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Banks Slow Multifamily Lending Even as GSEs Step on the Gas

Banks Bowing to Federal Regulatory Pressures, Even as Fundamentals Remain Strong
August 24, 2016
U.S. banks have continued to pull back on multifamily lending. The amount of such loans on their books has decreased for each of the last three weeks, according to the latest weekly bank asset numbers from the Federal Reserve, an indication that banks are originating fewer multifamily loans than the number of loans being paid off.

On July 20, 2016, multifamily loan assets on bank books totaled $296.3 billion. As of Aug. 10 (the latest numbers), the total had declined to $293.9 billion. The string of declines is the first since the Fed started reporting weekly multifamily numbers in January 2015.

Willy Walker, chairman and CEO of Walker & Dunlop.

The decline in bank lending has much to do with browbeating from federal regulators, according to Willy Walker, chairman and CEO of Walker & Dunlop, one of the largest CRE lenders in the country.

"The numbers don’t surprise me,” Walker said. "The Office of the Comptroller of the Currency came out in May saying they were concerned with CRE exposure at commercial banks.”

That federal scrutiny is changing both the volume and banks’ loan terms.

“I think the regulatory scrutiny, and certainly our own uncertainty about where the market is, is really resulting in a more well-defined lending environment,” Domenick Cama, senior executive vice president and COO of Investors Bancorp, said last month. “We are seeing fewer lenders doing things that were not good from an underwriting perspective. And what that means is that we are seeing fewer loans being made as IOs. We are seeing loans being made at higher cap rates, despite what the appraisals say.”

In addition to reacting to increased regulatory oversight, bankers said they're also pulling back from multifamily loans becuasee they can't make a reasonable profit on those loans at today’s tight cap rates.

“We continue to shift the mix within our loan portfolio towards a greater percentage of higher-yielding non-multifamily loans and our efforts have seen results as our total loan portfolio has transitioned to 45% originated multifamily loans, down from 51% at the end of the second quarter of 2015 and 56% at the end of the second quarter 2014,” Michael Allison, president of Commercial Bank for Opus Bank, reported last month.

Fannie Mae, Freddie Mac Still Going Strong


While federal banking regulators are applying pressure on banks, the federally sponsored Freddie Mac and Fannie Mae are turning up their multifamily lending.

The Federal Housing Finance Agency (FHFA) last week increased the 2016 multifamily lending caps for Fannie Mae and Freddie Mac, raising the caps from $35 billion to $36.5 billion for each effective immediately. It was the second increase this year.

The FHFA adjustment was based on increased estimates of the overall size of the 2016 multifamily finance market, which has been hotter than had been estimated due to continued high levels of property acquisitions and deliveries of newly constructed apartment units as well as record levels of loan maturities that require refinancing.

The FHFAs view of a growing multifamily market is supported by the Mortgage Bankers Associations June survey, which shows that multifamily debt originations are expected to grow from $262 billion last year to $273 billion this year to nearly $280 billion by 2018.

“We had a very strong first half, issuing more than $28 billion in multifamily securities and structured transactions,” said Josh Seiff, vice president of multifamily capital markets & trading at Fannie Mae.

In its mid-year multifamily market outlook, Freddie Mac noted that underlying multifamily demand remains strong and will improve further next year as the market absorbs the wave of new supply working its way into the market.

“Dispersion across individual markets will continue, but increased supply or economic headwinds in some markets will not derail multifamily growth at the national level,” Freddie Mac concluded.

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