Agency loans are multifamily loans backed by government-sponsored enterprises such as Fannie Mae or Freddie Mac. Heres what makes them stand out.In this article:
If youre looking for a multifamily real estate loan, you may wish to consider an agency loan. Agency loans are loans backed by government-sponsored enterprises (GSEs), such as Fannie Mae or Freddie Mac.
Agency loans have become increasingly popular options for financing real estate, especially for multifamily properties. But what exactly are agency loans and what makes them preferable to other types of financing? This article provides an in-depth look at agency loans, their key features, and reasons for their widespread use.
Overview of Agency Loans
Agency loans are mortgages issued or guaranteed by government-sponsored enterprises like Fannie Mae, Freddie Mac, FHA, VA, and USDA These agencies set standards for loans they will securitize, purchase, or insure
When a lender originates a loan meeting agency criteria, they can sell it to Fannie Mae or Freddie Mac. The agencies bundle these loans into mortgage-backed securities, giving lenders funds to offer more loans. This pumping of liquidity into housing markets is a key benefit of agency lending.
Agency loans finance single-family homes and multifamily properties nationwide. They are a consistent, countercyclical source of capital across markets.
Key Features and Parameters
Agency loans have defining features that make them attractive financing options
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Nationwide availability Agency loans are accessible across markets regardless of volatility or downturns. Geographic flexibility is a major plus.
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Low and stable rates: Agency securitization offers competitive pricing. Interest rates are consistently low given agency guarantee of timely repayment.
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Longer terms: Agencies provide mainly 10-year fixed rate loans. Options like interest-only periods are commonly available too.
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High proceeds: Agency execution often enables borrowers to maximize proceeds from a refinance or acquisition.
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Non-recourse: Borrowers aren’t personally liable for default. Fraud can trigger recourse but it’s otherwise limited.
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Assumable financing: Buyers can assume agency loans when a property is sold before maturity.
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LTVs up to 75-80%: Agencies permit high leverage. Amortization keeps LTVs stable over time.
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Flexible DCRs: Debt coverage ratio requirements are softer than conventional loans. DCRs as low as 1.15 are often eligible.
In exchange for these advantages, agency loans do have some tradeoffs like prepayment penalties and reporting requirements. But for many borrowers, the benefits outweigh the costs.
Why Agency Loans Are Popular
Several key factors drive the popularity of agency lending for real estate finance:
Reliable Capital Through Cycles
Agency loan activity increases when other sources pull back. This countercyclical role keeps capital flowing in downturns when liquidity dries up. Borrowers can depend on agency financing across cycles.
Lower Rates and Higher Proceeds
By issuing mortgage-backed securities, agencies offer lower coupon rates than balance sheet lenders. Refinances and acquisitions done via agencies maximize proceeds. Even small rate differences can equate to significant savings.
Flexibility for Borrowers
Borrowers can choose their own bank for deposits and maintenance accounts with agency loans. There are also minimal requirements on guarantors. The focus stays on property finances.
Ideal for Multifamily Finance
Agency execution shines for multifamily finance. It provides long-term, low-cost debt on stabilized assets. Owners keep their property’s upside and cash flow.
Strong Exit Strategy
For borrowers planning a hold or sale in 5-10 years, agency loans offer an efficient exit. Prepayment flexibility lets borrowers refi or sell when the time is right.
When to Use Agency Lending
Here are some ideal situations for financing real estate with agency loans:
- For stabilized, income-producing properties like multifamily, agency lending maximizes leverage and reduces debt costs.
- If aiming to hold an asset long term, agency loans give flexibility to refi or sell when strategic. Prepayment options support exits.
- For rate- and proceeds-sensitive borrowers, agencies offer the best terms and competitive pricing.
- When consistent low-cost capital is needed across markets or business cycles, agencies provide reliability.
- If there are minimal plans to recapitalize or access equity over the loan term, agency financing fits. More flexible bank loans may suit recap needs better.
- For borrowers wanting non-recourse financing, agency loans limit personal liability.
Institutions like REITs often prefer agency execution for these reasons when financing major property portfolios.
How Agency Lending Works
Behind the scenes, the agency lending process involves several steps:
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A lender like Chase originates a loan meeting Fannie or Freddie guidelines.
