Agency Debt is More Expensive, While Multifamily Property Prices are Still Skyrocketing  

This week, sat down with Geoff Platt, Vice President at Arbor Realty Trust, a major agency and HUD/FHA multifamily lender, to discuss trends regarding Fannie Mae and Freddie Mac multifamily financing, as well as other important trends in the multifamily industry. In this comprehensive interview, we discuss subjects including:

  • Fannie and Freddie’s new caps and how they will impact agency borrowers
  • The skyrocketing price of multifamily properties, even in secondary markets
  • Fannie Mae Small Loans and Freddie Mac Small Balance Loans
  • The impact of the potential privatization of Fannie and Freddie
  • The impact of Fannie and Freddie’s new push for more affordable properties
  • HUD multifamily loans vs. agency financing
  • The importance of personal relationships in the multifamily financing industry
Arbor is headquartered in Uniondale, New York, but lends to multifamily borrowers across the country. In 2018, the company originated $3.3 billion in Fannie Mae multifamily financing, and $1.5 billion in Freddie Mac multifamily financing for a total of $4.51 billion in agency loan originations. 

Hi, Geoff. Thank you so much for taking the time to sit down with me today and talk about the multifamily lending business. To start out, why don't you tell us a little bit about yourself and what you do?

I work for an agency lender, Arbor Realty Trust, and have worked there for about 9.5 years. Arbor is a publicly-traded REIT and a direct lender for Fannie Mae, Freddie Mac, and HUD. We also offer CMBS/bridge loans, as well as our single-family rental portfolio loan product. Our primary focus is on financing multifamily properties nationwide.

Right now, what do you think are the most important or impactful trends in multifamily lending?

Personally, I'm more focused on agency lending; Fannie, Freddie, and HUD, so I can speak to that in detail. All the changes in the last few months really threw us for a loop; the FHFA just reissued caps, which has provided with some clarification. The entire Fannie and Freddie multifamily lending process was kind of in limbo for a few months, so people didn't quite know what was going on.

The main concern in regards to multifamily financing is that the landscape is evolving. We're at a crux; Fannie and Freddie are the gorillas in the room; they have been since 2008 or 2009.

We're not necessarily nearing another crisis, but we are approaching another hurdle. If Fannie and Freddie go private, will other private lenders fill in the gap? Will Fannie and Freddie pull back again soon?

These are important questions to consider; especially since Fannie and Freddie literally pulled out of the market for two months this year. For the months of August and September, we barely had a single deal get through the application process. In essence, they turned off the spigot, tripled spreads, and pretty much turned away business.

With the new caps issued, things have gone back to normal, at least somewhat, but credit standards have tightened significantly. People still aren't sure of what lies ahead for 2020. Fannie Mae claims things will reset in November, but personally, I don't tend to believe things will reset to the way they were.

In my opinion, credit standards are here to stay, which, unfortunately, reduces fluidity in the market. The main reason why the FHFA actually reissued those caps is the strong demand for affordable housing. From our perspective, Arbor is already the number one provider of affordable property financing (or close), so this doesn't impact us. However, in a general sense, things are up in the air. Will things still stay as tight credit-wise? We're still not sure.

For example, in early 2019, for a solid deal with a qualified borrower and a good story, we were getting several years of interest-only financing and a good pricing waiver. Similar deals today are not getting the same feedback.

Aside from multifamily financing, what would you say are the most important or impactful trends in the multifamily industry as a whole?

I can speak to this from personal experience, as I also invest in multifamily on my own. People in the New York tri-state area are basically priced out for a number of reasons. Prices have gone up so much there that there's nothing to buy. Money has moved out of the city and to other areas, like South Florida, North Carolina, South Carolina, and Texas. Even in these areas, the prices are skyrocketing; properties that used to be priced at $80,000-$90,000 a door are now being priced at $150,000 a door.

People are even being priced out of deals in working-class areas like North Miami, where workforce housing is trading at a five cap (a 5% cap rate), which simply doesn't add up. I get the sense that we're at the top of the market here. I keep hearing clients say, "let me know if you hear of a deal that's off-market." That alone is a significant indicator of how prices are today-- particularly since I usually have nothing to tell them.

When a client is interested in buying something in this market, I check their numbers to see if it makes sense-- since there are a lot of false hopes among borrowers right now.

One of your main specialties is agency lending. In your opinion, why have agency loans become so popular among multifamily borrowers? Specifically, why are the Fannie Small and Freddie SBL programs so popular?

These programs are only popular for certain types of borrowers in specific markets. Most times, these small agency loans are the only product out there offering non-recourse financing with a 30-year amortization.

In markets like New York and California, local banks will provide better rates. However, in secondary or tertiary markets in places like Texas, the Midwest, or the Carolinas, in nine out of ten scenarios, a borrower will choose an agency lender rather than a local bank. With a bank, they'll generally get a full-recourse loan with a 20-25 year amortization, so agency debt is a lot more favorable.

Do you see Fannie and Freddie's small loan programs expanding in the upcoming year?

