What are Agency loans and how do they differ from non-Agency loans? Agency loans such as Freddie Mac and Fannie Mae are federally-backed, low-risk loans. While they are similar in many ways, they have their differences. Here's everything you need to know before closing your first Freddie Mac or Fannie Mae loan.
What exactly are Agency loans?
Agencies, such as Freddie Mac and Fannie Mae, are government-sponsored enterprises that provide federally-backed, low-risk loans. When approved lenders make a loan to a borrower, Freddie or Fannie will buy the loan and securitize it by grouping the loan with a variety of other loans before selling to investors in the secondary mortgage market.
Part of the appeal of Agencies is the low risk associated with it. Agency loans are so "safe" that they are (typically) non-recourse, meaning they don't require personal guarantees in the event of default or foreclosure.
Other perks of Agency loans include:
- Unrestricted cash out on refinances. Agency loans allow borrowers to leverage a higher amount of equity for immediate cash than most balance sheet or even CMBS lenders. There is also no restriction on what the funds can be used for unlike many other commercial/multifamily lenders.
- Longer, more flexible amortization. These loans typically offer longer amortization options (think 25 or 30 years) and sometimes, even fully amortization options. It is not uncommon for these loans to also have an interest-only period the first few years of the term.
- Lower rates. With Agency financing, rates are typically lower because there isn't much risk for lenders. However, Agencies will typically have some sort of max rate they don't want borrowers to exceed for risk purposes, and they will use that to back into the strike at which the borrower has to buy the interest rate cap. A very common strike might be around 2.00%, so Freddie might require you get a cap at 2.00% indexed against SOFR so they know your worst case all-in interest rate is 2.00% + loan spread.
Freddie v Fannie
Freddie and Fannie may have a lot of similarities but they have their differences too.
Freddie Mac (formally known as Federal Home Loan Mortgage Corporation) was created in 1970 as part of the Emergency Home Finance Act. Fannie Mae (formally known as Federal National Mortgage Associate) was created earlier, in 1939 to address the lack of affordable housing during the Great Depression.
From a commercial real estate/multifamily (i.e. not a personal homeowner) standpoint, this means that Freddie was initially meant to help lenders access funds for multifamily loans, encouraging the development of affordable housing for lower-and-middle income households. Fannie was meant to expand the secondary mortgage market during the Great Depression — it increased lender's ability to fund loans by providing mortgage-backed securities so lenders could reinvest their money and lend to others.
Both organizations have consistently provided inexpensive, long-term, fixed-rate mortgage funding for multifamily buildings since their creation; they were intended for slightly different things but the main goal was to provide more opportunities for lower-to-middle income households to become home/property owners. But while Fannie mostly buys mortgage loans from commercial banks, Freddie mostly buys loans from smaller banks. They also differ in their lending requirements — this means that albeit rare, one may qualify for a Freddie and not a Fannie, or vice versa.
In the Loan Docs
From an abstracting standpoint, Agency loans are easier compared to the other loan types. Although Freddie and Fannie docs are set up differently, they mostly contain the same content.
Click here to download our abstract templates!
When COVID hit, loan docs were adjusted accordingly. A common modification to Agency loans was to the riders.
The Multifamily Rider incorporating the COVID-19 Debt Service Reserve was intended as a protection mechanism for both the lender and the borrower, and we are sure many borrowers are aware of the escrow-like budgeting requirement they face. But the Rider itself incorporates some interesting and notable language, and we have been intrigued to see that the highest closing cost by far for recent Freddie or Fannie loans have been payment into a COVID Reserve.
However, these changes did not complicate the abstracting process.
Agency loans are by far the easiest to abstract because they contain the least amount of documents. The abstracting process typically takes around 30 minutes — plus another 10-15 minutes to look over the critical details (for each loan).
For more information on abstracting, check out these Abstract Questions You Should Be Asking!
If you qualify for an Agency loan, there are quite a few perks associated with them.
Then it's just a matter of choosing between Freddie and Fannie — which one suits your needs better.
Agency loans are different from non-agency and can be unnerving if you've never closed one before. But there are plenty of resources to learn more about them in order to prepare.
Want to learn more about Freddie/Fannie loans?
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