Capital Corner: May Agency Update

The Agencies are becoming more and more aggressive, loosening underwriting standards, and lowering pricing, as the multifamily market across all property types continues to outperform. They are equally active on acquisition and refinancing transactions, pressuring life companies, banks, and debt funds to sharpen their pencils and become more creative to win deals.

FHA/HUD: $20B transaction queue tests timelines
The underwriting queue remains the most pressing issue for FHA multifamily. Due to the significant increase in transaction volume, the timeline of the queue has continued to expand. We do, however, expect the queue to begin to compress as FHA works through its sizable pipeline and new submissions return to a more normal pace.

FHA is committed to assessing various options to assist in minimizing the impact of the queue, including relying more on contract underwriting assistance. Fortunately, once a deal is removed from the queue and assigned to an underwriter the response times from FHA have been very favorable. As anticipated, FHA multifamily loan volume is on pace for a record-shattering year, with over $20/B of committed and closed transactions YTD, compared to just under $22/B for all of FY 2020. This pace results in a total estimated 2021 transaction volume at just over $34/B. FHA rates remain in the 2.50%-2.60% range for refinance transactions (223f) and roughly 3.25%-3.30% for new construction/permanent deals (221d4).

Freddie Mac: Expect the return of sidelined products
As we move towards returning to pre-pandemic life, we have seen Freddie Mac begin to loosen up restrictions placed at the beginning of the pandemic. Debt service reserves are being waived more frequently, and cash-out refinances have resumed, all while seeing the lowest spreads issued in over a year. In the upcoming months, we anticipate the return of products that were sidelined last year, with a continued focus on collections and leasing. Freddie Mac’s A2 bonds continue to defy market levels. With historical levels around 50 bps, we are now in the third straight week at just 14 bps. Borrowers will notice much-improved pricing and flexibility on Freddie Mac quotes going forward.

Fannie Mae: Robust Q1 loan volume leads to reduced spreads
In April Fannie released their 2021 Q1 loan volume. Loan originations for the year were $21.5B versus $14.2B for the same quarter in 2020. This robust start to the year has largely been due to the ongoing record low-interest-rate environment. And with the 10yr Treasury rate remaining bound between 1.55% and 1.75% over the last month, rates continue to remain low, and demand for Fannie debt continues to be strong. At the end of April Fannie reduced spreads on loans under $6M and 65% LTV, making them even more competitive in the small loan space.

Fannie continues to be most competitive on fixed-rate debt with loan terms of 10-12 years. And transactions with high affordability components can expect to see significant discounts to already low rates. As the US continues to make strides toward a post-pandemic world, Fannie is beginning to open the door on programs that have been largely off limits for the better part of a year. Streamlined rate locks and nearly stabilized properties can be entertained for deals in strong markets or with experienced sponsors. Both of which can be valuable tools in reducing our client’s interest rate risk, and capturing the full benefits of the current rate environment.

Read our recent insights on life company lending.

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