Multifamily Federal Financing Guide

The commercial mortgage-backed securities market, which in recent years represented up to 66 percent of all commercial loans, has ceased to exist. This means the universe of commercial real estate debt currently outstanding now must be squeezed into a bucket of funds less than half the size of what it once was. So without an increase in the supply of real estate capital, how do deals get done? Simply put, the commercial real estate markets are faced with de-leveraging and all that goes with it.

For the moment at least, there is some good news if you are a multifamily owner. While certainly not immune from the problems impacting commercial real estate, the effects on the multifamily market have been somewhat muted, largely due to ongoing lending from government-sponsored entities, including Fannie Mae, Freddie Mac, and the Federal Housing Administration/Housing and Urban Development.
The GSEs offer a virtual alphabet soup of programs to finance multifamily from existing to new construction, affordable to market rate, student to senior, and manufactured housing to medical. The GSEs have extensive online resources that provide details about their various loan programs. However, there are differences in how each GSE can be assessed.

Fannie Mae
Fannie Mae places loans through a total of 26 Delegated Underwriting and Servicing (DUS®) Lenders, each of which is awarded a national license. These lenders are authorized by Fannie Mae to underwrite, close, and deliver most loans without any pre-review.

Freddie Mac
Freddie Mac places loans through its Program Plus Seller/Servicers. Program Plus Seller/Servicers are approved for specific geographic areas. Currently, there are a total of 29 Program Plus Seller/Servicers holding a variety of regional licenses scattered across the country.

The actual funding mechanism for FHA/HUD works differently than Fannie Mae and Freddie Mac. Freddie and Fannie essentially buy whole loans from their licensed lenders and sell them into the secondary market. FHA/HUD offers mortgage insurance that is then used to secure funds. For most multifamily business, FHA/HUD has a total of approximately 90 lenders approved to submit and process applications using Multifamily Accelerated Processing.

Basic Underwriting

Both Fannie Mae and Freddie Mac use underwriting benchmarks to arrive at loan proceeds; however, it must be stressed that these are benchmarks that can and do change.

Fannie Mae. Underwriting is based on a tiered system with more favorable rates offered for lower-leveraged opportunities. All other factors being equal, rates vary between 80 percent loan-to-value/1.25X debt service coverage ratio loans and 55 percent LTV/1.55X DSCR loans and five-year terms and 30-year terms. All opportunities are underwritten on a 30-year amortization and rates fluctuate daily.

Freddie Mac. Basic acquisition underwriting ranges from 70 percent LTV/1.30X DSCR for five- to seven-year loans to 80 percent LTV/1.25X DSCR for a 10- or more year loan. Refinance underwriting takes the maximum LTV down by 5 percent. All opportunities are underwritten on a 30-year amortization and rates fluctuate daily.

FHA/HUD. FHA/HUD underwrites on a 40-year amortization, but because it issues mortgage insurance, the cost is tacked onto the interest rate. Underwriting can vary based on the property type; however, a good rule of thumb is the lesser of 90 percent of eligible costs (in the case of new construction) or value (in the case of a refinance) versus a 1.11X DSCR. Like Fannie and Freddie, interest rates can change daily.

In today’s market where sales activity has been severely curtailed, it is difficult to know where the limiter is on loan proceeds -- income or value. In a stabilized property, income is relatively straight forward. However, value is another matter. For example:


Class B multifamily

Stabilized annual net operating income $1,000,000
Current interest rate 6.0%
Amortization 30 years
Minimum DSCR 1.25X
Maximum LTV 80%


Stabilized NOI $1,000,000
Divided by: minimum DSCR 1.25
Equals: debt service $800,000
Divided by: mortgage constant 7.1946%
Equals: maximum loan proceeds $11,120,000 (rounded)
Divided by: maximum LTV 80%
Equals: minimum value required $13,900,000 (rounded)
Divided by: stabilized NOI $1,000,000
Equals: implied cap rate 7.19%

Values and cap rates vary based on region; however, based on discussions with appraisers in the Houston area, it would be difficult for them to justify a 7.19 percent cap rate on a class B property. Therefore, this is an example of a loan that is value constrained in the Houston market. There may be markets where class B multifamily will sell for less than a 7.19 percent cap rate. In those markets, the loan would be income constrained.

Other Sources of Capital

GSEs are providing the bulk of the capital necessary to finance multifamily properties in the current market. However, while supplies fluctuate, other sources of capital are available.

Banks. Banks have significantly curtailed lending. However, for the right opportunities, loans are available (construction or otherwise). LTV ratios of 60 percent to 65 percent with a meaningful loan guaranty are common in the current market.

Life Insurance Companies. Life insurance companies are interested in high-quality apartment loans. The issue is one of leverage: They will not consider anything above 60 percent of value without strong documentation and persuasion. 

Mezzanine Debt. Most of the mezzanine debt available is targeting distressed properties, such as those that are bank owned.
Equity. While most of the equity available is looking for distressed property opportunities, some equity is still available for new construction.

  • New construction: A lower LTC means cash is king. Any new construction has to be built to higher unleveraged yields. At a minimum, this means 9 percent for top urban locations and 10 percent for suburban locations. Also, the build and sell model is dead. No one knows how to model the exit. Thus, much of the higher yield requirements are necessary to support potentially longer holding periods.
  • Distressed assets: Equity can be used the same way as mezzanine debt. If forced to de-leverage and mezzanine debt won’t work, equity may be the answer

U.S. Multifamily Mortgage Debt

Net Change, 4Q07-3Q08

Sources: Federal Reserve, NMHC

JamesR. Kirkpatrick, CCIM, MAI

James R. Kirkpatrick, CCIM, MAI, is vice president of Grandbridge Real Estate Capital LLC in Houston. Contact him at (713) 993-1332 or


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