As regional bank issues, economic volatility, and high interest rates continue to dominate commercial real estate conversations, government lending agencies (Fannie Mae, Freddie Mac, and FHA/HUD) remain trustworthy and consistent sources of capital. Through numerous economic cycles over the decades, these agencies have earned the trust of the marketplace as reliable sources of liquidity through thick and thin. The market yearns for stability, and periods of dislocation make that stability all the more valuable.
Fannie Mae, Freddie Mac, and FHA/HUD were designed to be steady providers of capital through all cycles. Whether the markets are experiencing an economic downturn, credit crunch, or liquidity crisis, the agencies don’t blink in response and continue to serve their mission of supporting housing markets (single-family and rental housing). Amid the current upheaval in the banking sector, the agencies are transacting business as usual, and moreover, they’ve continued to innovate their programs to meet the needs of the market. Through new adjustments to the Green Advantage loan program, Freddie Mac is leaning further into ESG efforts with more options for financing green upgrades to existing multifamily stock. Fannie Mae’s Sponsor-Initiated Workforce Housing program is addressing the affordable housing crisis through an innovative approach to protect naturally occurring affordable housing. These are just a couple of examples of how both agencies are adapting to the needs of the market while always providing aggressive pricing and credit terms. The agencies remain steady and steadfast.
One of the key components that has allowed them to continue lending without interruption is the market’s confidence in their securities. From Fannie Mae’s Delegated Underwriting and Servicing mortgage backed securities (shortened to DUS MBS), which has stood the test of time for several decades, to the Freddie Mac “K-series” and Ginnie Mae securities, all experienced a steady stream of buyers throughout the turmoil and were a testament to the hard work that the agencies have invested building the market’s confidence in these securities through numerous cycles. Far too often this confidence is overlooked, but it is in times of strain when we are reminded of its enormous value.
Another reliable source of capital during uncertain conditions is HUD. The agency is extremely valuable when the market is experiencing turbulence and other capital sources pull back. A consistent feature of HUD financing is the ability to achieve leverage that is at the top of the market, as it provides maximum 85 percent LTV for refinance transactions and maximum 85 percent LTC for new construction/permanent transactions. These incredibly attractive leverage levels are subject to the extended processing time which can span from 6 months to over a year. While these extended processing times can present a challenge for some sponsors, the additional leverage becomes acutely prized during down cycles when valuations are stressed, making loan proceeds even more important. These leverage levels and reliability make HUD a valuable source of capital.
HUD provides a consistent source of ground-up construction financing for multifamily properties. This is invaluable in the current marketplace as banks, the primary provider of construction financing for multifamily properties, are drastically tightening credit, with a special focus on commercial real estate. HUD’s 221(d)(4) program is an extremely attractive option in today’s marketplace, as most other construction lenders have significantly pulled back or exited the market altogether. HUD remains steady at 85 percent LTC. In addition, the 221(d)(4) is a non-recourse execution, thus HUD provides the highest leverage coupled with no personal recourse to the borrower.
An often-overlooked benefit to a HUD loan is the favorable prepayment structure. The typical provision features no lockout period with prepayment available starting at 10 percent in year 1 and declining 1 percent per annum, then open at par beginning in year 11. When combined with the fully amortizing term of a HUD loan (35-40 years), this prepayment structure provides the borrower with the best of both worlds: long-term protection with a self-amortizing term coupled with the ability to repay the loan early, if the need arises. In addition to this prepayment flexibility, HUD has two refinance programs (223a7 and IRR) that provide a “streamlined” execution that can reset the rate in the event of a drop in market interest rates during the loan term.
The lending cycle ebbs and flows. I have been lucky enough to have survived a number of difficult lending markets. In these turbulent periods lenders come and go and lending sources change. But through it all we have seen our government lending agencies provide vital liquidity to the country’s property industry. Once again, we are watching them rise to the occasion and meet the market’s needs when it needs them. We need to remember just how fortunate we are to live in a country that has these kinds of safety nets. All too often we forget about these programs (or pass on them due to their complexity) but it is important to keep them in mind, especially when times get bad.
Disclaimer: The opinions in this article are solely those of the author and do not represent the official position of Propmodo or its editorial team. We value diverse perspectives and aim to encourage open discussions. The information presented here is the author’s own and does not reflect our stance on the subject.
