Freddie Mac Apartment Lending During Covid-19

Select Commercial participates in the Freddie Mac Small Balance Lending (SBL) program for multifamily properties.  The Freddie Mac program offers great low fixed rates for long term permanent financing on a nationwide basis.  Freddie Mac SBL loans are also non-recourse (no personal guarantee from the borrower).  Due to Covid-19, Freddie Mac has made several changes to their lending guidelines which affect loan approvals.  Some of the major changes are as follows:

  • Most loans today require that a reserve account be setup and money escrowed from closing to cover 12 months of principal and interest.  This reserve account will typically be held for 12 months and used to cover mortgage payments in the event that the building owner is unable to make payments due to an inability to collect rental payments from tenants.  With many tenants out of work and not earning an income, many landlords are experiencing cash shortfalls and difficulty paying back their loans.  The reserve account will be released after the government lifts Covid-19 restrictions.
  • Refinance loans with cash out are subject to restrictions in loan to value ratio and debt service requirement ratios.  Loans that were typically approved at 80% LTV are now being quoted at 75%.  Loans that were typically approved with a 1.25x DSCR are now being quoted at 1.30X.  These steps effectively serve to limit the amount of cash out on a loan refinance.
  • Many apartment properties contain commercial space on the ground floor.  Unless the commercial tenant is an essential service (grocery store, pharmacy, etc.) the commercial space is being underwritten as if it is vacant (the income will not count).  This affects the overall net operating income of the property and effectively limits loan size on these properties.

In addition to these changes imposed by Freddie Mac, many state and local governments are limiting the ability of landlords to evict tenants for non-payment of rent.  This has caused many properties to suffer economic vacancies and losses.  These eviction restrictions are causing a drop in value of the property and difficulty obtaining maximum loan amounts.  We are watching the market closely for new developments as the pandemic continues.

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