The regulator of Freddie Mac and Fannie Mae plans to ease annual restrictions on their apartment mortgage business to prevent a lending slowdown, according to two people familiar with the matter.
The government-controlled companies, which buy and guarantee mortgages, are on track to reach a $30 billion annual cap in their multifamily business in the third quarter. The Federal Housing Finance Agency intends to tell the companies this week how it will loosen the limits that it had set in January, the people said.
Without an easing of the restrictions, Fannie Mae and Freddie Mac could have to hold back business in the second half of the year, resulting in higher costs to borrowers and less available multifamily credit. Fannie Mae might also have to slow sales of loans to investors. The companies have begun demanding wider interest rate spreads in an attempt to reduce their pace of business.
"Our sense is that the current situation is unsustainable as the lack of market clarity will ultimately have an impact on multifamily credit availability," said Isaac Boltansky, a policy analyst at Compass Point Research & Trading.
Housing officials in the last month discussed several options for relaxing the limits, including raising the caps by $5 billion for each company, said one of the people. They have also considered broadening the criteria to make more mortgages exempt from the limit, the person said.
Lending Surge
FHFA spokeswoman Stefanie Johnson declined to comment.
Fannie Mae and Freddie Mac's apartment business surged fourfold through April from a year ago, spurred by low interest rates and demand for rental units. Freddie financed $10 billion in multifamily loans in the first quarter, trailing just behind rival Fannie with $10.4 billion, both companies have reported.
The FHFA would be in uncharted territory if it makes changes to the mortgage limits mid-year rather than in January, said Lisa Pendergast, an analyst at Jefferies Group.
"It would be unusual for them to think about raising the caps now, but on the other hand, by summer, they could hit the ceiling," she said by phone this week. "They may have to shut down origination if that happens."
Increasing Rates
Fannie Mae and Freddie Mac began tapping the brakes by boosting their costs of borrowing, which may cause business to move to private lenders, according to Willy Walker, chief executive officer at Walker & Dunlop, one of the firms' biggest multifamily lending partners.
"Freddie and Fannie got ahead of themselves, and now they're trying to temper themselves by raising their rates," Walker said.
Freddie Mac increased the cost on its 10-year mortgage four times in April, according to data from Walker & Dunlop. Freddie Mac's floating-rate loan cost 62 basis points more by the end of the month, the firm said.
Fannie Mae similarly made its loans more expensive. Spreads on its 10-year mortgage increased a total of 45 basis points from late March to the end of April.
Commercial mortgage lending is booming as demand for rental units fuels multifamily construction. Total lending surged 49% in the first quarter from last year, according to data from the Mortgage Bankers Association. Multifamily mortgages increased 71% in the same period.
Mel Watt
"Everyone in this market will do more this year," Jeffery Hayward, head of multifamily lending at Fannie Mae, said in an interview.
FHFA's plan to ease loan restrictions comes five months after its director Mel Watt signaled to Congress that he would control the expansion of the two companies. They were seized by the government in 2008 as they neared insolvency.
"The focus here is not to compete where there is adequate private sector coverage of the multifamily market," Watt told a House committee in January.
CBRE Group Inc. said last week that the firm's multifamily lending backed by the agencies has been robust. CBRE Chief Financial Officer James Groch warned during the company's April earnings call that business could taper off toward the end of the year unless the caps are raised.
"At the current pace they're likely to hit their caps before year end, which could slow things down toward the end of year unless the caps are increased," Groch said.
Private Market
A slowdown in multifamily agency mortgages would be a positive development for the private market, according to Lea Overby, an analyst at Nomura Holdings. Fannie Mae and Freddie Mac scoop up the best loans, and their expanded business has meant private buyers, primarily banks, are left picking over the leftovers, she said.
"I am excited about them hitting the cap because it means we'll have better quality CMBS," said Overby, referring to commercial mortgage backed securities.
Freddie Mac and Fannie Mae have since last year deployed new strategies to circumvent the limits. They are diverting a small number of loans into exempted categories: affordable and manufactured housing and small-balance loans.
"It is a conscious strategy of ours to grow manufactured housing and small balance loans, in response to FHFA's scorecard," said David Brickman, executive vice president of multifamily business at Freddie Mac, adding that the firm plans to boost those categories of mortgages.
Fannie Mae has similarly sought to maneuver around the volume limitations.
"'Affordable' can be defined a bunch of ways," said Fannie Mae's Hayward. "We have done much more business this year because the market needs us to provide liquidly."
