Financing Focus

Fannie Mae and Freddie Mac Offer Options for Multifamily Investors

P roperty owners with large multifamily portfolios may be aware of the benefits of obtaining financing from the Federal National Mortgage Association, known as Fannie Mae, and the Federal Home Mortgage Corp., dubbed Freddie Mac. Generally, these two organizations can handle a large portion of multifamily property owners' financing needs in the form of mortgages, bond credit enhancements, or credit enhancements.

However, small to medium-sized portfolio owners may not consider these organizations as financing options. Or they may assume — incorrectly — that Fannie Mae and Freddie Mac are lending arms of the federal government weighed down in bureaucracy requiring that owners set aside a certain percentage of their units for low-income housing at below-market rents.

This is far from the truth. Washington, D.C.-based Fannie Mae and Freddie Mac are government-chartered, shareholder-owned companies traded on the New York Stock Exchange. They operate in all multifamily markets and provide services for the acquisition, rehabilitation, and construction of all multifamily properties.

Long History Congress formed Fannie Mae in 1938 to bolster the U.S. housing market during the Great Depression. In 1970, Congress created Freddie Mac to create a continuous flow of funds to mortgage lenders in support of home ownership and rental housing.

Their role is to buy mortgages from financial institutions, which they either keep in their portfolios or bundle into bonds for sale to investors. With an implied guarantee from the government, their AAA bond rating gives Americans a continuous and inexpensive mortgage source. Today, Fannie Mae and Freddie Mac hold or guarantee 42 percent of all single-family mortgages.

However, some multifamily property owners get the same benefit through these organizations as homeowners, with affordable mortgage money for market-rate apartment properties and seniors housing, and some special programs for affordable housing.

Fannie Mae and Freddie Mac were the original Wall Street conduit lenders, securitizing apartment loans and selling them to bond buyers. Other conduit lenders borrowed the model and created funding sources for all commercial property types, but they cannot compete as effectively on apartment loans because they can't offer interest rates as low as Fannie Mae and Freddie Mac.

Program Benefits Both organizations provide a consistent source of inexpensive, long-term, fixed-rate mortgage funding for apartments and seniors housing.

The organizations use delegated underwriting and servicing partners. Investors cannot partner directly with Fannie Mae and Freddie Mac, but must work with a DUS lender that represents the organizations. A list of DUS lenders can be found at Fannie Mae's Web site, dus_lenders.html.

In exchange for risk sharing, Fannie Mae grants DUS companies the autonomy to underwrite and close loans. Decision making rests solely with partners. Fannie Mae does not see credit files until after loans have closed.

The funding is non-recourse, or provided with no personal guarantees, unlike commercial banks, savings and loans, and some life insurance companies. In addition, Fannie Mae and Freddie Mac lend throughout the United States, whereas many lending institutions are regional. Unlike some life insurance companies and pension funds that desire new properties, they are less concerned with property age but look at property condition and market strength.

Moreover, they provide subordinate debt after their first mortgage loan has been seasoned, unlike conduit lenders that do not allow any subordinate debt. For example, Fannie Mae will provide a second mortgage 12 months after the date of its first mortgage. It will provide a third mortgage 12 months later, and a fourth mortgage can be placed against the property after another 12 months.

The loan amount can be increased up to 80 percent of current value. As the owner creates value, extra cash can be taken out for other acquisitions. A new buyer can assume the first and second mortgages and place a third against the property at the acquisition. The interest rates are about 20 basis points higher than going first-mortgage rates — cheap money by any standard.

Fannie Mae and Freddie Mac also offer full loans at 80 percent loan-to-value compared with many life insurance companies that are at best 75 percent. Fixed-rate loan terms can be anywhere from five years to 30 years, with up to a 30-year amortization schedule.

Lending Niches Both organizations also have special financing programs for specific types of projects.

One unique niche is the Fannie Mae Market Rate Forwards program for new construction and major rehabilitation. In this program, the interest rate can be rate locked in advance for two to 2 ½ years, and the funds can be released when the property is 90 percent occupied for 90 days and achieves a 1.25 debt coverage ratio. Fannie Mae Market Rate Forwards program financing for new construction and major rehab may take about 75 days to 90 days to coordinate all of the players.

The Low-Income Housing Tax Credit Execution is a similar forward commitment program offered by Freddie Mac. It provides permanent financing to build or substantially rehabilitate garden or mid-rise apartment buildings with low-income housing tax credits. In this program, the interest rate is locked before construction begins. It offers forward commitment terms of 12, 18, 24, and 36 months, interest only, with two six-month extensions available. Funds can be released when the property is 90 percent occupied for 90 days and achieves a 1.15 debt coverage ratio.

Both organizations have special programs for tax-exempt bond credit enhancements as well as programs designed to preserve and develop affordable housing. They also have seniors housing programs, which are specifically for congregate care and assisted living. The interest rates for seniors housing such as assisted living are almost identical to the interest rates for apartment buildings.

For all Fannie Mae and Freddie Mac loans, paperwork levels are similar to those of any non-recourse lender. Since no personal guarantees are in place, and only the property is collateral, underwriters look at properties' operating numbers more closely than some lenders, using a review similar to a Wall Street conduit or a life insurance company.

Timing from application to loan closing is about 30 days to 90 days for an existing property. Timing is based on the lender and the complexity of the transaction.

Len P. Deering, CCIM

Len P. Deering, CCIM, is a vice president at ARCS Commercial Mortgage Co. LP in Oak Brook, Ill., which is a Fannie Mae delegated underwriter and servicer and Freddie Mac Program Plus lender. Contact him at (630) 684-2282 or


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