Multifamily loans interest rates & pricing 101

[Dushyant Ravi]

I receive many pricing guidance requests for Freddie & Fannie Multifamily loans, so I figured I can shed some light on how I as a banker price loans. This will largely be focused on how agencies look at pricing but my background has also been in selling bonds backed by commercial real estate loans in the secondary marketplace.

There is a lot I can write about on break evens, returns, investor spread, securitization, etc but that’s not very relevant or interesting to borrowers and rightfully so as the only thing that matters at the end of the day is the interest rate spread to borrowers.

First and foremost, there is no one size fits all model. It is for this reason, I will underpromise and aim to overdeliver and not the other way around. Borrower A and borrower B getting a quote for the same asset from the same lender on the same day may not even get the same pricing. The variable here is of course the borrower (experience, repeat GSE borrower, etc) but in other cases there are also tons of variables- market, property sub type, Dscr and LTV metrics, interest only period, affordability/% AMI , acquisition or refi, loan term, loan size, fixed or floating, etc.

As you can see there are tons of variables but I will shed light on two important ones- metrics and market.

Fannie have three Dscr/Ltv tiers for the most part- tier 2- 1.25x/80%, tier 3-1.35x/65%, tier 4- 1.55x/55%. Freddie has something very similar well.

These tiers are important to know as you get different pricing based on the tier. At a very high level, I get real time data from the pricing desk every day that will tell me for for example- tier 2, 10 year term, >$6MM loan, fixed rate, 151-191 bps spread. Different tiers (2,3 or 4), loan terms (5,7,10 or 12+) will have different spreads and that will change based on Loan size and whether it’s Multifamily or manufactured housing, senior living, student housing, etc as well.

Market- Fannie provide the bankers every year something called form 4660 that will be updated frequently. This is the Bible. This dictates what we can do and cannot do. There are times we can confidently quote without even consulting Fannie and there are times we have to go through a pre approval process with Fannie. This form notes for example that Boston MSA is a "strong" market. "Strong" is Fannies internal classification and that matters as in those markets, 80% LTV for acquisitions is possible and interest only terms can potentially be upto 180 months.

Houston MSA for example is a “pre-review” market. This means we have to go back to Fannie and they will have to sign off before issuing a quote. A pre-review market has limits on leverage, interest only periods,etc

You have a few other market classifications but hopefully this makes it clear on how markets impact pricing, leverage, and even terms like interest only periods or response times before getting a quote.

My best advice to borrowers- given the variables in play with not only the asset but also the market , engage with your banker early in the process and also choose a banker that will not over promise and under deliver. It is very easy to verbally quote a deal but as you can see above, several variables will have an impact and then slowly leverage will start to get dialed back and pricing will creep up.