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Fannie Mae and Freddie Mac are having a slow third quarter. When the two agencies hit their lending caps a few weeks ago, there was some uncertainty about extending them. As a result, Fannie and Freddie have pulled back on both pricing and credit terms over the last 6 weeks, creating an opportunity for CMBS players to gain multifamily marketshare.

“The federal government puts out allocation every year with Fannie and Freddie, and once they hit that cap, they go into bunker mode and only do deals that fit their mandates, which are typically affordable deals,” Jonathan Lee, principal and managing director at George Smith Partners, tells GlobeSt.com. “So, in order to save their allocation for the year, they are being a lot more conservative on the deals that they do. That is driving a lot of business to CMBS right now.”

It isn’t unusual for the agencies to hit their initial lending caps in the third quarter. Generally, this causes some uncertainty until the agencies announce an extension. This year, however, some investors feared there wouldn’t be an extension. “This uncertainty usually comes around this time of the year,” says Lee. “The Trump Administration is trying to diversify the lenders in the space and take off less from the government, so there were rumors that they wouldn’t extend the caps. That caused additional uncertainty and some market congestion.”

The uncertainty fueled activity in the CMBS market. “CMBS lenders are starting to pick up more multifamily deals as a result,” says Lee. “We are pricing deals actively in the market, and we are finding that CMBS is 10% to 15% more in proceeds than Fannie and Freddie and 30 to 40 basis points inside Fannie and Freddie’s pricing on market rate units. They are being very aggressive and trying to take as much marketshare as they can.”

While CMBS is being competitive, there are still benefits to going to agency route. “With an agency loan, if you are getting a 10- or 12-year loan, you can put a supplemental on the loan, versus a CMBS lender where the proceeds from day one are the proceeds,” says Lee.

At the Fall NMHC meetings, Mark Calabria, FHFA director, announced new lending caps for the agencies of $100 billion per agency for the next five quarter period beginning in fourth quarter 2019 and running through all of 2020. This is a significant increase in lending capacity over 2018. Now, there is some certainty in the agency market that will likely result in strong activity by the year-end. “I think that Fannie and Freddie will rebound and have a strong end of the year, but they are having a tough third quarter,” says Lee.