In recent months Fannie Mae and Freddie Mac have become more conservative in their underwriting practices. As a result, the two agencies — which in 2008 accounted for almost 37% of the multifamily loans outstanding in the U.S. — will reduce their origination volumes this year. Spokesmen for the agencies explain that this relates to the contraction in the market, with a decline in property values.
The new coverage requirement for properties that are acquired or refinanced is at least 1.3 times the cash flow needed to service the amortizing debt. For borrowers who are seeking to take cash out of their properties, Freddie requires 1.35x, and for interest only loans, the figure jumps to at least 1.55x.
Fannie will write loans with coverage ratios as low as 1.25x, provided the property is in one of the best markets and has the best-performing collateral. The days of 1.15-1.20x coverage levels are gone. Also, Freddie and Fannie loans now include mandatory reserves–this is no longer negotiable. Finally, the agencies prefer to provide a loan that is no more than 70% of a property’s value, although they will go higher under certain circumstances.
Since there are few competitors in the market, credit underwriting is anticipated to continue to tighten. Funding is available from some life insurance companies as well as certain regional banks. However, the latter institutions will seldom provide loans of more than five years.
This environment contrasts with the ready availability of funds and loose underwriting standards through 2007. In that period, conduit lenders — which sell their originations off through the CMBS market — were aggressively bidding for loans, especially those for apartment properties.
With conduit lenders having effectively stopped writing loans in early 2008, Fannie and Freddie initially jumped in to fill the void, even after being placed into federal conservatorship.
Their regulator, the Federal Housing Finance Agency, said that they would continue to lend.
Historically, the two agencies have retained the bulk of their originations on their balance sheets, having relatively stable portfolios. Lately, they have made efforts to tap the capital markets to increase the source of funds for their originations.
This article is a summary of one originally published on Commercial Real Estate News. The full text is available at http://www.loopnet.com.
Please remember to leave a comment!
WANT TO USE THIS ARTICLE IN YOUR E-ZINE OR WEB SITE? You can, as long as you include this complete statement with it: ‘ “The Investment Property Insider” is published by Craig S. Higdon, a veteran commercial mortgage banker. He publishes the e-zine and blog, www.InvestmentPropertyInsider.com, for commercial real estate investors, developers, and industry professionals. Visit the blog and get this free report: “The 7 Biggest Loan Mistakes Real Estate Investors Make And How To Avoid Them.” ’
Craig Higdon, “The Insider”
www.ExcelsionMortgage.com, www.InvestmentPropertyInsider.com, www.CommercialLoanCoach.com
Craig Higdon has over 16 years experience in financing commercial loans, small business loans, construction loans, and land loans. He owns Excelsion Mortgage, a commercial mortgage direct lender offering a wide range of commercial lending resources to investors and commercial real estate service providers.
The © Copyright to all audio, video, images, and text are held by Craig S. Higdon and licensed under a Creative Commons License