I don't see them expanding the programs. At this point, with the caps and the FHFA mandates, Fannie and Freddie are only looking to meet those affordable guidelines. They don't care if it's a small loan or a conventional loan. In essence, I don't think there's necessarily a drive to expand the small loan products among Freddie Mac or Fannie Mae at present.

If you think about it, agency lenders (including Arbor, but also players like Walker & Dunlop and Greystone) did a tremendous amount of small-balance lending business in 2010, and most of these loans had 10-year loan terms. I'd be curious to see what a lot of the loan maturities are; I imagine a lot of them will be maturing between 2019 to 2022 unless most of those loans have been refinanced already.

How do you think Fannie and Freddie's new lending caps for Q4 2019 to Q4 2020 ($100 billion each) will impact multifamily borrowers? How might they impact the multifamily market as a whole?

Well, the agencies may be tightening up, and if they do, we're prepared. Arbor has created a private label platform, which walks and talks like agency debt, and sizes loans like the agencies. It's backed by CMBS and acts as a fail-safe for our clients. For example, if a deal falls out due to increasingly strict agency standards, we won't kick a client to the curb. Instead, we'll refer them to this, as we can typically get them equal or greater loan proceeds.

While this product is backed by CMBS, borrowers don't have to worry about external servicing constraints; Arbor services everything that we originate, so we can provide personalized service throughout the borrower's entire journey.

Aside from Arbor's strategy, if the agencies continue to tighten up, I think we'll see a lot of lending business being diverted to local banks and CMBS lenders.

What do you think about the requirement that 37.5% of all agency loans purchased between Q4 2019 to Q4 2020 must support mission-driven affordable housing?

This just has to do with the lenders; in fact, more deals than you might think qualify as "affordable," and it's not just Section 8 properties. In fact, to qualify for Mission-Driven financing, your property typically just needs to offer units at 80% AMI (Area Median Income) or less, so it's very easy to qualify. For instance, in a city like Los Angeles, 80% of AMI is not that low. A lot of properties will automatically hit this. Of course, you can get additional benefits if 30% of the units are at 60% AMI or less-- basically, you can ask Fannie or Freddie for an additional discount.

Will these changes incentivize investors/borrowers to create more lower-priced units?

Right now, this will not drive borrowers to do anything special. There's not that much of an incentive; if you're a borrower you don't get anything out of it. However, this could all change; maybe borrowers will be incentivized to create more affordable units if the agencies give real pricing discounts (they will reassess this in January). Perhaps the agencies will even increase the share of affordable loans they provide to 50% of overall volume-- we just don’t know yet.

Fannie and Freddie can do things very abruptly; as I mentioned, they pulled their entire pricing grid earlier this year. They had, and still have discounts for affordable small properties; however, it's much harder for market-rate borrowers who would have been able to qualify for an affordable deal to do so. For instance, a deal that would have been priced at 4.25% several months ago would now be priced around 5%. People were hurt very badly, especially small loan borrowers with a B or C class properties in medium or large markets. They do provide a small discount for properties with units at or below 80% AMI, but it's 5bps, which, in practice, has no impact.

What do you think about the re-privatization of Fannie and Freddie? How might it impact borrowers? Do you think it will lead to an increase or decrease in rates?

If Fannie and Freddie go private, their implicit government guarantee will disappear and they'll demand more profits. Specifically, traders will demand high returns and will want Fannie and Freddie to move toward taking on only investment-grade debt. Since their implied government backing will be gone, traders won't buy their bonds at low spreads; instead, they'll want higher profits to compensate for their increased risk.

Those wider spreads will pretty much guarantee that people will go to banks; since banks lend off their balance sheets, they can offer a loan at any rate they want. If this happens, the agencies may shrink their profits, eliminate some lenders, and focus only on specific markets. It's a scary thought, but I don't think it will happen.

Arbor also specializes in HUD multifamily loans; are there any interesting trends involving HUD's multifamily programs that you'd like to share?

Unlike agency loans, HUD is a government-insured loan, so that's not going anywhere. When compared to agency debt, HUD loans have much more attractive pricing and much more attractive terms, but there's always a price to pay for that. In this situation, the price is timing, since these loans take longer to close, and money, since these loans are more expensive to close. For instance, while a Fannie Mae or Freddie Mac Small Loan usually costs $15,000 to $20,000 to close, a HUD loan could cost between $30,000 and $40,000 to close.

What is the number one thing that multifamily borrowers should know before taking out a loan?

I can't stress enough the importance of personal relationships in this industry. Some very smart people believe personal relationships will likely fade as technology begins to take over more-- and there may be an element of truth there. However, there is something to be said for one-on-one relationships; I can't say enough how many times I've heard from clients that they felt like I was a partner in the deal; that's how invested I was in the process.

It's also essential to be careful when shopping for the terms of a loan. For instance, one lender may get you a tiny interest-rate reduction, but you may find that the lender is not helpful; perhaps they won't be there to answer the phone when you need them. In that way, it's a relationship game, especially when you hit a roadblock. In contrast, a good lender will be there to hold your hand and guide you through the entire underwriting process. No matter how experienced you are, going through the borrowing process is a pain unless you have someone to go through it with you.