Good times for borrowers

Russellville Park, a seniors community in Portland, Ore., took out a $49.3 million Fannie Mae mortgage this spring. Russellville Park, a seniors community in Portland, Ore., took out a $49.3 million Fannie Mae mortgage this spring.

Fannie Mae, Freddie Mac eager to make deals as competition with life companies and commercial banks intensifies.

By Bendix Anderson

Suddenly, borrowers have lots of choices for permanent financing for seniors housing properties. 

“Borrowing is fun again,” says Judy Marczewski, chief financial officer for Seattle-based Leisure Care. “It’s such a dramatic change from a few years ago.”

Marczewski chose a $49.3 million Fannie Mae mortgage for Russellville Park, a seniors community in Portland, Ore. She picked Fannie Mae because of strong relationships with her Fannie Mae lender, Berkadia Commercial Mortgage, in addition to competitive interest rates and underwriting.

Fannie Mae and Freddie Mac lenders are quickly growing their seniors housing business, despite heavy competition from commercial banks and life company lenders. 

These government-sponsored enterprises (GSEs) are eager to lend to seniors housing because they have found the business to be profitable and safe — even in tough times.

“The credit profile of this industry is so very strong,” says Chris Honn, director of the seniors housing group at Fannie Mae. “In our seniors housing book we don’t have any seriously delinquent loans.”

Big numbers

Both Fannie Mae and Freddie Mac increased the volume of their seniors housing lending by roughly one-third in 2013 compared to the year before.

“Fannie Mae is highly committed to growing this product,” says Honn. 

Fannie Mae lenders made a total of $1.6 billion in seniors housing loans in 2013. That’s a 33 percent increase from 2012. Fannie Mae’s volume of seniors lending in 2012 was healthy even compared to the years before the real estate boom and bust, when Fannie Mae’s volume used to total between $1.2 billion to $2 billion a year.

Freddie Mac made a total of $900 million in seniors housing loans in 2013. That’s up from $650 million
in 2012.

Fannie Mae and Freddie Mac grew their seniors housing business in 2013 even though the federal conservator that monitors the GSEs ordered them to cut their multifamily lending overall by 10 percent. 

The GSEs made room in their limited volume to grow their seniors housing business because the loans have been profitable and defaults almost nonexistent.

“Both agencies were very aggressive in the seniors housing space in 2013 and continue to be very aggressive going into 2014,” says Mike Lugli, national manager of seniors housing finance for KeyBank.

Borrowers rule

As the real estate markets heal, the balance of power has shifted away from lenders and toward seniors housing borrowers.

Fannie Mae and Freddie Mac lenders must now compete with life companies and commercial banks to get borrowers’ attention. 

“We are seeing a dramatic increase in competitive quotes on loan terms from commercial banks,” says Fannie Mae’s Honn. “Borrowers are getting more quotes than they have in the past.”

Banks once rarely offered permanent, fixed-rate financing, but that is changing. Regional banks now regularly offer fixed-rate loans with five-year terms. Community banks often lend as long as seven years at fixed rates. 

The interest rates offered by banks are often not the lowest. But borrowers who used bank financing don’t have to worry about prepayment penalties, which come with Fannie Mae or Freddie Mac financing. Life companies and insurance companies often offer the most competitive interest rates, but with low leverage.

As more lenders compete for borrowers, fewer borrowers are looking for lenders, experts say. Real estate investment trusts (REITs) have been buying up large portfolios of seniors housing properties. 

The problem for lenders is that REITs often don’t need to borrow money, since they can raise their own cash on Wall Street. 

Any debt that is carried by the properties that REITs buy is often paid off at purchase or as soon as the prepayment penalties have expired.

“The pool of properties with willing borrowers has shrunk,” says William Kauffman, managing director of seniors housing for St. Paul, Minn.-based Oak Grove Capital. 

Interest rates 

Fannie Mae and Freddie Mac have stayed competitive by keeping their interest rates low, even as interest rates overall rose over the last year.

“Our interest rates have been very consistent,” says Honn.

Fannie Mae and Freddie Mac lenders now offer 10-year financing with an all-in fixed rate ranging from 4.9 to 5.5 percent, or 220 to 265 basis points over the 10-year Treasury yield.

Those interest rates put Fannie Mae and Freddie Mac lenders in the middle of the pack of lenders — not as low as life companies but lower than many commercial banks.

Between the two GSEs, Freddie Mac lenders often offer the lowest interest rates by a few basis points. “Because we access the capital markets with a pooled risk, our pricing can be better,” says Steven Schmidt, seniors housing director for Freddie Mac. 

In contrast, Fannie Mae issues bonds backed by mortgages on single seniors housing properties. In turn, Fannie Mae lenders often close and lock in the interest rates on their loans a few days faster, according to experts interviewed for this story.

Interest rates for many kinds of permanent financing rose sharply in 2013, driven higher by the rising yield on U.S. Treasury bonds. Most long-term, fixed interest rates are based on Treasury bond yields, so when yields go up, rates offered by lenders rise. 

Treasury bond yields rose after officials in the Federal Reserve began to talk in May 2013 about scaling
back on federal stimulus programs, which help keep interest rates low. For most of 2012, the yield on 10-year Treasuries ranged between 1.5 and 2 percent. Since spring 2013, the yield has mostly ranged between 2.5 and 3 percent. 

