is based on loans purchased from lenders, such as NorthMarq. So we expect to see spreads lowering and credit parameters loosening up by the end of October, as that business will be purchased by Freddie in 2022. We all continue to wait with bated breath on FHFA’s 2022 cap and affordability requirements for the Agencies. Talk at Freddie seems optimistic that the cap will be raised for 2022 and more loans will qualify as affordable. That in turn will lead to more aggressive pricing and underwriting for the coming year.

Fannie Mae
Recent weeks have seen Fannie Mae quoting more aggressive terms for the Structured Adjustable Rate Mortgage (SARM) product. Select transactions are receiving strike rates of 3.00% or less, and cap terms as low as three years. These enhancements result in more loan proceeds, competitive interest rates, and lower costs for the sponsor. These improvements, in combination with the ability to prepay or convert the debt to a fixed-rate loan as early as 12 months after closing, offer borrowers maximum flexibility. Please note the SARM execution is still reserved for loans over $20 million and borrowers who have experience purchasing external interest rate caps.

There has not been any significant shift in transaction activity or policies for FHA multifamily over the past 30 days. Loan processing activity remains high as FHA works through the significant pipeline that it has built during 2021. The expectation is for the queue to compress as FHA continues to work through their pipeline, but the improvement in the queue may be slower than previously expected.

With interest rates hovering near historic lows NorthMarq has successfully identified several portfolio refinance opportunities via FHA’s Interest Rate Reduction (“IRR”) program. The IRR allows borrowers with existing FHA-insured properties to reduce their interest rate to current market levels with streamlined processing. Generally, an IRR can be processed in approximately 90 days and allows current FHA borrowers to benefit from today’s low-rate environment without having to endure a full underwriting process. NorthMarq expects to identify additional IRR opportunities while interest rates remain at current lows levels.

In closing
September 30 signals the end of FHA’s 2021 fiscal year, which will likely represent a record year of transaction volume. An official update on GSE 2021 fiscal year activity should be available in the October edition of Capital Corner.