CMBS Becomes More Attractive As Fannie and Freddie Restrict Lending

CMBS Lenders Offer Lower Rates, Extended Interest-Only Options for Multifamily Borrowers

Fannie Mae and Freddie Mac have been purchasing multifamily loans at a record pace this year, but, in the last month or so, sought to slow down their purchasing velocity by increasing spreads and adding additional restrictions for certain kinds of borrowers. The decreasing attractiveness of agency financing coincided with a drop in overall interest rates, making CMBS loans significantly more affordable for multifamily investors looking for fixed-rate debt.

However, this trend may not go on for long, as the FHFA recently announced that Fannie and Freddie will be able to purchase $100 billion in loans each ($200 billion overall) between Q4 2019 and Q4 2020. For 2019, the FHFA had originally set a maximum of $35 billion in multifamily loan purchases (each) for Fannie and Freddie; many types of loans, however, were exempted from this calculation, including all small-balance, green, and affordable products. In contrast, the new purchase caps have no exceptions, and, in addition, mandate that 37.5% of each agency's loans are provided for affordable properties.

Fannie and Freddie, Having Exceeded Expectations, Pulled Back During Q3 2019

Over the last few weeks, most believed that the Federal Housing Finance Agency (FHFA), which regulates Fannie and Freddie, wanted to see less overall loan volume for the agencies in the coming months and years. Agency lenders believed Fannie and Freddie would like to stay in line with 2018’s numbers ($77.5 billion for Freddie and $65.4 billion for Fannie). Their combined 2018 total of more than $140 billion in loan purchases is a 250% increase from 2014 and has lead to some private (non-agency) lenders complaining that it’s difficult to compete.

At the end of Q2 2019, Freddie purchased $38.6 billion in multifamily loans, a 14% increase from the $34 billion it had purchased at that point in 2018. Likewise, at the end of Q2 2019, Fannie purchased $39.2 billion in multifamily loans, a 23% spike from the $31.8 billion it had purchased at that point last year. Starting about a month ago, Fannie and Freddie each started widening spreads, likely as a result of these outsized numbers. Fannie Mae increased pricing by up to 100 bps for many of its mortgage products, while Freddie increased pricing by 50 bps for many of its loans.

CMBS Rates Fall As Agency Rates Rise (And Other CMBS Perks)

As of late August, most CMBS lenders offered 75% LTV loans at 250 basis points over the swap rate (typically coming to around 4.0%), while agency lenders offered 70% LTV financing at 260 basis points over the swap rate, (usually coming to approximately 4.1%). That’s a significant shift, since, for much of this year, agency loans were meaningfully less expensive than CMBS financing. However, borrowers will have to see how the new FHFA announcement will impact agency loan rates in Q4 2019, though with the recent cap increase, they are likely to fall, reducing the price gap between CMBS and agency debt.

While it's impossible to predict future interest rates, it's still important to note that CMBS loans have other, meaningful advantages over Fannie and Freddie multifamily debt– at least for some kinds of borrowers. For one, conduit lenders are significantly more lenient when it comes to borrower requirements; while the agencies typically require borrowers to have a net worth of at least 100% of the loan amount, CMBS shops usually don’t have hard and fast net worth requirements. Plus, conduit lenders generally offer longer interest-only (I/O) periods than the agencies.

In addition, conduits may be more willing to overlook past bankruptcies or legal issues than Fannie or Freddie. Conduit loans are also more generous when it comes to cash-out refinancing; while certain agency products do offer cash out, many do not-- and those that do often have restrictive rules involving it.