Fannie Mae increases multifamily small-loan cap to $6 million
Fannie Mae’s effective doubling of its multifamily small-balance loan cap was an independent decision, but one that certainly signals heightened competition in the rental-housing sector going forward.
The government-sponsored enterprise raised its small-balance ceiling earlier this month to $6 million across the board. Previously, Fannie had capped its small-balance multifamily program at $3 million nationwide and $5 million in eligible high-cost markets.
“Our team continuously calibrates our small-loan product features and credit parameters,” said Ann Atkinson, Fannie Mae’s director of multifamily customer engagement. “We felt this was the right time to evaluate our definition as [property] values have increased over the last couple of years and multifamily fundamentals have gotten stronger.”
Accompanying the change is a new approach to the eligible list of high-cost markets. Rather than raise the loan cap in those metro areas, Fannie will now offer certain underwriting benefits. For one, replacement-reserve escrows won’t be required for higher-leverage loans in those markets, said Paul Gembara, Fannie Mae’s director of credit underwriting in multifamily small loans.
Rising prices necessitated the change, Atkinson said, and they opened the door for streamlined, small-loan underwriting to more originators.
“The primary driver is due to increased property values throughout the country,” she said. “We’ve been in this business for over 20 years now. We reviewed the performance and valuations throughout our small-loan book of business, as well as general small-loan market data.”
Rick Wolf, senior managing director for Greystone, agreed that the move was vital for Fannie Mae’s small-loan operation. New York-based Greystone ranked first in 2018 among all small-loan producers for Fannie Mae’s Delegated Underwriting and Servicing (DUS) program.
“There were times where we would look at a deal and it seemed to fit a Fannie Mae product, but it was $4 million or $5 million,” Wolf said. “We could offer [a larger non-DUS loan], but when you review the cost structure, it became less competitive. So people said, ‘Well, let me look at a bank option’ or ‘let me look at a Freddie Mac option.’ This keeps the Fannie Mae product aligned with where the market is, and that’s a good thing.
“More of what was traditionally a small loan has had some value appreciation,” Wolf added. “Maybe what was a $3 million loan five years ago is now a $5 million loan. Same people, same building. I think it was a needed evolution and I applaud them for doing it.”
Gembara added that the move from the previously bifurcated model keeps things much more straightforward.
“This helps simplify the program,” he said. “We concluded that a simple and efficient approach is one [maximum] loan amount for all markets across the board.”
The change, while not precipitated by Freddie Mac policy, moves Fannie Mae’s small-balance ceiling closer to that of its GSE counterpart. Freddie Mac maintains a multifamily small-loan cap that ranges from $6 million to $7.5 million, based on market size.
“What the change really signifies, I think, is that Fannie Mae is committed to innovating and maintaining their competitiveness in the smaller market,” Wolf said. “That’s a big deal. When you move up to $6 million, you are extending the benefits of the small-loan program to a much broader segment of the market. That includes a little bit more streamlining on the appraisal, some reduced legal fees. Your third-party expenses are more cost-effective. There’s a real savings there.”
Lenders, Wolf said, can reap the benefits of more competitive options in the space moving forward.
“What’s good for the market here is that [Fannie and Freddie] have different product types,” Wolf said. “I think what this offers is greater flexibility to the borrower in terms of product selection, and sometimes Fannie and Freddie look at credit risk differently. It gives you more diversity and, frankly, opens up the door to a little competition, which is good. I think that usually conveys down to the borrower.”
The higher cap also helps further Fannie Mae’s mission to back affordable housing.
“We expect it to have a big impact in terms of providing additional capital and liquidity to the small-loan marketplace and support affordable housing,” Atkinson said. “In our experience, small loans have played a huge role in helping finance affordable multifamily properties. They truly support workforce housing. Being able to expand the benefits of our small-loan program to owners out there who could do more business with us in affordable housing was a big part of our decision.”