Small loans were a popular product type for Fannie Mae borrowers in 2005, and the government-sponsored enterprise (GSE) predicted it would continue to be a growth area in 2006.

Fannie Mae’s investments in small loans grew to $5.2 billion from $3.4 billion in 2004, a 53% increase. Fannie defines small loans as being no greater than $3 million (or $5 million in certain markets).

Fannie Mae’s total Delegated Underwriting and Servicing (DUS) program activity reached $19 billion in 2005, up from $16.2 billion in 2004. The GSE reported that it participated in financing for a total of $25.6 billion in multifamily rental housing in 2005, its second-best year on record. In 2004, its multifamily total was $21.2 billion.

Where to find flexibility

As Fannie Mae and fellow GSE Freddie Mac continue to confront heated competition from Wall Street conduits for multifamily loans, both are expanding their businesses in niche markets. Small loans, seniors housing and mixed-use developments are some of the niche markets getting more GSE attention. In addition, Fannie is continuing to make its financing programs more flexible and easier to use, and it is also continuing efforts to increase the leverage borrowers are able to get from its loans.

For example, on Feb. 2 Fannie announced an update of its Extended Maturity Option, which lets borrowers extend the term of their loan for up to 12 months (converting to an adjustable interest rate from a fixed rate period of typically nine years). In the new version of the option, the variable rate is built into the pricing over the whole term of the loan, and it converts automatically after the final year of the fixed term. This change helps Fannie securitize the variable-rate portion of the loan, something it couldn’t do with the previous version, according to Manuel Menendez Jr., Fannie’s vice president of multifamily product development. He said the revamped program also includes more-flexible prepayment terms, allowing earlier prepayment.

Over the past two years, about half of Fannie’s fixed-rate deals have been done with the extended-maturity format; Menendez expects between $4.5 billion and $5 billion of such deals in 2006.

Fannie Mae is also expanding its Preferred Delegation efforts and working to simplify and speed up its processes. Dubbed Preferred Delegation Plus, Fannie’s new effort is addressing parts of its system that make it uncompetitive and is letting its lenders handle more of the deal for what it defines as conventional, “nonlarge” (less than $25 million) deals.

It has also delegated to lenders the ability to allow greater amounts of commercial space in mixed-use developments. The limit on commercial space remains at 20%, but the GSE is flexible about that ceiling for projects where the commercial element is deemed to serve the residents and is appropriate to the neighborhood. Now the lenders, not Fannie, will make that decision.

“We found we were [involved with] too many loans on the front end,” said John Powell Jr., Fannie’s vice president of multifamily customer management. He also predicted that loan processing could be speeded up by a day or two as a result of an ongoing process of reengineering the DUS program.

“What we’re trying to do is take advantage of the flexibility of the market to be a portfolio lender,” said Menendez, noting that Fannie Mae can be more flexible on terms than conduits.

In addition to the growth in Fannie’s small-loan business, preservation of affordable housing will be an important financing type in 2006. Initiatives in student housing and rural housing are also expected to be unveiled soon.

Lender trends

Greystone Servicing Corp., Inc., is looking forward to getting a boost from Fannie’s efforts such as Preferred Delegation Plus and DUS Plus (for increased debt-service-coverage ratios up to 85%). “They’re giving us preferred delegation on things that we need to get waivers for, such as pricing and debt coverage,” said Daniel Lambert, Greystone’s managing director and co-head of DUS production. Acknowledging that “2005 wasn’t quite as good as 2004,” Lambert said 2006 was off to a good start and he expects to do at least $1 billion in 2006 for all Fannie lending.

In 2005, GMAC Commercial Mortgage Corp. did about $1.6 billion in Fannie business, about half of which was affordable housing, according to Jim Rowan, senior vice president and managing director of agency lending. He said GMAC remains bullish despite the fierce competition in the market, at least partly because of the efficiency of Fannie Mae executions and continuing innovations, such as DUS Plus and other supplemental loan options.

Other lenders are also optimistic about 2006, including Red Mortgage Capital, Inc., which provided more than $1 billion in Fannie Mae financing in 2005.

Prudential Mortgage Capital Co., which reported originating $1.41 billion in Fannie deals in 2005 (including $125 million in affordable DUS deals), up from $1.12 billion in 2004, expects to see a lot of refinancing in 2006. “The good old shape of the yield curve” has made long-term debt costs “as good as it gets,” according to David Durning, managing director of real estate finance for Prudential.