MBA CREF 2024: 5 Questions With Freddie Mac’s Kevin Palmer

The comments have been edited for length and clarity.

Commercial Observer: Are you worried about the state of the market today, and how the multifamily sector will be affected in 2024 if interest rates don’t come down to the levels expected? 

Kevin Palmer: 2023 was a bumpy market, and I would expect we’re going to continue to see bumpiness in the market. We’ve got a decent amount of headwinds that we’ve seen and we’re continuing to see in 2024, and higher interest rates are one of those. We’ve also got a lot of maturities happening, and the combination of those two is something that we’re watching really closely.

At the same time, the multifamily market has been pretty resilient, relatively speaking. The fundamentals are still good. From an occupancy perspective it’s still pretty strong, and the unemployment market in the economy remains pretty good. Just a couple of weeks back when I was at the National Multifamily Housing Council talking with a lot of the borrowers, it seems like there’s a lot of capital continuing to be in this space that’s ready to be deployed, and I think that helps put a floor on the issues that are out there. The other thing is what I call the Freddie factor, which is the fact that Freddie Mac will continue to be there from a countercyclical perspective as a constant provider for that liquidity in this market to help create stability in this important market as we continue to provide that funding needed for affordable housing.

Many U.S. markets in the Sun Belt are now facing oversupply issues with new rental properties coming online this year. How do you see this dynamic affecting the multifamily market?

Supply is another headwind that we’ll face in 2024, specifically with the Sun Belt market and Mountain West regions. There’s going to be a lot of pressure there from new supply that is going to put downward pressure on rents. But if you take even just a half a step back, so far we’ve seen nationally good continued demand for new housing and the supply that has been delivered has been able to be absorbed pretty well. We still see that overall rents nationally will be up in 2024, but every market is a little different so you’re going to see variation. Then, take another step back from a long-term perspective, and you see a multi-decade high of new supply being delivered in 2024, and if you look at 2025 and beyond, the supply level goes down quite a bit. 

From a housing availability perspective, we still need more housing to come online and we’re looking at how we can help support a more consistent supply of housing and rentals to be able to come online. From a demographics perspective there’s going to be a lot of new household formations that are going to happen over the next couple of years, and there’s a need to support additional supply to be able to preserve affordability in this market.

How is the pullback of many banks focused on CRE lending impacting Freddie Mac’s role in the market?

We saw that in 2023 because even though our volume was down in 2023 relative to 2022 — we were just under $50 billion — the size of Freddie Mac in the market was bigger, our footprint was larger and we will probably see something similar in 2024. I think that reflects the whole countercyclical nature of Freddie Mac that when you have some liquidity providers pull back, we’re able to kind of step in and fill that gap. 

There are certain areas that we’re watching closely. Construction financing was a key area that banks have and continue to provide financing, and we need that to continue on to be able to help support that future supply. We have programs such as our Forward program that helps provide construction lenders more confidence as we’re a takeout for that product. Once that property has been built and sufficiently stabilized, we provide the financing afterwards. And so we’re hoping that with that program we can continue to see good liquidity in that construction market, to be able to ensure that the market stays more stable.

Last November you tightened underwriting requirements in an attempt to ensure all loan documents are delivered directly from borrowers to Freddie Mac lenders and not passed to a broker. How is this guide update helping in reinforcing your seller relationships?

In November of last year, we did update our guide to ensure a proper chain of custody and documentation. With Freddie Mac, we fully underwrite the loans before we fund those and it does reinforce that relationship that we have. We work directly with our Optigo lenders and they may work with other third parties to be able to get that overall work done. This policy helps reinforce that the integrity of the source documents that we use to underwrite the loans is critical and we are relying on our Optigo lenders to be able to provide that to us.

We have seen recently a pool of smaller nonperforming loans for sale. Overall, what are defaults looking like this past year versus other crises like COVID and the GFC? 

We are seeing certain areas of distress. Overall, our portfolio continues to perform pretty well and our last reported delinquency level was just below 30 basis points, but I would expect that there will be continued pressure on performance. There are certain areas of our portfolio such as senior housing, or our small loans program, or floating-rate loans that we’re watching very closely as they have underperformed relative to the rest of our portfolio. But we’ve got a great asset management team at Freddie Mac that is proactively watching the issues that may come out and looking for ways to be able to help work with those borrowers to be able to keep the performance strong. Additionally, as we see broader distress in the industry, Freddie Mac can really roll up our sleeves and work on a lender-by-lender or borrower-by-borrower basis to provide the customized solutions needed to be able to help support and improve performance overall.

Andrew Coen can be reached at acoen@commercialobserver.com