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Fannie Mae and Freddie Mac lenders are fighting hard to compete with banks to make loans on apartment properties.

“We absolutely see the competition from banks continuing and heating up,” says Hilary Provinse, Fannie Mae’s vice president for multifamily customer engagement.

Banks are willing to make permanent loans to apartment properties at rock bottom interest rates.

To compete, Fannie Mae and Freddie Mac lenders are offering the lowest rates they can, plus faster service. But the competition is still cutting into the volume of Fannie Mae’s multifamily lending business. Last year federal regulators ordered Fannie and Freddie to limit their volume of lending to apartment properties, arguing that agency lenders were too dominant in the multifamily sector. Federal regulators are less demanding this year, but competitive pressure has picked up where the regulators left off.

Less volume for Fannie Mae

After the financial crash, when capital from conduits lenders and banks was less available, Fannie Mae and Freddie Mac dominated the apartment lending business. But the volume of multifamily financing from agency lenders is now shrinking due to increased competition. From the beginning of the year to the end of May, Fannie Mae’s multifamily lending business totaled just $6.0 billion. That’s less than half the $13.6 billion in multifamily loans that Fannie Mae closed and sold to bond investors during the same period last year. “That is obviously a significant decrease year-over-year,” says Provinse.

The shrinking volume of multifamily loans made by Fannie Mae and Freddie Mac does have a surprising side effect—helping to lower interest rates for their apartment loans. Fannie and Freddie now have fewer multifamily loans to turn into bonds. That means bond investors must compete for the limited supply, paying higher prices and accepting lower yields. Typical yield spreads for Fannie Mae 10-year delegated underwriting service bonds have dropped by more than 20 basis points since the beginning of the year, with more than half of that decrease coming after the end of the first quarter, according to Fannie Mae.

Multifamily experts put the current rates typically offered by agency lenders for permanent loans at less than 175 basis points over swaps—lower than typical conduit interest rates, though higher than typical bank interest rates. The interest rates offered by Fannie Mae apartment lenders have dropped by about 50 basis points on average, experts say. That includes the effect of lower bonds yields, plus the effect of Fannie Mae and its lenders squeezing their own fees. “We are pricing very competitively,” says Provinse.

Trying to compete

To help them compete, Fannie Mae lenders are also speeding up the process of taking out a Fannie Mae loan. That includes letting the lenders who originate Fannie Mae program loans take on more of the work. At the end of June, Fannie Mae will role out rules to expand its delegated underwriting service program. “It speeds up the process because lenders don’t have to talk to us for as much,” says Provinse.

Fannie Mae lenders can now also provide “soft quotes,” which don’t require as much information as a strong quote. The new process should be especially useful for borrowers looking for acquisition financing, in which the borrower may not have as much information about a property but needs an estimate of on an interest rate quickly. “It’s a more streamlined process,” says Province.

Scorecard surprise

Last month, the Federal Housing Finance Agency (FHFA) released its scorecard of goals for Fannie Mae and Freddie Mac.

Multifamily experts had wondered for months what federal regulators would tell Fannie Mae and Freddie Mac to do. In 2013, FHFA ordered them to cut their multifamily lending business by 10 percent. The agency now has a new director, Mel Watt, who is understood by multifamily experts to be a much less conservative overseer of the two mortgage giants. So few people in the industry expect another forced cut to Fannie and Freddie’s lending in 2014.

But some thought the scorecard would expand Fannie and Freddie’s multifamily mandate. The new scorecard keeps the overall cap on Fannie Mae and Freddie Mac’s multifamily loan originations at the same level as last year. However, several types of multifamily lending that the regulators want to encourage now don’t count towards the cap: lending to small and affordable properties that small, or those that classify as manufactured housing. Those three types of lending totaled more than $5 billion in 2013. That leaves a lot of room under the lending cap for more conventional multifamily lending.

Now that FHFA has lifted its restrictions on Fannie and Freddie’s multifamily lending, competition is cutting into their dominance of the apartment lending business. “We are seeing a return to a more normal competitive market,” says Provinse.

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