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Economic Commentary & Headlines

October 6, 2023

September job growth blew away expectations, as we learned this morning that employers added 336,000 jobs during the month, nearly doubling economists’ expectations for 170,000 and far exceeding August’s upwardly revised gain of 227,000 jobs. In fact, September saw the largest job growth since January and exceeded the level of job growth recorded in each month of the fourth quarter of 2022. Today’s jobs report was foreshadowed by Tuesday’s JOLTS report, which showed that job openings jumped in August, up 690,000 to 9.61 million versus 8.92 million in July, and well above the median forecast of 8.8 million. Job openings have dropped from their peak of 12 million last year but still exceed pre-pandemic levels. There were 1.51 job openings for every unemployed person in August, down only slightly from 1.53 in July. While down from a peak of 2 in 2022, the Fed would like to see the ratio fall back to pre-pandemic norms of around 1.2.

At 3.8%, September’s unemployment rate equated to August’s and remains circa historically low levels. Year-over-year, average hourly earnings rose 4.2%, down slightly from August’s 4.3%. And though that’s still well above pre-pandemic growth rates, the good news (at least from an inflationrelated perspective) is that when looking at hourly wages on a monthly basis, wages grew only 0.2% during the month of September, consistent with August’s growth rate, and annualizing to 2.4%. As the chart below shows, wage growth continues to decelerate.

(Above charts extracted from the WSJ)

The 10-year Treasury is down nearly a point today, yielding roughly 4.78%, spurred by this morning’s strong jobs data. While the Fed has raised the Fed Funds Rate by only a quarter point since its May meeting, 5-, 7-, and 10-year Treasury yields are up nearly 150 basis points since then, currently at levels last seen before the Great Recession. This move has been driven by an interesting combination of ongoing Fed activities, a positive near-term outlook, and longer-term structural concerns. Among other things, these factors include: a resilient economy; heightened expectations for a soft landing; acceptance of a “higher for longer” interest rate outlook; ongoing monthly run-off from the Fed’s balance sheet of up to $60 billion in Treasuries and $35 billion in mortgage-backed securities (quantitative tightening - the Fed’s holdings have declined by nearly $1 trillion over the past year); concerns over fiscal policy, government dysfunction, our massive $33 trillion national debt, its related debt service, and implications for its future funding; changes in the profile of buyers of Treasury debt and their yield requirements; an increase in the term premium (the additional yield that investors require for holding longer-term bonds); and/or a higher neutral rate.

As evidenced by the strength of the labor market and a cache of other recent economic data, the economy has thus far withstood the effects of the Fed’s tightening cycle remarkably well. Some of this is related to the now-waning impact of government stimulus payments and consumers and companies having insulated themselves by locking in mid- to long-term fixed rate debt fixed rate debt on their mortgages, car loans, and corporate financings. But a sustained period of high rates and tight credit conditions will inevitably hit the economy…eventually. Many market participants believe that a 5% 10-year Treasury yield could be an “inflection point” and that to stop long-term interest rates from leaping higher, the Fed should: 1) take the possibility of another 2023 rate increase off the table, 2) raise the possibility of cutting rates, and/or 3) signal that it is open to dialing back quantitative tightening. The MBA President &CEO said as much on CNBC last week as single-family mortgage rates hit 23-year highs, knocking application activity down to a level last seen in 1996.

(Side note: Is it surprising that we all were smart enough to lock in low rates on personal debt while the US Treasury continued to fund our national debt with short-term borrowings that must now be refinanced at much higher rates? The WSJ reports that the government currently funds $33 trillion of outstanding debt at an average interest rate of about 2.9%, and that every additional 1-point increase in interest rates will add more than $2.5 trillion of expense in the next decade.)

Forward Curves and The Fed Dot Plot

Pre-Fed Announcement (9/19/2023)

(Source – Chatham Financial)

Current (10/6/2023)

The chart above illustrates the change in expectations for future levels of 1-Month Term SOFR and Treasury yields since the end of July. As we shared in our update circulated after the Fed’s September 20 rate announcement, the Fed’s updated dot plot showed that 12 of 19 Fed officials show one more hike as necessary in 2023, with the dot plot up 50 basis points in both 2024 and 2025 relative to the prior dot plot, effectively taking back half the cuts that were included in the Fed’s June projection, and really cementing the “higher for longer” narrative.Forward curves accordingly shifted higher after that meeting, with the factors we listed above continuing to push forward curves higher.

