Multifamily Lending: Bank vs. Agency Loans
Before we start on the differences, it may be helpful to review some basic definitions of exactly what agencies are. Agency Lending refers to Government-Sponsored Enterprises such as Fannie Mae, Freddie Mac, and the Federal Housing Authority.
One differencebetween bank and agency financing is whether the loan is recourse or non-recourse. Fannie Mae and Freddie Mac (agency) loans are used for purchasing or refinancing primarily multifamily properties and are non-recourse with bad boy carve outs. This means that the debt is secured only by the loan collateral (e.g. the apartment community). If you default on a non-recourse loan, the lender can only recoup the pledged collateral. They can’t go after your personal assets. One of the biggest benefits of working with non-recourse lenders is that your personal liability is protected.
Multifamily financing from a bank has traditionally been non-recourse as well, but since COVID we have seen banks start to require recourse on their loans. This means that you and your partner(s) are personally liable for the full loan amount in the event of a default. If the property sale does not cover the loan amount, the lender can go after assets that were not used as loan collateral.
When it comes to interest rates, Banks have been offering a slight advantage on 5-year fixed rates, while Agencies have been offering tighter spreads on their 7, 10- and 12-year fixed rate products. We have closed many 10 and 12-year Agency loans at the same or better rates than the Banks were offering for 5 years.
Agencies also have the benefit of higher leverage, which top out at 80% loan to value (LTV). Banks in this environment have been comfortable at about 70% LTV with select banks going up to 75% LTV.
You are also going to want to consider prepayment penalties. Bank loans typically feature a stepdown 5,4,3,2,1% prepayment penalty, while Agency products have declining prepayment penalties or yield maintenance. Agency’s have mitigated this by offering supplemental loans during the loan term, and also allow their financing to be assumable. Agencies have required higher COVID reserves of anywhere from 6-18 months P&I which gets released after a certain period of time, compared to the banks who may require 3-6 months or possibly no COVID reserves.
For value add investments, It should be noted there are balance sheet lenders that offer low cost bridge loans on multifamily properties. These can be 2-3 year terms plus extensions and used towards acquisitions that require cap ex work, or lease up to stabilization. Interest rates start at L+3.50% on an Interest Only basis, with flexible prepay and up to 75-80% LTC. Minimum loan amounts are generally $5-7 Million.
While there is no right or wrong choice, as an investor, arming yourself with the knowledge needed to determine which loan products work best for you should ALWAYS be the first step.
Let us help you evaluate the various financing options available, and advise in choosing the right loan for your business plan and investment strategy.