The FHFA has ordered the two companies to cut back by 10% on their multifamily loan purchases from 2012. Some lenders like Walker & Dunlop say this cap has affected their ability to originate multifamily mortgages.
The share of loans sold to the two government-sponsored enterprises for them to securitize could fall to a level which hasn’t been seen in some time, according to Kroll Bond Rating Agency.
At the peak of the market in 2007, the conduit share of $36 billion in securitized multifamily originations was over 78%. Now, the GSEs dominate this business with a share over 95%, Kroll says.
This has helped to accelerate the pace of conduit lenders back into the multifamily space, says Bob Barolak, co-chief operating officer of Greystone, a multifamily mortgage banker. But it is not the only reason commercial mortgage-backed securities firms are again doing these loans.
Going forward, CMBS will continue to regain market share in the multifamily sector. Back in 2005 and 2006, the CMBS business was driving the agencies in their pricing policies for multifamily loans as well as affecting the lending standards, he says.
“The force that was CMBS will come back, no doubt about it,” Barolak says, adding that he is confident that the conduit lenders and other participants are more prudent today than they were during the boom.
A number of them will remain on the more prudent side. But the way conduit lenders minimize their risk is not through having more prudent underwriting, it is through doing more frequent securitizations, he says. That is why there will be more conduit lending in 2014.
Conduit lenders use the treasury markets to hedge their products while aggregating, and when there is a disconnect and they have a large position on the balance sheet, that is when they get hurt the worst.
Besides multifamily properties, Greystone finances skilled nursing properties and seniors housing properties. The company is predominantly Federal Housing Administration as well as Fannie Mae and Freddie Mac lenders.
Among commercial and multifamily lenders, life companies and banks are the least sensitive to interest rate movements mostly because they lend for their own balance sheet and thus can think about the rate environment in broader periods of time, Barolak explains.
On the other hand, Fannie Mae and Freddie Mac are highly sensitive to rising rates. The two government-sponsored enterprises had an advantage over the conduit business through June, when rates started rise as investors believed the start of the taper was near.
In 2014, there will be a slow uptick in long-term rates and because of this, banks and life companies will retain a competitive advantage. But there will still be plenty of demand, plenty of volume for the conduits and GSEs (within their regulatory cap).
Greystone’s volume the past three years was predominantly from refinance (similar to the residential business). Now the company is starting to see more requests for acquisition financing, Barolak says.
The growth in acquisition financing has several causes, including people putting their buildings on the market for sale and because real estate investment trusts and other investors have been using cash-on-hand to make the initial purchase but are now seeking financing and put the cash back into the bank.
Still, 10-year conduit deals done starting in 2004 and running through 2006 are starting to come due and those loans will need to be refinanced; that will be true especially in 2015 and 2016, he says.
Greystone is developing new sources of financing, which it has been doing independent of the FHFA moves, Barolak says. Among those sources are pension funds and conduit lenders. The latter is not because of the FHFA caps, as Kroll as postulated, but because Greystone felt its clients would get more competitive quotes from conduits and it could lose its customer base if it wasn’t able to be in this space itself.
Another trend to look for in 2014 in the commercial space is financing for green properties. These include tax credits, especially in California where the state required affordable housing to meet certain green standards to obtain this kind of financing, says Tony Liou, president of Partner Energy, a consulting firm.
Another government loan which has incentives to meet sustainability goals is the Small Business Administration’s 504 program. By meeting the energy goals, there is a higher limit of $5 million per project.
Financing to turn a property sustainable is also available, Liou says.
Even Fannie Mae, Freddie Mac and FHA have programs to provide extra capital to implement sustainability.