As the market was happy to close the books on a challenging 2023, the new year brings with it a sense of renewal and hope for what’s to come. Part of the hope comes from the realization that interest rates have likely peaked and declined 100+bp. On October 18, 2023, the 10-year Treasury peaked at 5.00%, but it now sits at 4.002% (1/9/24). As we all know, many lenders use the Treasury indices to price their all-in interest rates, so lower Treasuries, in many cases, result in lower interest rates for our clients. Hallelujah!
Even though the Treasuries have declined, not all lenders have reduced their interest rates (yet). Many banks and credit unions are holding their pricing at 6.50% - 7.50% simply because their cost of funds is tied to borrowing from the Federal Reserve (5.25% - 5.50%) or what they pay depositors (~5.0%). Two lender groups that generally price their all-in rates directly off the Treasury indices are Life Co. lenders and Agency lenders (i.e. Fannie Mae and Freddie Mac). At Gantry, we believe Life Co lenders and Agency lenders are primed to take advantage of the 2024 marketplace.
In particular, the Agency lenders, Fannie Mae, and Freddie Mac, will provide valuable liquidity to the multifamily lending marketplace. In November, the FHFA announced their volume caps for 2024. Both, Fannie Mae, and Freddie Mac, have a 2024 annual volume cap of $70 Billion each. In 2023, the Agencies have funded ~90 Billion (combined) and are tracking to fund ~$98 Billion by the end of the year (~65% of their 2023 annual volume caps). Typically, the Agencies achieve 90% - 100% of their volume caps, so 2023 is a down year for Agency production.
With the hope that transaction velocity increases this year, Agency lenders should be well situated to capture their share of multifamily lending marketplace. In 2024, both Fannie Mae and Freddie Mac have the mandate to lend 50% of their production in loans that qualify for their affordability guidelines. The affordability guidelines compare a property’s rental rates to the Area Median Income (AMI), so Fannie Mae and Freddie Mac will be hungry to meet those mandates and will offer pricing discounts for properties that qualify as affordable in comparison to 80% of AMI.
Below are some programs or highlights regarding Agency loans.
With the expectation that short-term interest rates are coming down and interest rate CAP cost decreasing, we expect to see more borrowers take advantage of the Freddie Mac Capped Arm program. This is a loan program that offers a floating interest rate using 30-day SOFR as the index. The 30-day SOFR index will move closely with the Federal Funds rate. The benefit to this program is that a borrower maintains maximum prepayment penalty flexibility. After a 1-year lock-out, a borrower can pay off the loan with a 1% prepayment penalty or refinance with Freddie Mac and they will waive the 1% penalty.
35-year amortization schedules can be available for acquisitions and non-cash-out refinances for properties that qualify for 50%+ of the units as affordable in comparison to AMI and the LTV is no more than 70%. The 35-year amortization schedule will also be available for acquisitions and non-cash out refinances with less than 50% of the units qualifying as affordable IF the LTV is no greater than 60%.
Fannie Mae and Freddie Mac have Near Stabilization programs for properties that are leasing up towards stabilization. This program is used to fund a loan that might pay off a construction lender prior to a project reaching full stabilization. Fannie Mae’s Near Stabilization seems to be the more desirable option between the two. Fannie Mae will consider a Near Stabilization project that is at least 75% physical occupied, at least 60% economic occupied, has received all certificates of occupancy and is tracking to stabilize in 120 days.
Shorter term loan requests of 5-year and 7-year are in high demand.
Rate buydowns are still available on select transactions with Fannie Mae and Freddie Mac. A rate buydown is typically used to lower the interest rate AND increase loan proceeds since the lower rate will allow more loan proceeds since the DSCR is typically the loan amount constraint.
Interest Only payments are still available with a minimal pricing increase to the all-in rate.
The typical prepayment penalty for an Agency loan is yield maintenance (Fannie Mae) or defeasance (Freddie Mac). However, both Fannie and Freddie, will allow borrowers to price in a more flexible prepayment penalties with an interest rate premium. Freddie SBL offers step down prepayment penalties. Fannie Mae and Freddie Mac conventional loan programs also allow a borrower to pay a higher interest rate and price in some additional flexibility at the back end of the loan term. For example, a conventional 7-year fixed Fannie Mae loan term would normally have a yield maintenance prepayment penalty for the entire loan term minus 6-months, but with a rate premium of ~15bps, the prepayment penalty can be changed to 5-years of yield maintenance and the last 2-years having a 1% penalty with the last 6-months having no penalty.
It is also worth noting that Freddie Mac and Fannie Mae are scrutinizing mortgage broker/mortgage banker originated loans at present. This increased scrutiny stems from an on-going Freddie Mac investigation of a mortgage broker named Meridian Capital. Freddie is calling into question some information provided by Meridian Capital on a specific transaction. Some market participants will suggest using a mortgage broker/mortgage banker to access the Agencies right now is a bad idea, but that narrative is largely competitors using this scenario to their advantage. The investigation will require borrowers utilizing a mortgage broker/mortgage banker to take one more step in the due diligence process.
Fannie and Freddie will require that borrowers confirm the due diligence provided did come directly from the borrower. This additional certification is instituted to protect Fannie Mae and Freddie Mac from fraudulent due diligence. It is our opinion that this additional scrutiny of due diligence only helps Gantry execute on more Agency business. Gantry has a 15+ relationship with one of the top Agency lenders in the country that ranks as the top Fannie Mae originator and the #3 Freddie Mac originator (2022 volume numbers as 2023 volumes haven’t been released yet). And Gantry happens to be the top correspondent for that Agency provider. In short, we are a trusted intermediary by the Agencies with an impeccable track record. The Agencies are worried about the unknown mortgage brokers in the industry or the mortgage brokers that don’t have impeccable track records. You will hear this over and over in our industry, relationships matter! And they matter more than ever now. Lenders are not as confident in their decision making today as they were a couple of years ago, so they look to trusted intermediaries for market knowledge and guidance.
As the largest independent mortgage banker in the U.S., we are excited to take advantage of a 2024 marketplace that will require in-depth analysis, transparency, and creative solutions. We expect to originate our fair share of Agency loans, but we will be active with all the capital sources. At Gantry, we pride ourselves on creating a marketplace of viable financing options for our clients and then navigating the loan process to a successful closing. We are looking forward to a prosperous 2024!