There is not much liquidity for commercial mortgages in the retail, office or hospitality sectors of the commercial real estate industry, but there’s plenty of capital available for multi-family (apartment) buildings. The good news is that the Government is lending massive amounts of money against apartment properties; the bad news is that no one else is.
Virtually all the institutional loans being made today to purchase, refinance or build apartments are being funded or otherwise supported by Fannie Mae, Freddie Mac, The Federal Housing Administration (FHA) or The Department of Housing and Urban Development (HUD).
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For almost 2 years now, these Government Agencies have been the primary lenders to the rental housing industry. They stepped in to counteract the liquidity crisis that was caused by the collapse in the commercial mortgage backed securities markets (CMBS) and, almost by default, have become the only game in town. Even the banks who claim to be lending right now are, in reality, just originating loans and selling them to Fannie or Freddie.
As the economy improves traditional multi-family lenders, such-as insurance companies, smaller regional banks and Wall Street investment houses, would like to re-enter the market place with their own commercial mortgage offerings. Unfortunately for them, they are finding that they can’t compete with Uncle Sam who, of course, can simply print the money that it uses to lend.
Fannie and Freddie could maintain their dominance in multi-family finance indefinitely, but they won’t. They are lending at such levels because no one else can. As the economy improves and real, traditional banking becomes profitable once again, Government Agencies will retreat and allow the markets to provide the necessary capital. When that happens rates will be higher but the increased competition will mean more people will be able to qualify for loans.
Those lucky enough to meet the requirements of a Government Agency loan ought to apply now. When the time comes to lure lenders back into the market the Government will make itself less attractive by further tightening their underwriting criteria and lowering their loan-to-value ratios.
To secure the most favorable rates, terms and conditions that Government sponsored lending has to offer, a borrower must have decent credit (640 or better FICO) and a sound balance sheet that includes some liquidity (cash in the bank). Fannie and Freddie will lend up to 80% LTV but most loans that they are accepting now are in the 70%-75% LTV range. The property must be able to pay its own mortgage with a debt-service-coverage ratio (DSCR) of 1.2% or better and the building has to be stabilized (history of profitability). It goes without saying that the property must also be in good condition with little deferred maintenance necessary. The Government is sponsoring loans in all 50 states in-order to benefit the rental markets nationwide.
Loans typically come with 3, 5, 7 or 10 year terms and are amortized over 25 years. Currently rates are at historic lows due to the weak economy.
Apartment owners can get Agency backed loans through their local banks, larger national banks and through many other commercial mortgage lenders who enjoy direct and indirect relationships with Fannie, Freddie, FHA and HUD. You can’t apply directly to the Government.
Property owners who don’t qualify for agency loans will have to pay more to a private lender or work to meet Government requirements.
It’s good to know that there is liquidity for multi-family investing, but it is disconcerting to realize that the only willing and able lender is the US Government. As things improve this should change.
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