Commercial mortgage-backed securities lenders are gaining market share in the apartment market as Fannie Mae, Freddie Mac and the life insurance companies have been less active than during the same time last year. "The agencies have become more active after starting the year slowly," said Faron Thompson, international director in JLL's capital markets group. "Borrowers have more choices than they've had since 2007. There are a number of different programs and a complete smorgasbord of opportunities."
There were about $706 million of new apartment loans in the first half of 2014 - about 2% less than during the same period in 2013. But Fannie Mae, Freddie Mac and the life insurance companies have seen their volumes drop about 13% year-over-year, according to a new report from JLL, citing data from the Mortgage Bankers Association. CMBS Lending volumes are about 19% higher.
Although Fannie Mae and Freddie Mac had a slow start to the year, this changed after Mel Watt to the reins of the Federal Housing Financing Agency in February. Watt succeeded Ed DeMarco, whose tenure was marketed by curtailing lending efforts with the aim of making Fannie Mae and Freddie Mac smaller and smarter. "[Watt] wanted Fannie Mae and Freddie Mac to make smart loans and well underwritten loans. He was not trying to put them in a volume box or keep them from responding to the market's needs," Thompson added.
Market participants have observed that in recent months, the GSEs have worked hard to be more competititve with the conduits. Dan Lisser, principal and senior managing director at Johnson Capital, observed that the GSEs became more aggressive when restrictions under DeMarco, such as reducing portfolios by 10% annually, were lifted. "For borrowers, [the liquidity] will continue to keep cap rates low as they can get attractive financing," Lisser said. "It will be very good for sellers as well, as they will see great pricing."
Peter Donovan, a senior managing director at CBRE, told REFI he is not surprised to see the increase in competition from the agencies. "I think they're doing it in a disciplined way," he said. "I dont like the word 'aggressive,' because I don't see it as a bad thing. This is not 2006 or 2007, where underwriting has seemed to go a little too far. It's always been fairly compeititive, but in a healthy way."
Thompson noted that earlier this year, CMBS pricing was almost in line with the GSEs. "But right now, agency pricing is anywhere from 15 to 35 basis points tighter. The gap has widened again," he added, noting that gSEs offer a product that is more customized that the so-called "cookie cutter" CMBS loans.
Ray Potter, founder of New York-based advisory company R3 Funding, illustrated. In March, the firm was working to arrange a loan on a portfolio of Class B apartments in Gates, NY, that was shopped to CMBS and GSE lenders. At that time, the CMBS lender was the aggressive. But three months later, the same borrower was looking for a loan on six similar properties in the same area. This time, a Freddie Mac lender offered termes that were much more aggressive, including a four-year interest-only period and a spread that was 20 bps tighter. "It was a pretty easy decision to go with the Freddie Mac lender - there was more IO, more proceeds and a tighter spread," he added.
There continues to be a divergence between the type of borrowers that CMBS lenders and GSEs are looking for. CMBS lenders tend to offer higher pricing and pursue smaller borrowers, Donovan noted. Both groups of lenders, however, are similar in terms of client base and execution. That means increased competition from Fannie Mae and Freddie Mac may affect borrowers in small ways, such as providng another year of interest-only or a particular structure that is more effective, he added.
On the syndicated lending side, the GSEs are about 20 basis points cheaper than the bank market right now. "But if you compare teh syndicated loan product to Fannie Mae and Freddie Mac, it's very different. The execution is more like a CMBS loan, whereas we are floating-rate, three- to five-year lender," Galligan said.
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