- Recourse structure
- Regulatory constraints
- Operational flexibility
- Post-closing (servicing)
Fannie Mae and Freddie Mac, also known as “the Agencies,” are two of the most competitive lending sources. Backed by a government-imposed duty to supply liquidity and stability to the multifamily market, they provide desirable terms and program flexibility.
1. Fannie Mae and Freddie Mac Lending Options Provide Borrowers with Competitive Terms
Agency loans may offer more competitive and flexible terms for borrowers than most lending sources. Some of the terms that make Agency financing so competitive include:
- Fixed or floating-rate options
- Maximum leverage of up to 80% of value
- 5-to-30-year loan terms
- Amortization of up to 30 years
- Cash-out refinance
- Flexible prepayment structures
- Fully assumable loans
2. Supplemental financing rights (Fannie Mae only) Non-Recourse Loans Limit Borrower Liability
One of the greatest differentiating factors between agency and bank financing is the liability requirement known as recourse obligations. Agency loans are almost always non-recourse; whereas, the banks are typically recourse loans. Let’s dive into this a little further.
A recourse loan includes a personal guarantee from the key individuals sponsoring the transaction, known as a “guarantor.” Should the borrower default during the loan term, recourse lenders have the ability to seek repayment from the guarantor, personally, for any losses and fees sustained by the lender, including shortage of debt repayment.
For example, if the collateral securing the loan needs to be sold in foreclosure and the sale of the property does not cover all debt obligations, the lender may go after the guarantor’s personal assets, such as a different property or car, to satisfy the debt obligations. For obvious reasons, these loans are generally not ideal for most real estate investors that have accumulated significant assets and wealth.
A non-recourse loan is a loan where the borrower (aka guarantor) is not personally liable for repaying the outstanding debt in the event of default or foreclosure. If the borrowing entity defaults on the loan, the lender can only seize the collateral, even if the property collateral does not cover the full value of the defaulted amount. Non-recourse loans do, however, include standard carve-out guarantees, also known as “bad boy” or springing recourse guarantees. In the event of default, if the borrower commits any of the specified bad boy acts (fraud, material misrepresentation, or preventing the lender from enforcing on its collateral, such as filing for bankruptcy or unpermitted transfers) then the guarantor is responsible for any losses that the lender incurs during the foreclosure process.
Additionally, the underwriting requirements between recourse and non-recourse loan transactions vary. Agency and other non-recourse lenders focus solely on the underlying asset as the main source of repayment. The borrower’s experience, net worth, and liquidity requirements are certainly considered during the underwriting process, but the required information on the guarantor is less extensive. Alternatively, recourse lenders will typically do a much deeper dive into the loan’s guarantor. Non-recourse borrowers typically don’t have to worry about providing individual tax returns, debt-to-income analyses, or analysis of personal liabilities to qualify for the loan.
3. Consistent Access to Capital, Regardless of Location or Exposure, or market conditions like the Pandemic
Banks tend to lend in focused geographical areas, even down to specific neighborhoods or submarkets. By contrast, both agency lenders’ mission statement is to provide liquidity and stability to the housing market, with a focus on affordability, in all communities across the nation. With a wide geographic footprint, the agencies provide investors with consistent access to capital regardless of location and market conditions. Agency lending has proven to be a reliable source of capital during recessions, the pandemic, and other volatile market conditions. While banks and other fair-weather institutions pulled back and stopped lending as a reaction to the unstable market conditions, the agencies held strong.
Another key concern for banks is “over-exposure” to any single borrower. For example, a small community bank may have a maximum lending limit of $15 million per borrower. If the borrower owns four assets and has a need for $17 million in debt, they would have to find multiple lenders to satisfy their debt needs. Alternatively, agency lenders do not have exposure limitations and provide unlimited access to debt as long as the borrower and property meet the minimum underwriting requirements.
4. Flexibility with Cash Deposits and Operating Accounts
To access competitive bank financing, borrowers may be required to bank their property’s cash deposits and operating accounts with the institution that provided the loan. Freddie Mac and Fannie Mae have no such requirements and allow the borrower to maintain maximum flexibility and keep their cash deposits and property operating accounts at their bank of choice.
Could agency lending be the right fit for your multifamily investment? While there are many options to consider when financing your multifamily property, we are here to help you navigate the process.
For more information, talk to one of our multifamily experts or get an instant quote through our instant quote tool.
Source: ANA RAMOS, Walker & Dunlop