Fannie Mae is an enterprise created by Congress that plays an important part in the U.S. housing finance system. The primary benefit of Fannie Mae, also known as the Federal National Mortgage Association (FNMA), is the liquidity, stability and affordability that they provide to the mortgage industry. Thousands of banks and other mortgage lenders have the loans that they issue bought by the FNMA. This provides lenders with liquidity, or available access to funds on reasonable terms, which they can use to create more loans and allow additional borrowers access to homeownership. The FNMA works to avoid housing bubbles and tries to keep the market as stable as possible.
While lenders gain access to liquid funds and borrowers can become homeowners, the FNMA packages the loans they purchase into mortgage-backed securities (MBS). An MBS is attractive to investors because it is a safer investment since Fannie Mae ensures them timely payments of principal and interest on the mortgages. With more investors putting money into MBSs, the pool of funds that is available for housing is expanded throughout the country. One of the two main types of loans that the FNMA purchases are multi-family mortgages, the other being single-family mortgages. The enterprise’s mortgage purchases provide a stable supply of mortgage funds for individuals and families that buy homes and investors that purchase multifamily residences.
What is a Fannie Mae multifamily mortgage?
Fannie Mae frequently purchases loans for multifamily residences, which can be any rental housing that has five or more dwelling units. Multifamily housing can be an apartment with one-room efficiencies, an apartment in a senior housing facility or an apartment for medium- to low-income residents. Regardless of the size, the FMNA is focused on providing high-quality, affordable housing, especially for families with annual incomes less than the median income of their area. Multifamily mortgages can also be issued for specialized types of housing including the following:
- Seniors housing – For properties that include skilled nursing, independent living and assisted living facilities.
- Cooperative apartments – For properties with shareholders that are entitled to exclusive use of a housing unit in the property.
- Manufactured housing parks – For land-leased manufactured parks and any related amenities.
- Student housing – For complexes located near major colleges and universities that are built exclusively for students.
- Affordable housing – For properties that are rent-restricted and subsidized by federal, state or local government.
When a lender sells a multifamily loan to Fannie Mae, it must maintain the established servicing standards. Fannie Mae loans continuously have their servicing standards reviewed and updated to best suit the market and current economic conditions. These standards are set in place to ensure that borrowers, lenders and future tenants can make the most out of multifamily loans. Multifamily mortgages are managed using a business model with the following four key principles:
- Workforce housing – Affordable and quality housing for the American workforce is Fannie Mae’s main focus. On average, about 80 percent of multifamily units that were finances were affordable for families at or below the median income in their area.
- Skin in the game – Borrowers must put cash equity into their financed properties. Lenders for multifamily must also share in any losses in order to ensure that both parties have their economic interests aligned.
- Cash is king – Lenders must underwrite multifamily loans for sale to Fannie Mae based on actual income as opposed to projected income.
- Delegation – Underwriting and servicing of loans is delegated to risk sharing lenders. This aligns the risk and provides certainty of execution and leverages the lenders’ capabilities.
In order to maintain their dependability and resilience, Fannie Mae guidelines dictate that this foundational business model is followed for all multifamily mortgages. To learn more about Fannie Mae requirements to protect homeowners, download our free guide.
What makes a multifamily Fannie Mae mortgage unique?
Both single-family and multi-family Fannie Mae mortgages operate within the secondary mortgage market, but there are some key differences between them. The multifamily mortgage market is significantly smaller than the single-family market, with single-family loans totaling nearly 10 times the amount of multi-family loans. This is mostly because there are much fewer loans that are distributed, as they are significantly larger, more complex and diverse in content than single-family mortgages. Since most multifamily borrowers are operating businesses, Fannie Mae collateralizes their loans with the income-producing properties that these businesses operate.
Additionally, Fannie Mae loans for multifamily mortgages are typically a much larger sum than single-family loans, and they also have shorter lifecycles. Multifamily loans can amount to millions of dollars, and are typically issued with five-, seven- or 10-year terms with balloon payments (larger-than-usual one-time payments) when the loan reaches maturity. As opposed to single-family loans, multi-family mortgages often include prepayment restrictions and additional prepayment premiums. Since these mortgages are more complex, Fannie Mae only works with lenders that have demonstrated financial strength, extensive multifamily underwriting and servicing experience and strong portfolio performance. As such, there is a very small number of lenders for multifamily mortgages compared to lenders for single-family loans.
Overview of Multifamily Mortgages
The Fannie Mae multifamily mortgage market serves a major role in providing housing for a varied range of individuals and families. Approximately 85 percent of all occupied multifamily housing units are affordable to households earning less than 80 percent of the area’s median income. Fannie Mae is able to scale their multifamily business by expanding or contracting in order to meet market conditions through delegating to their lenders and sharing the risk in each investment. Together, lenders and investors are able to make profit, more affordable homes are made available and the housing market benefits resulting in more mortgages being created.
This business has been sustainable for a few major reasons. For one, when borrowers, lenders and Fannie Mae share risk, they align their economic interests and work together towards a successful venture. Fannie Mae also targets a large and permanent segment of the market that is not very inviting or attractive to opportunistic investors. Finally, utilizing an integrated business team with commercial real estate expertise allows for Fannie Mae to purchase more loans while business teams manage most of the groundwork. Through this methodology, the FNMA has successfully served America’s workforce and housing market for decades.
Download our detailed guide to learn more about the benefits of Fannie Mae-back loans as well as the eligibility requirements of homeowners and lenders.