Apartment investors are getting very competitive interest rates for permanent loans from Fannie Mae and Freddie Mac lenders once again this summer.
“They are both back in the game,” says Mitchell Kiffe, senior managing director and co-head of national production for CBRE Capital Markets.
So far, 2015 has been full of changes in the race between types of lenders to make deals. For a few months this spring, the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac had to slow down, as they faced federal limits on the volume of apartment loans they could make. Conduit lenders zoomed ahead. Now the situation has reversed again. The GSEs have more capability to lend, thanks to their federal regulator. And volatility on the bond markets have driven interest rates higher for conduit lenders.
It all adds up to more choices for apartment borrowers, as GSEs and conduit lenders compete alongside banks and life companies to offer the lowest interest rates and best terms.
“It’s still a very good time to borrow money,” says Kiffe. “There is still a lot of liquidity in the mortgage markets.”
Fannie Mae and Freddie Mac lenders started the year with the lowest interest rates, roughly 180 basis points over the yield on 10-year Treasury bonds for a typical, fully- leveraged 10-year loan, according to CBRE. Conduit lenders charged slightly higher rates, with pricing of 201 to 220 basis points over the 10-year swap rate, which is generally higher by a handful of basis points than the Treasury yield.
This spring, the balance of power of shifted. Since the financial crisis, the Federal Housing Finance Agency has set some limits on the GSEs, since Fannie Mae and Freddie Mac still issue bonds backed by a government guarantee. Under these federal limits, Fannie Mae and Freddie Mae can each transact $30 billion in loans to apartment properties for 2015. The GSEs had a very busy spring, and seemed likely to hit their limits as early as this fall. To slow down, the GSEs tightened underwriting and hiked up their interest rates 40 to 50 basis points. In May, federal regulators gave the GSEs more room to lend. Many loans will not count to the GSEs lending totals, including properties in government affordable housing programs and properties that house low and moderate-income people without subsidies.
The GSEs’ interest rates are still 20 to 30 basis points higher than the beginning of the year—putting a typical interest rate at a little over 200 basis points over Treasuries, according to CBRE.
At the same time, the stock market crash in China and worries that Greece might leave the European Union have rocked the bond markets. There is still demand for commercial mortgage-backed securities, but not quite enough to smoothly absorb the growing volume of CMBS being issued—anticipated to be well over $100 billion in 2015, a new record since the financial crisis. Conduit lenders now offer interest rates 230 to 240 basis points over the swaps rate, according to CBRE.
“The recent volatility is clearly hurting CMBS,” says Kiffe.
Through all these changes, balance sheet lenders like banks and life companies continue to hold their usual positions. Banks continue to offer flexible permanent finance at fixed and floating rates. Life company lenders continue to offer very competitive interest rates for the class-A properties that they favor.
More money for multifamily
"Strong first quarter mortgage originations boosted the level of commercial and multifamily mortgage debt outstanding," said Jamie Woodwell, Mortgage Bankers Associaition's vice president of commercial real estate research.
The total amount of outstanding commercial and multifamily mortgage debt has been growing again since late 2013, when the total once again grew to more than $2.5 trillion in commercial and multifamily mortgage debt outstanding, breaking the record set in late 2008, before the global financial crisis.
"Multifamily mortgages continued to grow even more quickly than the market as a whole, with banks increasing their portfolios by $8 billion and agency and GSE portfolios and CMBS increasing their holdings by $10 billion," says Woodwell.