Lenders anticipate nominal adjustments with reduced FHFA caps 

 PGIM Real Estate, Regions Bank pros say 2023’s $6bn total rate cap reduction will be inconsequential.

The Federal Housing Finance Agency’s reduction of the multifamily loan purchase caps for Fannie Mae and Freddie Mac is not deterring lenders from pursuing their existing agency-linked debt initiatives. 

Senior commercial real estate debt executives from PGIM Real Estate and Regions Bank told Real Estate Capital USA the November 10 announcement is not so consequential and shows the government-sponsored entities will be operating business as usual.  

The new levels – set at $75 billion each for Fannie Mae and Freddie Mac – represent a 4 percent markdown from 2021 but are still notably the second-highest levels in the history of imposed volume caps.  

Mike McRoberts, head of agency lending with PGIM Real Estate and chairman of the agency platform, said the $150 billion combined total volume is likely to be higher than 2022’s total volume, which had not reached its $156 billion total cap as of mid-November. 

“Given that, and an expected slowdown in transactions in 2023 due to higher interest rates, we don’t see the volume cap limiting capacity for the agencies,” McRoberts said noting if demand exceeds expectations, the FHA can move volume caps up. “As far as affordable housing is concerned, the changes made to the mission requirements will drive the Agencies’ focus on workforce housing, which is where the deepest housing need are.” 

Jason Scott, managing director and head of conventional loan production for Regions Bank’s real estate capital markets group, said the affordability requirement updates loosen some of the existing constraints to allow more deals through. He noted Fannie Mae, as one example, has already dropped spreads to help try and drive the future pipeline for 2023 too. 

“There’s been a lot of quoting activity, but not a lot of signing up activity,” Scott said. “Everybody is kind of putting their toe in the water to see if it works.” 

McRoberts said he does not see a lot of negatives with the revised requirements FHFA has set for 2023. 

“The elimination of the 25 percent of total business for each agency needing to be at 60 percent of area median income or below takes some pressure off finding the deeply affordable units to finance,” McRoberts said. “I am concerned that may disadvantage those properties. However, Fannie and Freddie have been very disciplined about providing liquidity for those properties and I am confident they will continue to focus on their mission.” 

Scott said the proof of the new revisions will arise in deals originated for the new year, noting Regions Bank has not inked an appropriate sample size to evaluate as of now especially considering the present and looming volatility. 

“As a lender, you want to underwrite real risks, and the risk of recession is real,” Scott said. He added that debt and occupancy in multifamily assets need to be monitored should heavy layoffs start to rattle the market akin to what has been seen in the technology sector and some of the residential mortgage sector. 

“I do not think we have any real cap-specific concerns, it is more of a macro level concern about market softness relating to higher interest rates and a disconnect between cap rates and interest rates on new loans,” Scott said. “Negative leverage is a problem for the investment world.”