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Fannie Mae or Freddie Mac purchases the originated loan from the lender.
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The agency packages the debt with other loans into a mortgage-backed security.
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They sell the securities to investors like mutual funds, pensions, or REITs.
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The lender uses proceeds from the agency sale to offer new mortgages, repeating the cycle.
This flow of capital from agencies to lenders to borrowers provides market liquidity and homebuyer access to low mortgage rates.
Differences from Conventional Loans
Agency and conventional loans both have pros and cons that suit different needs:
Term Flexibility
Agency loans offer longer terms of 10 years or more. But they have prepayment penalties that discourage early repayment. Conventional loans tend to have more flexible repayment.
Requirements
Conventional loans thoroughly examine borrowers while agencies focus on property finances. Extra requirements on guarantors are common with bank lenders.
Recourse
Agency loans are primarily non-recourse aside from fraud. Conventional loans often have some degree of personal recourse attached.
Rates and Fees
Agencies can offer lower rates and higher proceeds thanks to securitization and secondary markets. But they charge fees like prepayment penalties.
Cash Access
Borrowers choosing agencies can use their preferred bank. Conventional loans require deposits/accounts at the lending institution.
Finding the Right Loan Option
Every real estate investment has unique needs. But agency lending provides an excellent choice in many circumstances when:
- Low, fixed interest rates are critical
- Maximal leverage and proceeds are desirable
- Consistent access to capital is needed across markets
- Non-recourse financing is preferred
- Loan term flexibility is less important than cost savings
Understanding your investment horizons, cost sensitivities, and capital access needs is key to identifying the best financing mix. Agencies bring major advantages like reliability, low rates, and flexibility that make them a go-to for many borrowers and multifamily investors. With programmatic access to both agency and conventional lending, the best institutions like Chase can provide customized solutions tailored to each client’s needs and objectives.
Lower Interest Rates
Agency loans typically have lower interest rates than other types of loans, such as conventional financing. This stems from the fact that agency loans are backed by GSEs, meaning that lenders themselves take on far less risk than they would with a conventional mortgage.
Agency loans typically offer amortization periods of up to 30 years. This generally keeps your monthly payments relatively low, increasing your cash flows. However, be aware that at a standard, 10-year (or shorter) term, you may need to pay a balloon payment as the mortgage matures..
Fixed- or Adjustable-Rate Loans
Agency loans are available as both fixed-rate and adjustable-rate loans. This means you can choose the type of loan that best suits your needs. If you opt for a fixed-rate agency loan, the interest rate will remain the same for the life of the mortgage — even if rates begin to rise astronomically. This provides peace of mind and stability, as you know your monthly payments will remain the same through the loans term.
Another advantage of agency loans is that they are backed by the government. This means that the GSEs will make payments on the loan if you default. This can give you peace of mind knowing that your loan is backed by the government.
Agency vs Non Agency Loans In Under 1-Minute
FAQ
What is the meaning of loan agency?
What is the difference between agency and non agency loans?
What is an example of an agency loan?
How do you qualify for an agency loan?
What is an agency loan?
An agency loan is a loan that is a mortgage-backed security and it is created by the following entities: The most secure loan group is the GNMA. The US government guarantees this group, and there is no default risk. The groups FNMA and FHLMC are GSEs (government-sponsored enterprises). Conforming loans fit into this group, as do conventional loans.
What does agency mean in a mortgage?
What does agency mean in the mortgage? Agency means that a bona fide regulatory body, typically by and for the government of the US, (FNMA, FHLMC, and/or GNMA) will back and securitize loans post-closing. Most mortgage loans are regulated in some form or fashion by either a governmental or quasi-governmental body.
How do agency loans work?
Once an approved lender makes a loan to a borrower, Fannie® or Freddie® will purchase it. At that point, they will generally pool it with a variety of other loans in a process known as securitization, and will then sell the resulting bonds to investors on the secondary market. What Makes Agency Loans So Great?
What is the difference between a bank and Agency loan?
Borrower vs. property focus: Bank and agency loan servicers perform due diligence on the borrower and property. But bank loans generally focus on the borrower, while agency loans place that focus on the property.