The chart from MBA shown below tracks changes in Federal Funds Rate forecasts over the last 11 quarters. Each line represents, for a given vintage of predictions, the median value of the projected appropriate target level at the end of the specified calendar year. The chart illustrates how policymakers’ views have evolved upward quarter after quarter since March 2021. Per the CME’s FedWatch Tool, the market is currently pricing in a 29.3% probability of a quarter point hike at the next Fed meeting in November 2023.

The Future of Bridge Loan Floating Rate Debt Costs?

Fixed Rate

Using the 10-year Treasury forward curve and applying a spread of 175 bps (roughly mid-range of the spread spectrum for Agency and LifeCo fixed rate, permanent financing today), fixed rate multifamily loan interest rates look to remain circa current levels into 2026. Correspondingly, debt yields also look to remain relatively static, implying that loan proceeds will be primarily driven by NOI growth moving forward, as opposed to interest rate reduction, which has routinely enhanced loan sizing since interest rates began their long decline in the 1980s! What about the potential impact of spread tightening? After all, pre-GFC we did see agency fixed rate spreads tighter than they are today. Holding index yields constant, a 50 bps reduction in spreads, for example, would tighten debt yields by just 5.5%, correspondingly bumping loan proceeds up 5.5%; should we see spreads tighten by 100 bps, debt yields would decrease by roughly 11%, resulting in an 11% increase to proceeds.

Floating Rate

Using the one-month term SOFR forward curve and applying a spread of 350 bps (roughly mid-range of the spread spectrum for debt fund bridge loans today), the curve indicates a roughly 50 bps decline in potential pay rate, to 8.30% by October 2024. Pay rates are projected to remain over 8.00% until the first quarter of 2025 and above 7% beyond 2027. Debt yields are not included in the floating rate chart above because floating rate loan sizing methods vary across lender profiles.

Interest Rate Cap Costs (source—Chatham Financial)

With recent shifts upward in the forward curve, rate cap prices are back to levels in line with or exceeding their prior 2023 highs. The following charts show the cost of an interest rate cap since early 2022 for a $50 million notional amount on the 1-month term SOFR index rate as provided by Chatham Financial. Continual changes in future rate expectations and adjustments to the shape of the forward curve generate material cap cost fluctuations as evidenced below.

(Prior to October 2022 the cost of caps with strike rates over 4.00% were not published on Chatham Financial's website. We’re also now showing you pricing for 1-year caps, as many debt funds now allow a 1-year initial cap in conjunction with new loan origination, and we believe 1-year caps and their related cost will play an important role in bridge loan extension negotiations. See the discussion in the Distressed Multifamily Debt section below).

Distressed Multifamily Debt and the Loan Maturity Wave

August data for securitized loans backed by multifamily properties continues to show strong current pay data in the mid-to-high 90s. The only real distress we are seeing is in Maturity Defaulted loans, primarily in the SASB market. There has not been a noticeable change in 60+ day delinquent loans, specially serviced loans, or foreclosures/REO but we will continue to monitor and report on this data. Agency loans continue to outperform nonagency securitized multifamily loans with current pay rates of 99.5% to 100% for conventional loans and 98.4% for Freddie Small Balance loans. Any delinquency issues, though still relatively minor, remain concentrated in the seniors housing space (98.2% current).

(Source – JP Morgan)

Though not yet reflected in delinquency rates, stress remains below the surface, in fact, our data indicates more than 25% of outstanding loans over $25 million that mature through July 2025 have DSCRs below 1.00x. The stress remains hidden by interest reserves, in-place interest rate caps, cash infusions from investors, and loan modifications. We expect these issues to begin bubbling up to the surface in the fourth quarter of 2023 and throughout 2024 as initial 2- and 3-year loan maturities are reached on bridge loans originated at the height of the last cycle, when cap rates were at their lowest and leverage was at its highest, from the second half of 2021 through the summer of 2022. Many of these value-add properties will struggle to meet their extension tests and owners may struggle to meet additional capital requirements and purchase expensive rate cap replacements when they reach their initial maturities. As our charts show below, lenders are working through their first wave of maturities with over $11 billion due in October and November.

