After a fast and furious quarter of lending, Fannie and Freddie need to do fewer deals to stay within the caps set by federal regulators.
By Bendix Anderson
One of the most important sources of capital for the seniors housing business may run out of money to make loans later this year, say industry experts.
Fannie Mae and Freddie Mac each have a cap on how much they can lend to apartment properties. At the rate they have been lending so far this year, they may hit those caps of $30 billion apiece well before the end of 2015.
“There is a very high probability that at some point in the third quarter they are going to be hitting those caps,” says Jason Schreiber, senior vice president of seniors housing finance for Pittsburgh-based PNC Real Estate.
Facing that possibility, lenders like PNC are preparing to offer a range of financing options to seniors housing borrowers.
Fannie Mae and Freddie Mac are also slowing down the rate at which they are making loans through lenders like PNC. For example, they are competing less fiercely to offer the lowest interest rates, says Schreiber. That will help assure the money that Fannie Mae and Freddie Mac have available to lend lasts longer.
The government-sponsored enterprises (GSEs) have aggressively grown their seniors housing lending business over the last year with new programs, more attractive underwriting rules and a string of giant financing deals for large portfolios of properties.
But if they continue to lend money at the pace they set earlier this year, they are likely to collide with the limits on their multifamily loan production set by their federal regulator, the Federal Housing Finance Agency (FHFA).
“Their run rate after the first quarter would get each of them to their $30 billion caps well before the end of the year,” says Carolyn Nazdin, national program manager of healthcare mortgage banking for Cleveland-based KeyBank’s Senior Housing and Healthcare Group.
Fairly tight grip on the reins
The federal government took control of Fannie Mae and Freddie Mac in 2007, when the two mortgage giants teetered on the edge of insolvency and collapse during the global financial crisis.
Since then, FHFA has overseen their operations and set their goals. Since 2013, those goals have limited the dominance of Fannie Mae and Freddie Mac in the multifamily mortgage market.
In March 2013, FHFA first mandated that Fannie Mae and Freddie Mac cut their volume of lending to apartment properties by 10 percent from the prior year’s totals.
Fannie Mae limited its multifamily lending to $28.8 billion in 2013, while Freddie Mac capped its lending at $25.9 billion — still a tremendous amount of financing and second only to the volume set in 2012.
FHFA allowed Fannie Mae lenders to transact a little more business in 2014. That year, Fannie Mae funded $28.9 billion in new business volume for apartment properties.
Meanwhile, Freddie Mac Multifamily funded $28.3 billion in new business volume in 2014, reflecting a 10 percent increase over the prior year.
Seniors housing lending is a relatively small piece of that total. Fannie Mae provided $1.5 billion in loans to seniors housing properties in 2014, slightly less than the $1.6 billion in 2013. Freddie Mac provided $1.2 billion in seniors housing loans, up substantially from $900 million in 2013.
In the first year of the caps, Fannie Mae slowed its pace of lending by charging higher interest rates. The strategy worked so well that Fannie Mae realized halfway through 2014 that it had room to lend more, so it cut prices to compete.
Both GSEs lent to their limit in 2014. “Both companies went to the top of the FHFA cap,” says Nazdin. “With very robust pipelines going into 2015, now they are slamming on the breaks again.”
Strategic shift
To make sure that they don’t reach their caps before the end of the year, both Fannie and Freddie have sharply slowed down the rate at which they are making new loans.
“In the last 30 to 45 days, they have increased their pricing and tightened credit standards,” says Nazdin. “They have raised their pricing significantly. However, rates today are still lower than last year at this time largely due to Treasuries staying low.”
Fannie Mae and Freddie Mac now offer interest rates of 4 to 4.5 percent for permanent loans that cover 65 to 75 percent of the value of seniors housing properties, depending on acuity, according to Cathy Voreyer, managing director of Wells Fargo Multifamily Capital.
Those rates are higher than a few months ago, though they are roughly in line with the rates offered by the GSEs over the past few years.
Fannie Mae and Freddie Mac have stiff competition from life insurance companies when it comes to lending to the best sponsors that possess the highest quality properties. Insurance companies can even offer financing at longer terms at interest rates comparable to typical Fannie Mae and Freddie Mac financing.
“You might get a 15-year term from an insurance company for an interest rate not far off from the rate on a Fannie Mae or Freddie Mac 10-year loan,” explains Nazdin.
However, interest rates are still highly attractive for borrowers. Fannie Mae and Freddie Mac now offer interest rates that are slightly lower on average today than they were a year ago.
That’s because even though Fannie Mae and Freddie Mac have increased the part of the all-in interest rate that they control, the other part of the interest rate equation has fallen.
The yield on benchmark 10-year U.S. Treasury bonds fell nearly 100 basis points over the 12-month period ending
this April.
One reason is that the U.S. economy has improved while the economies of many other industrialized nations have slowed.
