Why the GSEs may be pacing multifamily buying as the economy reopens

Lenders are likely to run up against fewer underwriting restrictions when selling multifamily loans to the government-sponsored enterprises this year, but they might receive less favorable pricing due to GSEs’s caps on the number of such loans they’ll purchase.

“There’s a return to pre-pandemic credit parameters,” said Debby Jenkins, executive vice president of Freddie Mac’s multifamily division. “Debt service reserves, and things of that nature, are being rolled back.”

DSRs have generally been discontinued and those on pre-existing loans may be phased out once their contractual obligations are fulfilled because they turned out to be scarcely used and vaccines are opening the economy back up. But a $70 billion per-GSE cap on volume this year that’s lower than 2020’s remained in place at press time, and that could limit what Freddie and its competitor, Fannie Mae, could buy this year.

So far, this year’s volume is running at a rate faster than 2020’s for both GSEs. Last year, Freddie purchased $82.5 billion in multifamily loans, and Fannie bought $76 billion. In 2021, Fannie Mae as of the first quarter already had purchased $21.5 billion in loans, up from $14.1 billion at the same time a year ago. The $14 billion Freddie bought during the first quarter of this year also was higher than the $10 billion it bought in the first quarter of 2020. Those increases occurred even before reserve requirements were rolled back in May.

That means Fannie and Freddie may be looking to make adjustments so that they have enough of an allocation to last the full year. Fannie already had made one as of the first quarter, when it temporarily increased the fees it charges to guarantee loans in order to slow volume.

“The caps are one of the bigger issues that Fannie and Freddie have to deal with right now,” said Don King, executive vice president at Walker & Dunlop.

Lenders and the Mortgage Bankers Association at deadline were reporting that pricing had generally normalized during the second quarter, in part because some of the volume between January and March came from an overhang of business from the end of 2020 that wasn’t delivered to the GSEs until the beginning of 2021.

“What we're hearing from lenders is now that the GSEs have sort of gotten back on track, they're active in the market and competing with all the other capital sources out there,” said Jamie Woodwell, a vice president at the Mortgage Bankers Association.

But pricing could still become less attractive in the months ahead. While the caps are adjustable, many mortgage professionals think the Federal Housing Finance Agency director who set them, Mark Calabria, would be reluctant to raise the limits because he’s generally lowered and set more restrictions on them during his term.

Also, while there have been more private investors in the market that can serve as alternatives to the GSEs this year than in 2020, some of those buyers also have annual limits or allocations that also could come under increasing strain as year-end approaches.

In addition, the amount of longer-term economic damage from the pandemic may not be clear until later in the year when more government contingencies related to the coronavirus could be phased out. (While DSRs have been lifted, other measures have not, such as forbearance on the GSEs multifamily loans, which, at press time, was scheduled to continue through Sept. 30.)

“I think given the strong loan volume we’ve seen, the agencies will have to potentially widen out pricing as we approach year-end,” said Shahin Yadzi, principal and managing director at George Smith Partners.

So long as there is sufficient capital available for multifamily loans in the broader market, there is justification for the current caps, which ensure the GSEs don’t crowd out private capital and remain focused on their mission. At least 50% of the loans sold under the caps must fund apartments that meet certain affordability benchmarks in 2021, as compared to 37.5% in 2020.

“There are players who outside of Fannie and Freddie have stepped up this year and provided a significant amount of liquidity and capital to the market,” said Dave Borsos, a vice president at the National Multifamily Housing Council.

The FHFA’s next moves
Although there’s skepticism about its willingness, the FHFA has maintained since November that it could adjust the caps this year, and a spokesman had confirmed at press time that guidance was still in effect.

“To ensure the enterprises continue to provide sufficient liquidity and support in the multifamily mortgage market through the economic cycle, FHFA has been and will continue to monitor the coronavirus’ impact on the multifamily mortgage market and will update the multifamily cap and mission-driven targets if adjustments are warranted,” the agency said in the press release issued when it set the 2021 caps.

The Biden administration is generally considered less inclined to shrink the GSEs’ footprint than the Trump administration, and there is a chance the FHFA may follow its lead. Calabria could even be replaced if a court case related to the independent directorship of the agency plays out the way that a similar one involving the Consumer Financial Protection Bureau did. A ruling in the FHFA directorship case was still pending at press time.

"The decision is not a foregone conclusion, although the likelihood that the court would follow the same path as it did with the CFPB is high," said Quyen Truong, a partner at Stroock & Stroock & Lavan in Washington, D.C., and a former assistant director and deputy general counsel for the Consumer Financial Protection Bureau.

But the Supreme Court could bypass the issue of whether the independent director position was constitutional or it could decide that the FHFA's framework is otherwise distinguished from the CFPB's. In the event of outcomes such as those, it's possible that the status quo would remain in place, and the current director would remain until the end of his term in 2024, unless he was removed for cause.

Even if the court's decision was one that made it possible to replace the FHFA's current director, there would be no guarantee that the process involved would be fast enough for the annual limit on the Fannie Mae and Freddie multifamily caps to be raised before year-end.

"It's likely that any major change in direction at the FHFA would take months to roll out," the attorney said.

The housing inventory crisis could also be a compelling reason for public officials to consider raising the GSEs’ multifamily caps or otherwise making them less restrictive.

“In many markets, we’re under-housed and faced with pressures as it relates to the price of lumber and materials, as well as the cost and availability of labor in the construction trades,” said John Randall, executive vice president and national production manager at Grandbridge Real Estate. “Policymakers have the ability to solve for some of that equation by not constraining the agencies’ availability of liquidity.”