Fannie Mae and Freddie Mac interest rates stayed low because the other factors in the interest rate equation became less expensive. 

Investor demand grew for seniors housing bonds issued by Fannie Mae and Freddie Mac, lessening the difference between the yield of these bonds and Treasury bonds. Also, the agencies are collecting less in fees for their financings. 

“We’ve had adjustments to our prices for guarantee and servicing fees,” says Fannie Mae’s Honn.

Locking the rate

Most borrowers believe interest rates are likely to rise again as the economy improves, but no one knows exactly when that will happen.

That uncertainty makes borrowers practically desperate to close their loans and lock in their interest rates, so that suddenly rising rates don’t hurt their deals. 

“Borrowers want faster and faster turnaround on loan closings,” says Honn.

Typically it takes 60 to 90 days after a borrower submits his application to close a Fannie Mae or Freddie Mac loan.

Fannie Mae has a reputation for sometimes going a little faster. “They will sharpen up their pencils to close a deal,” says Lugli.

For example, it took just 45 days after application for KeyBank to close a $160 million Fannie Mae loan for a portfolio of four seniors assisted living properties in Florida for Kayne Anderson Capital Advisors.

Underwriting eases

The underwriting terms set by Fannie Mae and Freddie Mac also are getting a little more flexible. “Terms are loosening,” says Keybank’s Lugli.

The GSEs now offer more borrowers longer interest-only periods in which borrowers pay just enough each month to cover the interest on the loan. 

Most GSE loans still have no interest-only period, though interest-only is becoming more common. 

The GSEs sometimes offer interest-only financing for the whole term of a permanent loan, provided the loan covers less than 50 percent of the value of the property and the debt-service coverage ratio is at or above 2.0. The borrowers must also have a strong track record.

“We are seeing more requests for interest-only loans,” says Honn.

Stronger economic conditions

Improving real estate fundamental also are making financing easier for borrowers. 

The occupancy rate for the assisted living segment of seniors housing stood at 89.1 percent during the first quarter of 2014 and 90.2 percent for independent living, according to the National Investment Center for the Seniors Housing & Care Industry.

In the years after the Great Recession, seniors housing properties often suffered from low occupancies. Prospective new residents often put off moving if they did not absolutely need seniors housing services. Many single-family homes lost a great deal of value during the housing crash. 

Independent living properties, which provide fewer services, faced the worst challenges.

Russellville Park, Leisure Care’s property in Portland, Ore., opened a new phase in its mix of 293 independent living, assisted living, and memory care seniors housing units in 2009, during the worst of the Great Recession. Two years later, the apartments were still not fully occupied. Berkadia BBVA Compass gave Russellville a lifeline — an interim loan from their balance sheets.

Two years later, Russellville was fully occupied at 90 percent, and early this year the occupancy rate hit 95 percent.

Seniors housing occupancies are now strong in most markets, though it’s still difficult to finance independent living properties in the handful of secondary and tertiary markets where demand is still weak.

“Agencies really pay attention to overall occupancies,” says Dan Biron, senior vice president of seniors housing and healthcare in the New York City office of Berkadia Commercial Mortgage.

GSE lenders also prefer to lend to borrowers who have at least five years of experience in the seniors housing business and at least five properties in their portfolios. Borrowers with slightly less experience can sometimes get a waiver, however. Berkadia recently provided agency financing to a Florida developer that owned three seniors properties and had three more under construction.

Most Fannie Mae or Freddie Mac loans to seniors properties are 10-year mortgages, though borrowers are also becoming interested in seven-year loans as interest rates for long-term financing get higher compared to short-term loans.

For the strongest borrowers, these loans cover a maximum of 75 percent of the value of a seniors property, though lower leverage is more common. The properties range from small assets with as little as 40 units to properties as large as 850, with an average size of roughly 100.

Smaller properties with fewer than 40 units are also difficult to finance, though borrowers sometimes bundle a number of these properties together into one mortgage deal.

Floating-rate returns

GSEs are also providing long-term, floating rate financing. “Floating-rate is very popular right now,” says Fannie Mae’s Honn.

Long-term, floating-rate loans provide flexibility to borrowers who can refinance or sell their properties without triggering a prepayment penalty. 

Since GSE fixed-rate mortgages are securitized and sold to bond investors, borrowers who want to prepay GSE loans often need to set up a complicated yield maintenance structure to keep regular payments flowing to the bond investors after the borrower exits the loan.

Floating rates are now also much lower than fixed rates, priced over the 30-day London Interbank Offered Rate (LIBOR) with all-in rates of about 3.25 percent.

Freddie Mac’s new deal

Freddie Mac has also partnered with lender Greystone to offer seniors housing borrowers a $150 million revolving credit facility. 

This interest-only, floating-rate financing offers borrowers extra flexibility with their financing. Freddie Mac expects the product to grow quickly. “The revolver product continues to gain traction,” says Freddie Mac’s Schmidt.

Oakmont Senior Living tapped its $29 million credit facility for its Oakmont of Chino Hills property in Chino Hills, Calif. 

“The facility allows us to finance assets off our construction loans sooner than ever before, and we can increase the leverage of the facility as assets stabilize and then again on the exit refinancing,” says Joe Lin, CFO at Oakmont Senior Living in a statement.

The credit facility is a big stretch into new territory. Usually, neither Freddie Mac nor Fannie Mae have been willing to take on construction risk.