Cooper Williams
President, Essex Financial Group
When financing multifamily properties, most apartment owners first think about government sponsored entities, Fannie Mae and Freddie Mac. The GSEs have historically offered more competitive terms than conventional apartment financing sources – insurance companies and banks – on everything from the higher leverage to lower interest rates for longer-term, fixed rate loans. However, times are changing.
According to research conducted by the Mortgage Bankers Association, the insurance companies’ mortgage debt holdings increased by 9% in 2018, which is higher than the overall market average for multifamily debt holdings. This increased exposure to multifamily debt is directly attributable to insurance companies expanding their debt offerings on their balance sheets, along with adding new programs with third-party capital partners.
These third-party capital partners have increased the insurance companies’ bandwidth and product offerings, which in turn has parlayed into more opportunities, more loan requests and more closed loans. This trend will continue for the remainder of the year as the GSEs are closely managing their capped business in order to maintain liquidity through year-end.
In a fast-moving, constantly changing economic environment, it is important for apartment property owners to understand how the insurance companies might compete against the GSEs, in order to secure the best possible loan terms to align with their business objectives. Here are a few ways in which the insurance companies are going head-to-head with the GSEs and winning business:
Interest rates. Insurance company spreads are consistently 30 to 60 basis points lower than GSE spreads for moderate leverage (approximately 65% loan to value) on Class A and B multifamily properties in major metropolitan areas. This is amplified with the GSEs reaching their allocation caps at the midyear point. While the insurance companies are not as competitive with the GSEs on full leverage 75% LTV loan requests, the insurance companies will get extremely aggressive on lower-leverage requests.
We are currently seeing insurance company spreads as low as 125 bps for sub-55% LTV loans, and with today’s 10-year U.S. Treasury hovering around 2%, apartment property owners can still lock in 10-year fixed rates as low as 3.25%. Unlike the GSEs, insurance companies can fix the rate at loan application for 90 days, and for a very small increase in the spread (2 to 3 bps per month), the insurance companies can lock a rate for up to six months.
Variety of terms. Insurance companies have a significant need for long-term (10- to 30-year), fixed-income assets where monthly or semiannual interest payments can match to long-term payout requirements on annuities and life insurance policies. As such, the insurance companies can offer a longer-term product that the GSEs can’t offer, and with today’s flat yield curve, there is only a marginal difference between a 10-year fixed rate (approximately 3.5% on average) and a 15-year fixed rate (approximately 3.65% on average).
Additionally, insurance companies are now offering shorter-term floating-rate loans through expanded capital offerings with third-party clients. These new floating-rate options are designed to compete directly with the banks, and the insurance companies are winning with their lower cost of capital and nonrecourse capabilities.
Creativity. Insurance companies are starting to get creative in order to steal business away from the GSEs. Insurance companies can be creative on a case-by-case basis when a loan request does not fit within the confines of a particular loan program. Creative structures include funding hurdles (initial funding at 1.10x debt coverage ratio, followed by the full funding upon stabilization), earnouts based on predetermined loan metrics (debt yield, debt coverage ratio), interest reserves or other holdbacks, higher leverage on the right asset, master leases, or limited recourse obligations until stabilization. The potential possibilities can be tailored to the borrower’s needs, where the GSEs are constrained by their set programs.
Additionally, insurance companies can underwrite a property on a forward-looking basis and are not as reliant as the GSEs on trailing three- or 12-month operations to underwrite, size, quote and close a loan. This is particularly helpful for construction loan takeout loans or repositions that are in the process of stabilizing.
Construction-to-permanent loan products. Several life insurance companies offer construction-to-permanent financing options, which allows borrowers to fix a long-term interest rate preconstruction, eliminate interest rate risk during construction, and eliminate refinance risk during lease-up and stabilization. Most programs have a minimum duration of 10 years, and several insurance companies can go as long as 30 years fixed. In fact, one specific insurance company program has a 40-year term with a 40-year amortization (think HUD 221(d) (4) without the giant timeline and uncertainty).
Before deferring to the GSEs on your next acquisition loan or refinance, you might want to look into alternative financing options with the insurance companies. You may be surprised by the positive results.