Commercial Mortgage Alert reports that late payments across all CLOs, including all property types, continue to climb while the percentage of loans in special servicing falls as many lenders are granting modifications. The rate of modifications increased to 11.8% of outstanding CLOs in the second quarter, up from 6.5% in the first quarter. Additionally, a small number of troubled loans have been purchased by managers out of the CLO trusts and replaced with new loans as the CLOs neared the end of their reinvestment periods. Loan modifications include maturity extensions, increased loan balances and reserves, interest rate reductions, and payment deferrals. In some cases, modifications include preferred equity investments from the lenders to be used as interest rate reserves. Whether these modifications rescue landlords or just delay an inevitable reckoning remains to be seen, but restructuring a capital stack with rescue capital in the form of preferred equity at rates of 11%-14% to cover interest payments on first liens in the 8%-10% range, for example, could ultimately prove to be counterproductive.

At the height of the market, bridge lenders were making loans sized to ~6.50% exit Debt Yields. At today’s rates, an agency loan sizes to ~9.30% Debt Yield, which means that a Borrower’s actual exit NOI would have to exceed the Lender’s originally underwritten exit NOI by 43% for a cash neutral refinance with agency debt. Even with an underwritten exit Debt Yield of 7.50%, the Borrower would need to beat the lender’s original underwriting by 23%. Given slowing rent growth and higher than expected expense growth, these hurdles may prove difficult to reach. While this may spell trouble for borrowers, we don’t see this materializing into a significant amount of lender stress (yet). For example, assuming a 3.50% purchase cap rate (not uncommon in 2021 and early 2022), an 85% loan to value, and a 5.50% current cap rate, a property’s NOI would only need to grow by ~31% for the property’s value to remain above the lender’s loan balance, and 30%+ NOI growth was achieved by many properties acquired during 2020 and 2021, given strong rent growth over the past few years combined with a well-executed value-add plan.

In signs of what may lie ahead for over-leveraged multifamily owners, lenders are already taking back multifamily assets purchased in March through June 2022, foreclosing on loans reaching their initial maturity dates. For example:

H.I.G. Realty foreclosed on their $65 million loan to MSC Investment Management on Virginia Highlands Apartments in Atlanta in August 2023. The Borrower purchased the property in March 2022 for $81 million.
MF1 foreclosed on their $51 million loan to Rockstar Capital on Aspire at 610 apartments in Houston in August 2023. The Borrower purchased the property in March 2022 for ~$70 million.

The charts below summarize our team’s analysis of data on outstanding securitized multifamily loans sourced from Trepp, Fannie Mae, and HUD. Our search was limited to multifamily properties with $25+ million in unpaid principal balances. Our data indicates that over 25% of loans maturing between Oct. 2023 and July 2025 have a DSCR below 1.00x.

Agency and Non-Agency Lending & Pricing Update

Agency – While the conventional loan programs of both Agencies allow leverage up to 80% of property value, the current interest rate environment typically drives DSCR constrained loan sizing at ~55%-65% of property value. The upshot to low/moderate leverage is that the agencies price better at these leverage points. Agency pricing shown in the chart above reflects these realities and assumes that a portion of the property’s rents are mission oriented.

The agencies start the fourth quarter of 2023 with plenty of capital for borrowers ready to transact. (YTD monthly production numbers are outlined later in this update.) Expense underwriting, particularly insurance and taxes, remains a focus with Fannie recently issuing underwriting guidance to address rising expense trends. Fannie recently also announced a move to more tightly manage full-term interest-only approval on properties older than 2000 vintage that are not located in Strong or Eligible markets. Full term IO on Tier 2 (1.25x DSC) loans are still achievable but will require Fannie credit approval. Fannie has also pulled back the use of 35-year amortization for conventional deals, reserving it only for certain MAH transactions, while Freddie continues to offer it for select conventional deals, particularly those with strong mission goals, Select Sponsorship, moderate leverage, and hard cash equity in the deal. Freddie is also pursuing lease-up deals expected to stabilize within 6 months of closing. Both GSEs have released new Affordability Models incorporating the latest AMI (income) data which in many cases shows higher property level affordability – one of the key drivers for GSE pricing and terms. GSE deals now require radon testing for 25% of ground floor units.

Freddie Mac recently announced 2023 business deadlines as we approach the end of the year. Deadlines to submit a full and complete package to the underwriting team for a year-end close will be:

Conventional: Wednesday, November 22
TAH: Tuesday, November 14
SBL: Friday, December 1

Deadlines to submit a full and complete package to Freddie Mac’s purchase team for a year-end funding will be:

Non-pooled transactions: Friday, December 15
Pools: case-by-case basis, please coordinate accordingly.

