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Perhaps you are aware that in Sept 2019, the Federal Housing Finance Agency (FHFA) revised their caps on multifamily loan purchases for Fannie Mae and Freddie Mac (Government-Sponsored Enterprise or GSE) for the five-quarter period between Q4 2019 and Q4 2020. The new purchase caps are $100 billion for each GSE, for a combined total of $200 billion, for all multifamily business – no exclusions.

“Multifamily housing is a critical component of addressing our nation’s shortage of affordable housing,” said FHFA Director Mark Calabria. “These new multifamily caps eliminate loopholes, provide ample support for the market without crowding out private capital, and significantly increase affordable housing support over previous levels.  The GSEs should also manage under the caps to provide consistent, stable liquidity to the market throughout the entire five-quarter period.”​​

While the $200 billion cap is cumulative, the GSE’s likely didn’t want to exceed an implied quarterly rate of $20 billion in loan because a) they take their liquidity mission seriously as a consistent source of debt capital through all market conditions, and b) they didn’t want to use up all their allocated capital in the first 3 quarters and have to go back to FHFA for more cap space. So as a result, both GSE’s now enter the second half of 2020 with a relatively large amount of volume cap remaining:

(in billions)

Volume Cap

Q4 2019 First Half 2020

2nd Half 2020

Freddie Mac  $          100.00  $             18.10  $             33.70  $             48.20
Fannie Mae  $          100.00  $             17.60  $             30.20  $             52.20


With interest rates at an all-time low right now, we can assume that both GSE’s have a large pipeline of loans.  Still, it is likely they want to leave a little “dry powder” in order to safely stay under the volume caps. Equally likely is that both GSE’s want to come close to the volume cap – without exceeding it – simply because they won’t want to provide a reason for the FHFA to reduce their volume caps for 2021.

I believe this will create a window of opportunity for borrowers in late Sept/early Oct when the GSE’s will be in a ‘use it or lose it’ situation. We could therefore see a push to sign up loans in those weeks provided the loans can be closed (and sold to the GSE’s) by the end of the calendar year. Since lower prices typically increase demand, I expect lower loan spreads in those weeks so as to come close to, but not exceed, volume caps.

What about their Mission Targets?

To ensure a strong focus on affordable housing and traditionally underserved markets, FHFA has directed that at least 37.5 percent of the GSEs’ multifamily business be mission-driven, affordable housing.  This new minimum of 37.5 percent responsibly assures that the GSEs’ multifamily businesses have a strong and growing commitment to affordable housing finance.

My guess is that heading into the second half of 2020, both Freddie and Fannie got ahead of this goal so they would not need to scramble to find this business – or worse yet – lower credit standards in order to spur demand. If this assumption is correct, then the pricing discount for affordable loans (relative to conventional loans) will be less dramatic that what we have seen in the first half of this year — think 10 – 15 bps discount versus 20 – 25 bps of discount. When Fall arrives, I think it’s going to revert to the norm since loans originated then will typically not get purchased by the agencies until the new calendar year.

You would think the GSE’s would be happy to fund more than 37.5% in affordable loans, but that’s not likely to happen. Even though the GSE’s are hard-wired to find, underwrite and close this important type of business, the stark reality is that by exceeding the goal it simply raises the bar for the following year. If, say, 42% of their current pipeline is mission-driven/affordable housing, they may spend the next few months concentrating on more conventional loans, which are also more profitable for them.

Economic Data as of July 31, 2020

In case you missed it…

  • 2Q GDP down 33%
  • 10-year UST at 54bps; Bloomberg 4Q forecast remains steady at 87bps; 10-year UST at start of year was 1.88%
  • S&P 500 at 3,246, essentially unchanged since start of year
  • Freddie A-2 bonds surprisingly jumped a few bps last week, while Fannie 10/9.5’s were flat (view both of these as a sort of “cost of goods sold”)
  • Freddie forecasts multifamily vacancies to increase 200 to 250 basis points over the next several quarters; rents down 1% to 2%