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Eager to make deals on apartment properties, Fannie Mae and Freddie Mac program lenders cut their interest rates at the beginning of this year. “We want to compete aggressively for business with top sponsors,” says Hilary Provinse, vice president of multifamily at Fannie Mae.

That might have come as a surprise to housing market watchers. Federal officials have set tight limits on how much Fannie Mae and Freddie Mac program lenders can lend to multifamily properties—and those limits may drop again this spring. Whatever happens, experts agree Fannie and Freddie are not likely to continue to dominate the market for multifamily finance as the economy recovers.

But the mortgage giants are still in business. Even with a federal cap on the volume of lending they can do, they need to stay competitive to lend up to their federal limit. That means that since many banks and life insurance companies cut the interest rates they offer multifamily borrowers in the second half of 2013, Fannie Mae and Freddie Mac lenders have also lowered their rates to stay competitive.

“Both Fannie Mae and Freddie Mac cut their spreads considerably in the last 30 days,” says Mitchell Kiffe, co-head of national production for the debt and equity finance group at CBRE Capital Markets.

For a loan covering 75 percent to 80 percent of the value of an apartment property, with a debt service coverage ratio of 1.25x, agency lenders are offering spreads averaging 190 to 195 basis points over the yield on Treasury bonds. That’s 20 to 30 basis points less than the spreads on offer late last year. These spreads have compressed the most in primary markets for institutional assets and institutional buyers, but the spread compression has been felt throughout the country.

Low speed limit

Last March the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, mandated that the agencies lower their volume of multifamily loans by 10 percent for 2013. Fannie and Freddie accomplished this by making their loan products just slightly less attractive.

“They were adjusting the business volume through pricing,” says Eileen Grey, associate vice president for multifamily with the Mortgage Bankers Association, an industry trade group.

Fannie Mae and Freddie Mac are still the leading sources of multifamily capital, even with the reduction in volume, and they still need to attract a significant number of multifamily borrowers. Even with the cap, 2013 was the second biggest year on record for Fannie Mae and Freddie Mac’s multifamily programs aside from 2012. Fannie Mae reported $28.8 billion in multifamily loans in 2013. Freddie Mac reported $25.9 billion. “That’s still a tremendous amount of volume,” says MBA’s Grey.

Fannie and Real estate experts are also hopeful that FHFA may be less harsh in forcing the market for multifamily loans back into the balance that held before the crisis. “Their share of the market went down last year and it will continue to go down,” says CBRE’s Kiffe. “Their market share would have gone down even without regulatory intervention.”

FHFA has not yet issued the scorecard of goals that it expects Fannie Mae and Freddie Mac to achieve in 2014. In January, the Senate confirmed a new leader for FHFA: former Congressman Mel Watts. Some experts are hopeful that his leadership will be good for the mortgage finance business. “We are certainly excited about Mel Watts’ appointment,” says Grey.

Congress may also finally pronounce judgment on Fannie Mae and Freddie Mac in 2014, if financial reform legislation gets passed. The U.S. Senate has been working on a bi-partisan proposal that would preserve many aspects of the current system that seem to work, though the outlook for the passage of such a bill is still unclear.


This article was republished with permission from National Real Estate Investor.