The U.S. Government will Be Guaranteeing Loans for Multifamily Landlords
Contrary to popular opinion Fannie Mae and Freddie Mac do not actually issue any mortgages. Rather, they guarantee mortgages that banks issue, providing that the borrower meets certain criteria. So, if a borrower defaults on his mortgage, Freddie/Fannie will pay the banks. This, in turn, encourages the banks to be a bit more lenient in mortgage requirements. The result is obvious: banks issue more mortgages than they would have if those guarantees were not in place.
But any potential small multifamily landlord will be disappointed that the Federal Housing Financing Agency (FHFA) has just announced its lending caps for 2023. (This is the agency that oversees and sets certain guidelines for Freddie and Fannie – and the loan caps are down slightly from 2022.) This year Fannie and Freddie will get $75 billion each to secure mortgages. Last year that number was $78 billion each. Quite honestly, it’s difficult to understand why in a troubled housing market that number would be lowered and not, in fact, raised. But my best guess is that the FHFA expects multifamily originations to contract this year.
Importantly, to ensure a strong focus on affordable housing in traditionally underserved markets FHFA said, it will require at least 50% of each multifamily business be “mission-driven” affordable housing.
“The mission driven loan caps, coupled with a new mission-driven category for affordable housing properties, will continue to ensure that the enterprises [Fannie and Freddie] have a strong commitment to addressing the need for affordable housing,” said Director Sandra L. Thompson. “The new affordable housing category will provide incentives for conventional borrowers to maintain rents at affordable levels for extended periods of time.”
The program which began on November 1st of this year allows financing of multifamily buildings of two to four units, even if they are not adjoining each other. Previously, the loans were allowed in top and standard markets only. Now, however, the program can be utilized in an any market nationwide, including poorer, underserved communities, as mentioned earlier.
Some of the criteria stipulates that there must be a minimum of ten apartment units per portfolio, none of which can be occupied by the owner. One-unit buildings are strictly forbidden unless they are directly adjacent to another property in the portfolio with more than one unit. Further, the borrower must provide financial reports that are unified, meaning that the individual buildings must be treated as one property, rather than a number of separate ones. Another criterion is that the buildings must be within three miles of each other, must be in the same county, and same state. Also, all buildings must be managed by the same property manager. This ensures consistent property management standards.