The first half of 2017 has seen tremendous lending activity from our
correspondent life insurance companies, as several are ahead of plan for their
2017 loan allocations. Essex has recently
observed that life companies have been particularly competitive lending on
multifamily properties, especially in the past few months.
The multifamily lending space is typically the domain of Freddie Mac
and Fannie Mae, but recently, Essex has observed several life companies outperforming
the two agencies, both in terms of loan proceeds and interest rate. Two multifamily deals that Essex has worked
on in the past two months have stood out in particular. On each deal, life companies were able to
offer 5-10% more in loan proceeds and interest rates that were 20-30 basis
points (bps) lower than the best agency terms.
Essex believes that its relationship life company lenders will
continue to offer better loan terms for those Borrowers looking for moderate to
high leverage (40% - 70% LTV) for two reasons.
First, life companies are more comfortable looking at a Property’s
current financial performance, the quality of the asset, and the strength of
the Sponsor. Life Companies rely more on
a Property’s in-place rental income and expenses, and less on the Property’s
trailing 3-month, 6-month, or 12-month operating statements. Agencies are obligated to underwrite a
Property’s recent past performance, and one bad month of occupancy has the
potential to significantly limit loan proceeds.
Secondly, a recent Wall Street journal article (link below)
articulates how the two agencies are increasingly off-loading mortgage default
risk to investors in the form of credit-risk transfers, which may be increasing
interest rate spreads for multifamily borrowers. Fannie and Freddie have traditionally
purchased mortgages from lenders, packaged them into mortgage-backed securities
or bundles of individual loans, and sold these securities to investors with a
repayment guaranty backed by the Federal Government in the event of a
default. Credit-risk transfers are like
traditional mortgage-backed securities, but without the repayment guaranty, and
therefore offer higher yields for investors.
Sales of these credit risk transfers are increasing, and for the
residential mortgage industry, are expected to reach $15 billion in 2017, up
from $13 billion in 2016.
Off-loading credit risk to private investors is one way the government
is reducing its role in the U.S. mortgage market. However, private investors naturally demand a
higher yield for buying these riskier assets, and as a result, agencies will
need to increase interest rate spreads for multifamily borrowers in
concert. Essex has already seen several
cases of agency lenders increasing their interest rate spreads 20-30 bps in the
past six months.
Essex believes that these two factors provide an excellent opportunity
for multifamily investors to secure long-term life company financing with
attractive terms, rates, and loan proceeds.
Our life company lenders are also able to offer construction take-out
loans when a new property achieves a 1.0x debt coverage ratio, longer loan
terms for generational assets (15-30 years fixed), and forward loan commitments
up to 12 months (9 months beyond the free 90 day initial rate lock). Most life company loans that Essex originates
will also be serviced by our in-house team of servicing professionals, which
currently services a 700-property, $3.5 billion loan portfolio and is
frequently hailed as being best-in-class.
Wall Street Journal: Investors Take On Mortgage Risk From Fannie Mae, Freddie Mac