When looking for financing options, multifamily investors are faced with an overwhelming variety of choices. While it’s easy to focus solely on rate, proceeds, and closing costs when comparing lending alternatives, it’s also crucial to understand how a given loan will affect your long and short-term investment strategies. In addition to available loan terms, the following factors are critical in determining whether a financing solution will enable you to meet your investment goals:
Fannie Mae and Freddie Mac, also known as “the Agencies,” are two of the most competitive lending sources around. Backed by a government-imposed duty to supply liquidity and stability to the multifamily market, they provide desirable terms and program flexibility.
Read on to learn why you should be considering agency lending.
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:
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.
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.
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.
Walker & Dunlop, as a Fannie Mae and Freddie Mac lender, not only originates, underwrites, and closes agency loans, but we service them post-closing as well. This ensures that our clients are provided the same exceptional service throughout the life of their loan. With Banks and other institutions, the loan is typically sold to another lender or institution to service your loan.
Think agency lending is the right fit for your multifamily investment? While there are many options to consider when financing your multifamily property, Walker & Dunlop is here to help you navigate the process with our dedicated multifamily team. We are focused on delivering an enhanced customer experience and streamlining the process for a quick closing.