On July 31st, the Federal Reserve lowered interest rates by 0.25% to 2.25%, the first interest rate cut since 2008. In addition, the 10-year U.S. Treasury yield has also fallen sharply, down to 1.7%, from about 2% just a few weeks ago, and down from about 2.7% at the beginning of this year. And, on August 6th, Freddie Mac Multifamily announced that it was increasing rates and adding additional restrictions for its Small Balance Loan (SBL) program, amid overall rate increases for both Fannie’s and Freddie’s multifamily lending programs.
I sat down with Janover Ventures’ Camilo Padron to discuss how these changes will affect the multifamily industry, what borrowers should expect in the coming weeks and months, and how Fannie and Freddie’s new policies may impact the market.
How will the Fed lowering rates impact the multifamily finance industry
I think that more players are going to be able to compete on deals, including CMBS, HUD, and balance sheet lenders. For those who qualify, agency loans (Fannie and Freddie) were the clear choice a few weeks ago, but with their recent interest rate hikes, borrowers are getting interested in other types of loans. As a result, we might see agency lenders being beaten out by non traditional financing methods.
In the end, it’s all what the borrower wants; different loan products are best for different client investment strategies, particularly depending on their short and long-term goals and their intended holding period. For instance, if a borrower wants a 10-year, interest-only loan with a 30-year amortization, they can only get that from CMBS, but if they’re patient, well-qualified and want a super-low interest rate, HUD will generally be the best place to go. Overall, I think it’s going to be fun to see how lenders compete as the market continues to change.
What else can you tell us about HUD and CMBS when compared to agency loans?
Right now, CMBS leverage is slightly less but rates are lower, while HUD refinancing offers the lowest rates you can get today. While it’s harder to qualify for HUD loans, we’ve been able to get our clients over HUD’s hurdles. And, with all the new changes to Freddie’s SBL program, it’s likely that some alternate players are going to come in and take some of that business. In the end, HUD and CMBS rates are still very low. Of course, we don’t how long this will last, but it’s pretty great for now.
Do you think these changes are going to impact overall transaction volume?
It depends; for the average borrower, interest rates are still pretty low, even from the small balance side. In essence, it’s cheap to get debt right now, and this might increase overall transaction volume, but only time will tell.
So, overall interest rates fell, but Fannie and Freddie actually raised their rates, especially for the SBL program. Why did this happen?
Interest rates did fall, but this isn’t necessarily correlated to Fannie’s and Freddie’s rate increases. The real reason is likely because the agencies really exceeded their goals this year, and are now looking to slow down originations. In essence, Freddie and Fannie have their own regulations and program holdbacks they need to account for and don’t want to expand too quickly.
What were the biggest changes impacting the Freddie Mac SBL program?
Overall, interest rates only increased a little bit-- in many cases, the SBL program is still a great choice. However, Freddie did add some additional restrictions, which will definitely impact the availability of the program for certain borrowers.
Some of the most important changes include:
- Less flexibility with DCR/LTV
- 45-day application deadline
- Stricter compliance policies for interest-only loans
- Smaller affordability discounts
- The SBL program will no longer offer loans less than $1 million
Overall, Freddie wants cleaner deals, stronger cash flow, higher occupancies, and wants to avoid financing properties in higher-crime areas.
How will the new 45-day application deadline impact SBL borrowers?
It shouldn’t have too much of an impact, it just means that borrowers will need to be smart and responsible to make sure the due diligence process proceeds in a timely fashion. It also incentivizes agency lenders to get things in even faster, especially with Fannie Mae loans since most rates aren’t fixed.