Multifamily Market Growing Faster than Expected

At the start of 2019, Freddie Mac’s Multifamily Outlook forecast a continuation of the strong and stable market we have experienced throughout the past few years. We anticipated that new supply in certain markets would remain elevated because of the healthy construction market, demand for multifamily units would remain high due to ongoing demographic and lifestyle preference trends, and that rent growth and occupancy rates would remain above historic norms.
We got it right, with one important exception: interest rates. The 10-year Treasury rate was about 3.2 percent in November and we expected a rising rate environment that would push up mortgage and cap rates, slowing market growth. Instead, rates promptly fell 50 basis points in December and have since fallen another 70 bps. Today, there is speculation that the Fed might lower rates and the yield on the 10-year Treasury has hovered around 2 percent.
This lower-than-expected rate environment has grown the multifamily origination market substantially. We see this in publicly available industry data, and it is reflected in our new business volume. In fact, our Optigo lenders have continually reported increased mortgage demand over last year. Discretionary refinancing, sales activity and overall deal volume is much higher than we thought it would be.
As a result, volume for the entire multifamily origination market could be upward of $20 billion more than 2018’s record levels.
With our conventional production cap held constant at $35 billion, a larger market means that both agencies are focusing heavily on managing origination volumes so that we can continue providing liquidity, stability and affordability to the multifamily market through year-end. Despite these challenges, Freddie Mac’s prior approval underwriting model has allowed us to manage our pipeline with precision, and we fully expect to remain within the cap while managing increased inflows and mortgage demand.
With the continued strength in our origination business, Freddie Mac Multifamily has also worked to innovate our investor offerings. In June we celebrated the 10-year anniversary of our K-Deal platform, our signature innovation that has now securitized more than $300 billion in loans and fundamentally transformed how our business works. Today, we transfer nearly 90 percent of credit risk on newly acquired loans, securitized through the K-Deal and other credit risk transfer initiatives, to private investors, helping insulate taxpayers from potential credit losses.
Our continued credit discipline means our loans substantially outperform the market. In the first quarter of 2019, our delinquency rate was a mere 3 bps. In their history, our K-Deal structured securities have had less than 1 bp of losses and 99.96 percent of loans securitized by K-Deals are current.
More than 500 investors have participated in our K-Deals already, and we continue to broaden our investment offerings to attract diverse sources of private capital.
In January, we completed our first credit risk transfer offering through the Multifamily Credit Insurance Pool (MCIP). In May, we launched our Private Placement PC Swap execution, which is designed to provide liquidity to small mission-driven financial institutions. And we recently priced our very first K-G Deal, which exclusively securitizes workforce housing financed through our energy-efficiency Green Advantage® product.
These innovations and others have helped Freddie Mac continue meeting its mission of providing affordability, stability and liquidity to the multifamily market. Nearly 90 percent of the units we finance support housing affordable to renters earning area median income or below. And we work to diligently manage our business so that we can remain in every market through all business cycles, helping make home possible for more and more Americans every year.
By: Debbie Jenkins (NREI)
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