Finance: Good Times

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April 29, 2015
Tony Petosa and Nick Bertino
Wells Fargo Multifamily Capital

A comment made frequently by lenders at a recent national banker’s conference was, “It is a good time to be a borrower.” Correction, it is a great time to be a borrower! Treasury yields have been hovering at or near all time lows, loan spreads are at favorable levels, and lender underwriting guidelines have moderated – some believe too quickly – as a result of an expanding supply of active lenders in the market.


Most commercial real estate lenders who survived the 2008 market meltdown have worked through their troubled assets, and are once again lending. New lenders, including a multitude of conduit lenders, have joined the fray in anticipation of a large spike in the volume of maturing loans over the next three years. According to a survey released on January 13, 2015, by the Mortgage Bankers Association (MBA), a relative measure of supply and demand showed that lenders were 50% more eager to make loans than borrowers were to take out loans.


Most lenders and participants at the MBA’s annual conference, which took place in February 2015, expressed optimism about the overall health of commercial lending markets and future growth prospects. According to the MBA, the amount of commercial and multifamily debt outstanding rose to a record high in the third quarter of 2014, and now stands at $2.6 trillion. New loan originations in 2015 are projected to be $414 billion, an increase of 7% from 2014.


The following is an overview of lending alternatives and the environment we anticipate during the remainder of 2015.


Conduit Lenders


The re-emergence of Commercial Mortgage Backed Securities (CMBS), and conduit lenders who originate these mortgages, has been a key factor in the market’s recovery over the past three years. Conduit lenders originate and pool loans that are sold in the capital markets, resulting in attractive financing terms for a wide range of properties and borrowers. While conduit loans are not a good fit for every borrower, they play an essential role underpinning the market by providing lending options for properties that may not otherwise be eligible for competitive financing terms.


Conduit loans have account for as much as 50% of total commercial real estate lending volume in some years. At the peak of the market in 2007, annual U.S. conduit lending volume was close to $230 billion. In 2008, however, the CMBS industry was all but dismantled until the second half of 2012, which marked the comeback of conduit lenders when investors (buyers of CMBS) once again became comfortable with underwriting standards and real estate exposure in general. Conduit loan production in 2014 totaled approximately $101 billion, which was an increase of approximately 19% of 2013, according to a recent issue of Commercial Mortgage Alert. Some insiders are projecting 2015 conduit lending volumes will be as high as $125 billion. CMBS and similar securitized loans currently account for 21% of outstanding commercial and multifamily mortgages in the U.S.


Multifamily properties are highly desired among conduit lenders who need a diverse mix of property types for their loan pools. MHCs in particular are in strong demand among conduit lenders since other lenders, most notable Freddie Mac and Frannie Mae, compete aggressively for traditional apartments thereby making it more difficult for conduit lenders to win that multifamily business.


Government-sponsored entities


Fannie Mae (FNMA) and Freddie Mac are the two government-sponsored entities (GSEs) that actively lend on MHCs. They have the directive from their regulator to enhance the flow of credit to multifamily properties nationwide. Fannie Mae was the most reliable lender, and often the only option, during the most recent lending crisis. On April 29 2014, Freddie Mac received approval from its regulator, the Federal Housing Finance Agency (FHFA), to begin lending on MHCs. This move is reflective of a more expansive role for the GSE’s being signaled by FHFA director Mel Watt, who assumed office on January 6, 2014.


FNMA loans are accessed through Delegated Underwriting and Servicing (DUS) lenders who are designated to underwrite, process, close, and service loans for Fannie Mae. Freddie Mac loans are accessed through its designated lenders, called sellers/servicers, who play the same role as Fannie Mae’s DUS lenders.


GSE’s offer very attractive terms, including recently introduced early rate lock options, and GSE loans now comprise 43% of outstanding multifamily mortgage debt in the United States. In 2014, FNMA and Freddie Mac provided $1.5 billion in financing to MHC owners, and we expect this to be substantially higher in 2015 since Freddie Mac was not lending on MHCs until the second half of 2014. In addition, MHC loans are excluded from GSE annual lending volume caps, which should further increase the GSE’s demand for MHC loans.


Life Insurance Companies


Life insurance companies (Lifecos) have an ongoing need to invest money in long-term, fixed rate investments with defined maturities, which includes commercial real estate loans. Lifecos purchase CMBS as investors, and also directly originate loans to borrowers. In 2014, lifecos originated $61 billion of commercial real estate loans, and account for 14% of outstanding U.S. commercial and multifamily debt.


With regard to MHCs, Lifecos continue to focus on higher quality, preferably age-restricted, communities in larger markets with financially strong and experienced borrowers. They generally pursue larger loan sizes ($5 million or more) at lower leverage levels than can usually be achieved with conduit or GSE lenders. Lifecos tend to have a pricing advantage for loans with fixed rate terms in excess of 10 years, and they also offer the ability for the borrower to lock rates at the time of application.


Banks and Thrifts


Bank and thrifts hold the largest share, 37%, of outstanding commercial and multifamily mortgages in the U.S. assisted by the tailwinds of improving property values, bank and thrifts have addressed most of their “bad” real estate loans, and are now expanding loan origination efforts. Additionally, bank deposits have increased, providing additional funds to lend. Banks and thrifts originated $944 billion in new commercial and multifamily loans in 2014.


Bank lending in usually limited geographically to the footprint of the bank’s retail network as many banks prefer to lend only to local borrowers to whom they can also provide additional banking services. Furthermore, since banks typically require a personal guarantee, their underwriting focuses more intensely on the individual providing the personal guarantee.


Some banks consider MHCs to be a special purpose property type outside the scope of their normal lending activity, and therefore, approach MHC lending in a conservative manner. However, there are substantial differences across the country in bank lending programs that are offered for MHCs. In some regions, such as the west coast, there are banks that market specifically to the MHC sector.


In summary, financing is readily available for solid quality MHCs in most markets. Lenders will continue to compete heavily for the higher quality properties and borrowers. While disruptions in the capital markets could put the brakes on the good times, it is great to be finally talking about commercial lending without analyzing the state of the market recovery.


Tony Petosa and Nick Bertino of Wells Fargo Multifamily Capital specialize in providing financing for MHCs through Fannie Mae, Freddie Mac, conduit, and balance sheet lending programs. For more information or for a copy of their “Manufactured Home Community Financing Handbook,” please contact: Tony at 760-438-2153 or; or Nick at 760-438-2692 or; or visit



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