Government lenders Fannie Mae and Freddie Mac bought fewer multifamily loans in the third quarter, a sign that higher interest rates are curbing investor demand for buying apartments.
Fannie Mae and Freddie Mac reported lower multifamily business volume compared to last year as apartment sales slow and they prepare for potential credit losses. Both lenders remain in government conservatorship, a result of being bailed out by the federal government during the 2008 housing market collapse.
Loan buying has fallen off for both lenders this year because of higher interest rates. They had big 2021 fourth quarters.
Fannie Mae, which buys loans from large banks, said multifamily volume fell to $15.9 billion from $18.7 billion in the second quarter and from $16.4 billion a year earlier. Most of the loans involved workforce and affordable rental units, according to Fannie Mae.
Fannie Mae's loan purchases increased in the second quarter after a drop in the first quarter, reflecting a surge in apartment buying as interest rates began to rise following the Federal Reserve's initial rate hikes that have continued throughout the year in an attempt to tame inflation.
Revenue was up 9% to $1.22 billion in the third quarter for Fannie Mae's multifamily business compared to a year ago, largely because of high guaranty fees and interest rate increases. Fannie Mae said average debt in a deal dropped to 60% in the third quarter compared to 65% last year, showing investors have had to put more equity into purchases.
Reduced Lending
Fannie Mae lowered its outlook for loan volume in the multifamily sector this year because of market conditions.
“We expect that multifamily mortgage market originations for 2022 will be between $400 billion and $430 billion," which is down from the $475 billion the lender estimated at the start of this year, said Chryssa Halley, Fannie Mae’s chief financial officer, on the company’s earnings call on Tuesday.
Meanwhile, Freddie Mac, which buys loans from small banks, bought $14 billion in multifamily loans in the third quarter, slightly down from $15 billion in the second quarter and a drop from $18 billion in the quarter last year. Revenue for Freddie Mac's multifamily business decreased to $760 million for the quarter compared to nearly $1.3 billion a year ago.
Like Fannie Mae, most of Freddie Mac's new business was for loans involving affordable rental housing.
David Benson, Fannie Mae's president and interim CEO, said the lender expects full-year gross domestic product to be flat this year.
“We continue to believe that a modest recession is likely to occur beginning in the first quarter of next year,” Benson said on a Tuesday conference call with investors.