For at least a year, Fannie Mae & Freddie Mac have been considered the only game in town when it comes to multifamily residential financing. This is no longer necessarily the case.
In late 2008 and early 2009, with the lending community in turmoil as a result of the failures (or near failures) of Bear Stearns, Lehman Brothers, AIG and others, Fannie and Freddie’s implied government backing made them appear to be a safe haven in a financial world staring into the abyss.
In fact, even Fannie and Freddie went over the edge and were taken into conservatorship-making the previously implied government guarantee into a factual, bankable reality. With the federal government fully on the hook for their obligations, they became nothing more than tools of national economic policy (arguably not a tremendously different status than before their rescue). It was a laudable goal of the federal government at that time to keep the multifamily lending market functioning, and the accessibility of Fannie and Freddie financing was a key element in keeping many properties out of default.
However, by the second quarter of 2009, many institutional lenders (insurance companies, pension funds, banks of all types, etc.) had made allocations of capital that they intended to use to finance multifamily properties. For healthy portfolio lenders, this period was viewed as the first good lending opportunity in many years. Wall Street, which had been an overwhelmingly dominant force in real estate lending for the better part of a decade, was out of business, causing the portfolio lenders to believe that they would be able to make safe loans at dramatically higher spreads than had been possible for years.
There was wide divergence among these healthy portfolio lenders as to what spreads they should offer, but all agreed that rates should be dramatically higher than the Wall Street-driven lows of the heady 2005-to-2007 period, when spreads dropped into the mid-double digits over Treasuries. During the second and third quarters of 2009, Fannie and Freddie maintained a strong presence and continued lending at exceptionally low rates. Again this worked to the benefit of many multifamily owners, as the exceptionally low rates continued to prevent maturity defaults that would have resulted had the portfolio lenders’ higher spreads been the best available.
As a result of Fannie and Freddie’s excessively low spreads through the end of 2009, the portfolio lenders were unable to compete. Some dropped their spreads, but quickly found they were still not picking up any significant market share. Fannie and Freddie’s pricing was so low that they were shutting out the competition, and a significant subset stopped even quoting multifamily loan offers.
WITH THE OPENING of 2010, loan officers at many portfolio-lending institutions received mandates from senior management to increase loan originations, and multifamily financing continues to be the product of choice-although some loan officers remain hesitant to offer quotes. While there is still a divergence in spreads among portfolio lenders, a growing subset have dropped spreads to the point where the margin over Fannie and Freddie is small enough (in some cases within 50 basis points, as opposed to 200 to 250 basis points during the spring of 2009) that additional factors beyond the coupon rate should play a factor in a sophisticated borrower’s decision.
The implied-and, eventually, actual-government backing made Fannie and Freddie the most (or only) financially secure lenders in the early days of the credit crisis; but that security now exists at the whim of a federal government torn between a dysfunctional legislative body whose membership has shown itself to be primarily focused on petty partisan squabbling, and an executive office that, despite a campaign run to the contrary, is increasingly playing up the “Main Street vs. Wall Street” divide. Compelling arguments could be made from both sides as to whether those conditions augur for continued aggressiveness or an impending pullback from Fannie and Freddie-and that uncertainty is exactly the point.
No one can be sure what Fannie and Freddie will be doing 60 or 180 days from now, which makes this an important time for borrowers to be building (or rebuilding) relationships with independent portfolio lenders that are profit-motivated, market-driven and eager to regain some market share in the multifamily lending business. Throughout their chains of command, these institutions have career employees with sharp memories, and giving them an opportunity to capture business in today’s environment may sow the seeds for strong relationships for many years to come.
With the most aggressive portfolio lenders now offering 10-year multifamily loan rates below 6 percent, it is hard to see how this could be a bad path to try. Sole-sourcing is a dangerous game-especially in light of the political headwinds-and the definition of a good loan includes far more detail than merely the lowest coupon rate.
Scott A. Singer is principal of the Singer & Bassuk Organization, LLC and a member of REBNY’s Finance Committee. He writes monthly for
The Commercial Observer about finance.