While managing their volume to meet the cap, Fannie Mae and Freddie Mac plan to continue providing capital to seniors housing properties that need it.
“Our charter asks us to create liquidity. We are committed to the seniors housing business,” says Steven Schmidt, national director of the seniors housing group at Freddie Mac. “We have been in it a long time — since 1998.”
Seniors housing is attractive for Fannie Mae and Freddie Mac partly because of the property sector’s strong track record. For example, seniors housing rents continued to grow, on average, even during the most difficult years of the financial crisis, according to data from the National Investment Center for Seniors Housing & Care.
Independent living properties performed slightly better than multifamily housing overall, and assisted living properties performed significantly better. “Market dynamics do not affect seniors housing the way they do multifamily,” says Chris Honn, director of the seniors housing group at Fannie Mae.
As a result, the seniors housing loans made by Fannie Mae and Freddie Mac in recent years have had almost no defaults. “The performance of the loans is excellent,” says Schmidt.
Worst-case scenarios
If Fannie Mae and Freddie Mac fail to slow down their lending business enough, so that they hit their caps on multifamily production, they may be forced to simply stop funding new loans until Jan. 1, 2016. That would force borrowers who depend on the GSEs to find other financing options.
“Fannie and Freddie could be forced to pull out of the market prematurely — creating a financing gap that will be difficult to close,” according to the National Multifamily Housing Council, a Washington, D.C.-based trade group that met with FHFA to ask the regulator to use “flexibility in administering the caps.”
Many lenders that offer Fannie Mae and Freddie Mac financing are preparing for the possibility that they may need to provide borrowers with other kinds of financing.
“We can handle a range of financing options,” says PNC’s Schreiber. PNC is making sure that it has cash available on its balance sheet to offer bridge financing, if needed, as well as term and construction debt.
Alternative solutions
Balance sheet lenders like PNC have the ability to provide acquisition financing for a seniors housing property within a tight time frame, even if Fannie Mae and Freddie Mac hit their caps. Once the calendar year ends, Fannie Mae or Freddie Mac could subsequently acquire the loan as part of next year’s lending.
However, solutions like this one may not be able to help all borrowers. “There is still concern among smaller owner-operators,” says Voreyer of Wells Fargo. “Balance sheets are not going to supply all the needs in the market.”
Fannie Mae and Freddie Mac lenders are likely to take good care of proven borrowers that they have worked with many times before, but borrowers without that track record may not be so lucky.
“Borrowers with long-term relationships are going to be at the front of the line,” says Voreyer.
Demand is very high for financing because of new developments that will need permanent financing as they stabilize. Borrowers also need financing to buy properties and refinance properties with expiring loans.
“Acquisition activity is probably at an all-time high,” says Fannie Mae’s Honn. “We have quite the robust opportunity to do financing.”
Borrowers are also eager to refinance seniors housing properties. “Interest rates are low and people are taking the opportunity to refinance before rates rise,” says Freddie Mac’s Schmidt. Permanent loans that were still too new to refinance a few years ago now provide strong opportunities.
Fannie Mae and Freddie Mac have been at the center of many of these transactions. “Fannie Mae and Freddie Mac are absolutely critical to providing liquidity to the seniors housing business,” emphasizes Nazdin.
Giant deals
A handful of giant transactions are part of the reason that Fannie Mae and Freddie Mac have provided such a large volume of multifamily lending early this year.
In January, Fannie Mae provided a $334 million credit facility through Key Bank Real Estate Capital to Chicago-based Enlivant, an owner and operator of seniors housing formerly known as Assisted Living Concepts.
A portfolio of 54 seniors housing properties in a dozen states backed the 10-year loan. This credit facility is flexible. In other words, Enlivant can remove properties from the portfolio that secures the credit facility and replace them with other properties, depending on its financing needs.
Big deals like Enlivant’s credit facility are an important part of Fannie Mae’s lending business. “It’s one of our best product weapons,” says Honn. Fannie Mae has provided more than a dozen credit facilities since 2003.
However, there is a limit to how many of these giant deals Fannie Mae can provide — even without the cap set by FHFA. “Very few borrowers have fifty properties,” says Honn. “The bread and butter of our business is still loans to single properties, or two or three properties in one financing.”
A single, giant transaction accounted for all of Freddie Mac’s increase in volume in 2014. At the end of the year, Freddie Mac closed a $350 million refinance loan for NorthStar Realty Finance Corp. and Formation Capital, secured by 36 seniors housing properties including independent living, assisted living and memory care communities in 10 states.
Freddie Mac has continued to enter into huge transactions this year. The GSE provided a $670 million permanent loan this spring to a portfolio of 52 seniors properties owned by New Senior Investment Group Inc., a seniors housing real estate investment trust, through Walker & Dunlop.
The loan lowered the financing cost for the properties and will help fund new acquisitions. It only took 41 days to close the massive deal, says Schmidt. “We are committed and we are very quick.”