Big Expectations for Small Loans in 2022

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In the last year, the multifamily originations market has seen impressive growth. In fact, according to The Mortgage Bankers Association, multifamily originations are anticipated to rise to a record $409 billion—a 13 percent increase from 2020. With the market growing at such a remarkable rate, The Federal Housing Finance Agency (FHFA) recently announced the 2022 Scorecard for Fannie Mae and Freddie Mac and established that their 2022 multifamily loan purchase caps will be raised. This raise—which is based on the agency's projections for the market’s growth—and the new Scorecard provide much to be encouraged about as many of the new modifications favor the products offered by the agencies.

According to the 2022 Scorecard, multifamily loan purchase caps for both Fannie Mae and Freddie Mac will be elevated to $78 billion each, for a total of $156 billion. This marks a raise from the previous caps of $70 billion each in 2021 and also represents an 11.4 percent increase year-over-year. Additionally, the Scorecard requires that a minimum of 50 percent of both Fannie Mae and Freddie Mac’s loan purchases must be “mission-driven.” Also, at least 25 percent of loan purchases need to be affordable for residents who are at or below 60 percent of the area median income (AMI)—a five percent increase from 2021. This 5% increase, coupled with the cap raises, translates to an approximate $40% increase in dollar volume.

The increase in the AMI requirement will likely result in increased competition between Fannie Mae and Freddie Mac to win business, creating an improvement in pricing for borrowers as well as more flexible credit parameters. Also, by allowing both 100% AMI and 120% AMI markets to contribute to the 50% mission-driven requirement, there should be an expansion in the amount of eligible properties—which is a huge benefit to the small loans market.

According to Rick Wolf, head of small loans production at Greystone, the $16 billion in total raises over the prior year creates significant opportunity for the agencies while the new loan purchase requirements will also require Fannie Mae and Freddie Mac to engage in more mission-driven business.

“Increasing the multifamily lending caps opens up more market share for the agencies,” said Wolf.

“When you see the caps go up, the agencies have to deliver more of that business to achieve the overall 50% mission-based goal, as well as to those who are at 60 percent AMI or below. There is a little nuance, but before it was only properties that were at or below 80% area median income or 60% area median income that qualified for mission-based goals. Now they've expanded that to include those that are at 100 percent and 120 percent in cost-burdened and very cost-burdened markets, so the eligible pool of properties has grown, and this will positively impact the small loan market.”

In addition to the increases in multifamily loan purchase caps and the changes to loan purchase requirements, the definition of mission-driven has also been changed for 2022. Under the new expanded definition, mission-driven now includes, not only the 100% and 120% cost-burdened and very cost-burdened markets, but also includes the Agencies Green programs. By allowing Fannie Mae and Freddie Mac’s Green programs to contribute to mission-driven requirements, there will likely be greater pricing discounts for qualifying loans in addition to renewed interest from clients in the product.

“There will be more volume overall,” said Wolf. “The way they changed the goals means that there will be more focus on providing mission-based business. Small loans by nature provide a disproportionate percentage of mission-based business and we expect 2022 to be a good year for this segment of the market.”

Finally, in more positive signs for property investors of workforce housing and middle-market multifamily, Freddie Mac recently eliminated its COVID debt service reserves (DSR) requirement for small loans, easing the upfront capital requirements for borrowers, and Fannie Mae has recently decreased its pricing, indicating confidence in the strength of the market going forward.

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