You’ll find our usual detailed agency pricing update below.

Life Companies – Life companies continue to be active with most having remaining allocations for 2023 fundings. In this market, the life companies can be the best pricing option for low leverage core multifamily transactions, while the agencies often price inside the life companies for deals with mission-oriented rent levels.

For the right deals and borrowers, life companies may offer greater proceeds than the agencies, as they can accept a lower going-in DSCR, particularly where there is an upside story regarding projected cash flows. That said, the life companies have enhanced their focus on asset, submarket, and overall loan credit quality. Five-year money has been in high demand, causing some to only offer longer term, fixed rate debt; however, there are still lenders with shorter term capital, some as short as 3-year and many have 7-year money and can offer flexible prepay options. Spreads are in the 190-210 range for moderate leverage, with lows in the 150 range for very low leverage and highs to 230+ for “stretch senior” loans. Life companies are not able to compete with the agencies on pricing for assets that meet “mission” or housing goals for the agencies, so they are competing more for extremely low leverage transactions, newer Core deals, or pre-TCO or lease up deals, where the agencies are less competitive. Life companies have seen an uptick in demand construction/perm loans, with advance rates in the 55%-60% LTC range and pricing in the UST +275-300 bps range.

Commercial Banks – Banks have been largely absent from the commercial real estate lending landscape driven by decreased liquidity and tighter credit standards. Available liquidity has been impacted by higher money market rates, the potential for new capital requirements, office loan impairments, and materially reduced payoff velocity. Many banks are looking inward to shore up their balance sheet in anticipation of additional pain in the office sector and new capital requirements.

Banks that are lending today are requiring deposits in conjunction with making new loans, particularly on construction loans where the deposit requirement can range from 10%-50% of the new loan amount. They are focusing on high quality real estate with strong sponsors with a focus on existing relationships, especially those that drive fees via the bank’s other business lines (deposits, cash management, wealth management, etc.) If available, banks can structure value-add loans offering slightly higher proceeds than agency floaters at more attractive spreads than the debt funds. These banks are more frequently structuring their value-add loans as earn-outs compared to the future funding structures used in years past. Permanent bank loans are sized to wider debt yields (9%+) than their agency and life company competitors.

Debt Funds / Mortgage REITs – Volatility, rising rates, higher operating costs, warehouse and repo line repricing / reduction, recession-related risks, and uncertainty in the banking sector combined to disrupt lending in the debt fund space, which is heavily dependent on the cost and availability of credit provided by the banking community. Banks widened pricing and reduced warehouse and repo line capacity available to the debt funds, while also imposing greater restrictions on low debt yield (i.e., low cap rate / low cash flow) deals that once comprised a heavy component of many debt funds’ production volume.

While conditions have improved from the summer months as CLO spreads have tightened, interest rates remain higher and leverage lower than what the market became accustomed to over the past several years and deal volume remains muted. MF1 is currently in the market pricing an $895 million CLO transaction backed 100% by multifamily loans. Price guidance on the AAA bonds is in the 220-225 bps range, which would represent a 20-25 bps improvement from the last deal that priced 9/15/23 (BSPRT 2023-FL10).

Debt Funds continue to offer value-add bridge debt for multifamily assets, though they are seeing far fewer of those opportunities today. Bridge lenders have a strong appetite for lease-up opportunities and will close at or shortly after TCO, with some able to fund pre-TCO. On exits, some lenders are sizing to a fixed rate perm take-out, which is sizing to ~8.50% or higher DY. Bridge lenders are underwriting minimal market rent growth. Low-end pricing in the moderate leverage bridge space is SOFR+275–325. These are for premier assets, strong locations, strong borrowers where lenders have conviction in their underwriting. Bridge lenders are more typically pricing at SOFR+325–375 for B+ quality assets/locations or better. Inferior quality assets and higher risk transactions and markets are pricing in the SOFR+375–425 range, or higher.

CMBS – Volume remains muted on the back of high index rates and recent volatile Treasury yields. Prior to the most recent run up in Treasury yields, CLO and CMBS spreads had seen moderate spread improvement from the late spring and summer prints. That said, quoted CMBS spreads are generally unchanged from our prior update.

