GSEs like Fannie Mae and Freddie Mac have been growing their loan books and, as of the first quarter of 2023, that doesn’t seem to be slowing down. According to data from the Federal Reserve, GSEs had $8.33 trillion in lending on their books as of Q1 2023, up about 12% over the same quarter a year earlier. The data shows that GSEs have been growing their loan books aggressively since the COVID-19 pandemic began in 2020.
However, the data also shows that demand for GSE-sponsored loans has been declining since the end of 2021. The net percentage of banks reporting higher demand for Fannie- and Freddie-sponsored loans hit -93.0 in Q1 2023, according to Fed data. That’s the lowest level in the data set that goes back to 2015. The number suggests that virtually all lenders are reporting a decline in demand for GSE-sponsored loans.
The recent crisis in banking is actually an opportunity – for borrowers in multifamily and for the GSEs (government-sponsored enterprise) like Fannie Mae and Freddie Mac.
That’s one of the key takeaways from Beekin’s recent webinar on small balance lending.
With many lenders pulling back on new lending amid the uncertainty in the regional banking sector, certainty of execution is a big deal for people looking to borrow in the small loan space right now, said Kevin Vanarsdall, Deputy Chief Underwriter at Greystone.
“These are tough times to navigate. Greystone, as a vendor of Freddie and Fannie [loans], we basically represent these GSEs that were created with that purpose in mind – liquidity, stability and affordability in the marketplace,” Vanarsdall said during the webinar.
“And that certainty of execution is, I think, what borrowers are starting to seek out. And I think that’s one thing the GSEs do really well, is step up at times like this.”
For Freddie and Fannie SBL lenders, the pullback in lending at some banks presents an opportunity to grab market share, said Jerry Lam, Chief Underwriter for Freddie Mac SBL at Greystone.
“Banking firms have pulled back. Most recently, [at] the end of March, some LifeCos and banks basically signaled to the market that their buckets are full. That could be just a precursor to something bigger, meaning some of the liquidity in the market space dried up, in the sense of ‘Hey, we’ve got to backstop our balance sheet,’” Lam said.
“This is a great opportunity for the agencies [GSEs] to come in and provide that liquidity and also pick up some market share that we’ve lost to banks over the last 12 months,” he added.
“The players in the market right now, the ones that are most interested in financing, are the ones that have to,” Vanarsdall said.
“So you see more acquisition than refinance, and when you do see refi it might be a property that recently stabilized, it might be construction financing. The makeup of the transactions we’ve seen has shifted in those directions for sure, and the loan types themselves are definitely shorter terms.”
Timing of loans and interest rate volatility
With interest rate volatility on the rise, panelists agreed that borrowers are increasingly looking at the timing of their loan, in order to land the best possible rate. But to do that properly means the borrower has to be prepared, the panelists said.
“Nothing pains us more as underwriters [than] to have our borrowers say, I’ll just wait for the rate to drop. Then the rate drops [and they say] ‘I’m not ready.’ You’re scrambling, you’re in a mad dash to a red light. By the time you got ready, the rates have gone back up.”
Travis Jones, SVP and Chief Underwriter Small Loans at Berkadia, says the key is to talk to your lender and understand what you need to have in place to be ready to jump on a lower interest rate when it appears.
“It costs nothing to have a conversation with the lender that you choose. Have a conversation with them. The more information you have, the more detail that you have up front, the easier it is to help them confirm that you’re agency ready,” Jones said.
“Go to Fannie Mae’s website, download the small balance loan terms sheet. … Do the same thing with Freddy SBL”.
The key is to have your documentation ready to go – including your insurance policy, the panelists stressed, as well as using better data to support underwriting.
Fannie vs. Freddie: Loan comparison
And at a time when interest rates are volatile over short periods, making the right call about whether to get a Fannie-backed loan or a Freddie-backed loan can make a difference.
Fannie is more competitive in longer-term loans of 10, 12 or 15 years, while Freddie is stronger on shorter loans in the five- or seven-year range, Jones said.
With Freddie, you have the rate quoted to you locked in for 35 business days, but with Fannie loans, that rate can vary while you wait for approval.
A typical loan approval takes 90 days with Freddie, and about 45 days with Fannie, Jones said.
Preparing for a Fannie or Freddie loan
If you want to lock in a rate when interest rates drop, you’ll need to make sure you have everything lined up, Jones explained.
“It’s about two to three weeks to get a third-party report in. In that time frame, bucket what you do. Your first two to three weeks, all of your personal financial statements, your REO schedule, your documents, your credit authorizations, get that to your underwriter. Let them process that,” Jones explained.
“The other one that I really recommend, and I cannot stress this enough – start your insurance process early.”
Without proof of insurance in place, getting a quote from Fannie or Freddie can be a headache, he added.
“Those are government quasi-agency programs, and they just come with more documents and scrutiny. That’s just a fact.”
Vidur Gupta, CEO of Beekin, said “The panelists represent more than 30-40 years of underwriting experience for multifamily loans. Their insights are invaluable to borrowers looking to navigate this market”.
The message that in a tough market, you should ‘Keep calm and carry on’, and focus on the basics to succeed was reinforced by these erudite executives at top lending institutions.