reddie Mac has spent more on purchases and issuances in the first half of 2019 than in any recent year, and it’s raising some eyebrows.
A look at the agency’s monthly volume summaries reveals a YTD $212 million in purchases or issuances as of June 2019. For comparison, previous years saw numbers ranging from $183-$190 million, and $205 million in 2015.
While Fannie Mae doesn’t seem to be having a similar year (their Quarterly and Annual Results indicate $247 billion in provided YTD 2019 liquidity compared to $249 billion for the same time period in 2018), Freddie Mac’s spending poses an interesting thought experiment: What would happen if these agencies overspent in a year’s first half? Given their dependence on an annual government-dictated fixed allocation, could borrowers find themselves being held to stricter qualification procedures in the second half?
Understanding Agency Funding
In commercial real estate, Fannie Mae and Freddie Mac are a major source of funding for multifamily housing. Introduced by Congress to provide stability in the housing market, these agencies are huge assets for the people who qualify for their help. And therein lies the problem.
Qualifying for agency funding is often a slow, difficult process. There are credit requirements, and long waiting periods associated with loan evaluation. While investors in affordable housing can benefit from their low interest rates and high levels of leverage, the process of securing funding can be a deterrent for many.
Agency funding is attractive primarily because they offer non-recourse loans. Unlike recourse loans, borrowers who default with an agency enjoy protection of their personal assets. The commercial real estate property is held as collateral, and goes to the agency if a borrower can’t make payments. This lowered personal liability is a draw for many multifamily housing buyers and investors.
Agency funding doesn’t work for all buyers and investors, however. Due to the increased risk for the lender, strict underwriting criteria often comes with longer, less flexible loan terms. The good news is that not all of this is necessary for buyers and investors seeking the protection of a non-recourse loan.
Funding Alternatives to Agencies
Fannie Mae and Freddie Mac may be major funders for CRE, but they’re far from the only choice. Here are a few other options Pioneer Realty Capital provides:
CMBS Loans. The vast majority of commercial mortgage-backed security (CMBS) loans are non-recourse, similar to agency funding. A CMBS loan leverages commercial real estate property against the loan in case of default. Of course, some things are too good to be true. It’s wise to speak to a commercial real estate professional, such as those here at PRC, about things like “bad boy carve outs.” These clauses can include conditions which make a CMBS loan a recourse loan, removing the desired security.
Pioneer Realty Capital offers CMBS multifamily property loans. Choosing a loan originator like PRC means personalized financing options, more flexible guidelines, and attractive terms.
Bond Financing. Using a bond fund is a little different than borrowing against a property. In this scenario, a property owner or prospective property owner spreads their borrowing across multiple, individual lenders by selling bonds. Bonds are essentially certificates. Each is worth a set face value plus an interest rate. The borrower is beholden to paying interest back to their multiple lenders until the set maturity date, at which point the face value of the certificate must be paid. If a borrower cannot pay the amount back, it’s called defaulting on the bond. Bond defaults can result in bankruptcy, but are often resolved when cash flow improves.
Bond financing is great for CRE buyers and investors who are confident in their ability to pay back the bonds by their maturity date. PRC has bond fund options for interested investors and buyers.
Insurance Company Loans. Commercial mortgages provided by a life insurance company or group of companies are called insurance CRE loans. In this scenario, the insurance company is the first to benefit if a default results in property liquidation. This is called being in “first lien position” on the property. These loans are great for apartments, office, retail, and industrial properties. They do tend to require borrowers with good credit and low leverage.
Insurance companies are careful in their investments, as their customers expect dividends and strong performance. This means providing detailed information on existing cash flow and income for commercial properties. In exchange, these loans come in a range of negotiable terms and structures, including non-recourse. The advisors at PRC can help you decide if an insurance company loan is right for you.
Pressing on Without Agency Help is Possible
From initial purchase to refinancing, and renovating to build-out, there are funding options for every commercial real estate owner and investor at every stage. The experts at Pioneer Realty Capital specialize in finding the best possible non-agency financing and advising based on your needs and risk tolerance. Whether you’re seeking a new place to start your business, or a way to fund expansion, we’re here for you. Call 682-518-9416 or fill out this quick form to speak to a financial expert.