Home Loan Market Transformation


The benefits for lessors and lessees have spurred a sharp rise in GSEs’ share of the multifamily loan market. Traditionally, banks were the dominant source of small loans to fund affordable multifamily housing, with small meaning in the $1 million to $7 million range for buildings often between five and 50 units, and they remain so today. That being said, the small multifamily lending landscape changed after Fannie Mae entered the market in the mid-2000s. This change further accelerated when Freddie Mac introduced their small-balance loan program back in 2015.

Fast-growing cities like Denver, Seattle, San Antonio, Texas and Jacksonville, Florida, are especially fertile territory for agency financing. Secondary and tertiary markets are also benefiting from the streamlined loan offerings provided by Fannie Mae and Freddie Mac because the GSEs can offer data and insights into niche markets thanks to their national reach and broad network of lending partners.

Last year in the U.S., more than 71,000 properties were financed by small loans totaling $169 billion in volume. Banks accounted for $117 billion, or 69%, of the total, while Fannie Mae and Freddie Mac’s share was $12.9 billion or 7.6%. Insurance companies, credit unions and other non-bank lenders such as online lenders, funded the remaining 23%, according to data compiled by CrediFi.

To be clear, Fannie Mae and Freddie Mac do not lend money directly. They market the loans through financial service firms called delegated underwriting and servicing lenders for Fannie Mae and Seller/Servicers for Freddie Mac. Some companies in this category include Walker & Dunlop, CBRE, Arbor and Newmark Knight Frank. The DUS lenders screen borrowers, then underwrite and originate the loans for a fee, after which they continue to provide servicing and asset management for the properties. In some cases, the obligations are then transferred to the agencies, who in turn bundle and sell them as asset-backed securities. After such transfers, the private lenders continue to administer the loans.

These programs are rising in popularity namely because they offer terms and options that meet the specialized needs of borrowers such as Ghiselli, whose multifamily investments represent their side gig.

As a rule, the terms of agency loans soundly beat what one can obtain from banks—primarily loans that do not exceed seven years and are full-recourse, meaning that borrowers are on the hook for the full amount if they default. By contrast, agency-backed loans are mainly non-recourse, and they enable borrowers to lock in attractive fixed rates for up to 30 years.

Banks versus Agencies

But the choice of which to borrow from, a bank or an agency, is not always black and white.

Since banks are licensed to promote loans only in specific markets, their expertise in those markets can be deep, while the agencies are nationwide and have no geographic limits. With respect to underwriting, banks focus primarily on the creditworthiness of the borrower, asking to see individual tax returns and requiring a fairly detailed global cash flow analysis. For example, they provision for borrower credit card debt, car loan debt, personal loans and a variety of other types of debt in order to satisfy the bank’s individual underwriting requirements. This process can be time consuming and complicated, requiring a fair amount digging to fill out the necessary paperwork. In addition, many banks will require the borrower to have a minimum amount deposited at the bank in order to qualify for such a loan.

For borrowers with complicated tax returns, loans handled through Fannie Mae and Freddie Mac are more attractive because there is no need for debt-to-income analysis. The agencies do not require underwriting of individual tax returns and, as non-depositary institutions, do not require deposits. Because the loans they offer are non-recourse, they focus somewhat less on the borrower and more on the characteristics of the property itself, including its past, current, and projected cash flow.


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