By: Amnon Cohen, Managing Director, Lever Capital Partners

The Trump Administration led by Mark Calabria, lead Director of the Federal Housing Finance Agency, is making a push to re-privatize Fannie Mae and Freddie Mac by removing the agencies from government conservatorship. 

In August 2008, the U.S. government took over both agencies as they were heading towards insolvency. This was a result of the Great Housing Crisis caused by the subprime market crash and subsequent recession that followed. In September 2008, the U.S. Congress authorized $100 billion in bailout funds for both agencies to keep them afloat. The recovery in the housing market enabled Fannie Mae and Freddie Mac to return to profitability and eventually repay the U.S. Treasury the entire bailout amount plus an additional $20 billion in interest. 

Fannie Mae and Freddie Mac are now making loans at a record setting pace. The current administration, and some economists, believe it is time to make the agencies private again. The current administration believes the GSE’s (Government Sponsored Enterprises) are a burden on the government and if regulated should be ran by a private enterprise. However, there are many in the real estate industry who feel that a private company who lacks the backing of the U.S. Treasury may unnerve investors and result in agency backed loans to become more expensive and volatile. As news of the impending privatization trickled through the market, Fannie Mae multifamily loan spreads spiked 50 basis points while similar loans in the private sector remained steady or decreased. 

Michael Bright, President of the Structured Finance Industry Group and the former acting President of Ginnie Mae, told Bloomberg that keeping Fannie Mae and Freddie Mac structured exactly as they are and releasing them to privatization is a “dangerous experiment.” There are several reasons for Mr. Bright’s fears. The two main dangers are that a) A private lender is perceived to be more volatile than a government agency and b) A pure for profit lender may exclude some housing products or markets that they may deem as less profitable

The National Association of Realtors also supports an explicit government guarantee. NAR President John Smaby penned a letter to Mr. Calabria stating that any reforms must be well designed and thoroughly vetted before implementation. He also added that any reforms that take place should keep in mind the GSEs public mission which is to  “provide liquidity, stability, and affordability to the U.S. housing market”.

We at Lever Capital Partners share the sentiment of if it ain’t broke, don’t fix it. Currently, Fannie Mae and Freddie Mac are the leading multifamily lenders in the country, and their aggressive lending rates and terms have trickled down to others in the lending industry including: banks, life insurance companies and CMBS lenders. Privatizing the agencies may change the parameters that are currently in place, which may affect, rates, terms, leverage and capitalization rates in the most influential segment of the Commercial Real Estate Industry.

Sources:

https://www.washingtonexaminer.com/opinion/op-eds/privatize-freddie-mac-and-fannie-mae

http://www.mortgagenewsdaily.com/06052019_gse_conservatorship.asp

By Adam Vanlerberghe, Lever Capital Partners

A strong recent economy combined with loosened regulatory constraints have contributed to a healthy commercial real estate (“CRE”) lending environment. 

In such an environment, banks often look to put out more capital and be a bit more aggressive with their underwriting. Back in 2017, large banks with more than $100 billion in assets experienced a 5% growth rate in commercial real estate lending, according to Fitch Ratings. In addition to increased activity, we saw banks offering loans as high as 75-80% loan-to-cost (“LTC”) on construction projects. Higher LTC ratios have certainly been welcomed by our commercial real estate developer/investor clients as it lowers their required equity contribution, thus allowing them to pursue additional investment opportunities and/or limit their need to bring on added partners.

However, that 5% growth rate reported by large banks in 2017 shrunk to 1.2% in 2018, according to Fitch. The reduced growth rate is likely to coincide with more conservative underwriting from these larger banks. As a result, underway construction projects may have difficulty when transitioning from their high LTC construction loan to their take-out/permanent loan facility in a more conservative lending environment. This can especially be the case when a recently completed project needs time to reach stabilization and/or didn’t realize enough value creation during the development period. When this occurs, the permanent loan proceeds being offered may not be enough to fully payoff the high LTC construction loan.
The team at Lever Capital Partners (“LCP”) helps our clients navigate such funding shortfalls and can often bring multiple solutions to the table such as a bridge loan, mezzanine loan, preferred equity or joint venture equity. We always consult with our clients and carefully consider their partnership structure and business strategy to help them determine the absolute best solution.
Fortunately, large banks that are pulling back on CRE lending are not the only options available, as the above funding solutions will likely be provided by a non-bank capital source. At LCP, we have a vast network, experience and long-standing relationships with private/public debt funds, REIT’s, private equity, credit unions and life insurance companies which we utilize to provide our clients with optimized funding options for their commercial real estate transactions.   

Source: 

https://www.nreionline.com/lending/bank-exposure-risk-cre-lending-creeps-higher?NL=NREI-21&Issue=NREI-21_20190605_NREI-21_700&sfvc4enews=42&cl=article_1&utm_rid=CPG09000020162406&utm_campaign=20841&utm_medium=email&elq2=0a930ff8f8e14fcab78dc9c0c04d55ea