GSEs, Hunt Real Estate Capital Weigh In on FHFA’s New Cap Structure

By Paul Bubny

Changes are coming for the GSEs—Fannie Mae and Freddie Mac—and for their roles in multifamily lending in particular. Eight days after the Treasury Department issued its long-awaited plan to end government conservatorship of the GSEs, the Federal Housing Finance Agency’s new director, Mark Calabria, announced that the lending caps for multifamily would be reworked. Rather than a $35-billion cap with exceptions for mission-driven work, the new structure expands the caps to $100 billion each over the next five quarters, with 37.5% of the cap set as a floor for mission-driven business. The definition of mission-driven has also changed—it will no longer include loans that support energy efficiency in multifamily.

Hunt Real Estate Capital has been among the most active providers of agency loans through Fannie Mae Multifamily and the Freddie Mac Multifamily Optigo programs. To help industry members unpack the changes ahead, Hunt recently hosted a webinar titled “How will the FHFA’s New Cap Structure Impact Multifamily?” James P. Flynn, President and CIO of Hunt Real Estate Capital, moderated the discussion with Fannie Mae Multifamily’s Michael Winters, and Freddie Mac Multifamily’s Peter Giles.

Flynn was encouraged by the Sept. 13 announcement from Calabria, a view shared by his two panelists. “I think we had all lived under a shadow of uncertainty for some time,” Flynn said. “The FHFA’s new cap structure supports the view that the Agencies are an important part of the industry, and that their size is acceptable to the regulator. Overall it’s positive.”

From the perspective of the GSEs, “We’ve been under a lot of uncertainty for the past 10 years, so the announcement provided clarity for us,” along with “a great road map,” validating the GSEs’ place in the multifamily market, said Winters, VP of lender relationships, structured transactions, and small loans.

VP of production and sales at Freddie Mac Multifamily, Giles observed that early spring saw weekly demand for loans bump up from the typical $4 billion to about $6 billion, due largely to the drop in 10-year Treasury yields. “People were rushing in,” he said. “We were in a capped environment and we were concerned about hitting our cap.”

He noted that the Mortgage Bankers Association released a 2020 projection of $390 billion in Multifamily lending activity. On a four-quarter basis, the expanded caps would give Fannie and Freddie about $80 billion each for roughly a 41% market share, “which feels right. It assures that, if we manage our pipeline correctly, the market will have consistent liquidity in all four quarters.”

September 30 saw the FHFA and the Treasury Department issue a joint statement that Fannie and Freddie would be allowed to retain a combined $45 billion in capital, well above the $3-billion mark for each GSE that had been in place for some time. Flynn pointed out that this supported the objective of removing the GSEs from conservatorship, although it’s just a fraction of the capital the GSEs ultimately will require to become private.

“In our halls, this news was as welcome as, if not welcomed more than, the September 13 news,” said Giles. “It has been our objective and our hope for the past 10 or 11 years to get back to being a privately owned company.” The increased capital retention, he added, represents “the first step.” Similarly, Winters said, “it provides us with a little more certainty, a little more of a path forward. That’s something we’ve been awaiting for a long time.”

Regarding the elimination of the carve-out for energy-efficiency financing, Winters said, “In no uncertain terms, our company is committed to green.” He added that Fannie’s green-lending program has been operating for nine years, “so we did this well before it was an exclusion play. We believe in it on the Multifamily side and we believe in it as a company.” He acknowledged that achieving the dollar volume of green financing that Fannie Mae has provided in recent years may be a tall order, but added, “You’ll see green as an important part of our business going forward.”

Freddie Mac did $23 billion in green financing in 2018, and Giles similarly tempered expectations for a repeat performance. “Our green volume in prior years was related to the uncapped treatment of the program,” he said. “We’ll need to change the program so that it suits the mission, which is defined by the FHFA.” Conversely, added Giles, “We believe in green. We think if you’re doing energy improvements that are in-unit, you’re reducing costs to tenants. We like that a lot.” With that in mind, the Freddie Mac Multifamily team is currently “in the lab, trying to figure out the right pricing” for green financing.

When asked whether the five-quarter level of $100 billion would be divided evenly across five quarters or would mean a spike in fourth-quarter activity for Q4 and then a tapering-off in Q1 of 2020, Giles said he expects approximately $20 billion of activity per quarter. “We think it’s important to deliver that consistency to the marketplace,” he said. “That is our promise to you and a fundamental mission of ours throughout the year.”

Pictured, at top: James P. Flynn: Above left: Michael Winters. Below right: Peter Giles.

For comments, questions or concerns, please contact Paul Bubny