Agency Spreads and All-In Rates

Agency Fixed Rate Spreads

Agency Pricing Grids and the Impact of FHFA’s Affordability Guidelines

Fannie’s posted Credit Fee range for conventional fixed rate debt across all loan terms spans 50 bps, while its floating rate Credit Fee range spans 30bps. In response to FHFA’s volume cap and affordability requirements, loans on properties with 0% to 10% of their units exhibiting rents affordable at mission-oriented levels will price near the higher end of the 50 bps pricing range. Greater levels of affordability will allow for larger discounts from the high end of the range, with the lower end of the range reserved for loans on properties with some combination of high levels of affordability, Priority Borrower sponsorship, stronger credit metrics (i.e. DSCR and/or LTV better than required for a particular pricing Tier), and/or Green financing. It’s also possible to combine heavy affordability, strong credit metrics Priority Borrower sponsorship, and/or Green financing to drop below the low end of the pricing range. Freddie Mac takes a similar approach when pricing its loans.

Agency Green Financing

Fannie Mae Green Rewards and Green Building Certification financing is available for fixed and floating rate loans of all loan terms and offers a potential spread reduction of up to 25 bps, though typically the benefit is in the 15-20 bps range. In addition to a lower all-in interest rate, Green financing may also result in higher proceeds for properties located in Fannie Mae’s designated “strong” markets and for Tier 3 (1.35 DSCR / 65% LTV) and Tier 4 (1.55 / 55%) loans.

Fannie segmented pricing discounts for its Green Building Certifications as indicated below:

Click here for a listing of the different types of Green Certifications grouped into each of the four categories referenced above.

Freddie Mac’s Green Up (borrowers commit to making energy and water saving improvements) and Green Certified (for existing Green certified assets or Green certifications that are obtained in conjunction with Freddie Mac financing) programs offer a potential spread benefit of 15 bps. The Green Up program was modified in March 2023 to eliminate affordability requirements, and is now available for 5-, 7- and 10-year fixed and floating rate loans. Green Certified financing remains limited to 10-year fixed rate loans and requires that 40% of the property qualify as workforce housing based on market cost designations (at 80%, 100%, or 120% of AMI). Freddie Mac’s Green Retrofits program is also available only for 10-year fixed rate loans and offers a pricing benefit of 5 bps if qualified energy and/or water efficiency improvements have been made at the property within the current calendar year and the preceding 2 calendar years; targeted affordable preservation loans and conventional loans with at least 20% of the property’s units affordable at or below 60% of AMI are eligible.

IO and Prepayment Flexibility Costs

Currently, the cost of interest-only is minimal, and the cost of prepayment flexibility has stabilized:

10-year loans with 7 years of yield maintenance are seeing spread adders of +45 - 50bps.
7-year loans with 5 years of yield maintenance are seeing spread adders of +40 - 50bps.
5-year loans with 3 years of yield maintenance are seeing spread adders of +40 - 50bps.

The charts below outline changes to agency baseline pricing grids for 10-year fixed rate full leverage loans, along with related pricing policy changes made by Freddie and Fannie over the past 6 months. Both agencies’ conventional loan programs allow leverage up to 80% of property value, but achievement of full leverage agency debt is rare, because loan sizing is typically DSCR constrained, so most agency quotes are priced lower than the baseline ranges shown below, which again allow for maximum leverage loans.

Agency Floating Rate Loan Sizing, Rate Caps, Spreads

The charts below outline changes to agency baseline pricing grids for 10-year floating rate full leverage loans, along with related pricing policy changes made by Freddie and Fannie since the beginning of the year. Affordability, sponsorship, and credit metrics (such as moderate vs. full leverage) are considered as discussed above when the agencies price their floating rate loans.

Note that Fannie Mae and Freddie Mac implemented an additional, more conservative sizing restraint on their floating rate loans that limits the loan proceeds available based on a 1.20x DSCR (Freddie) or a 1.25x DSCR (Fannie) at the actual loan interest rate (1-month trailing average SOFR plus the spread). These changes have resulted in agency floating rate debt delivering lower proceeds than agency fixed rate debt.

Freddie Mac has adjusted its interest rate cap requirements to better align the strike rate with the loan’s amortization schedule: Any interest rate cap expiring during an interest-only period will have a maximum strike rate based on the underwritten interest-only breakeven rate; any interest rate cap expiring during an amortizing period will have a maximum strike rate based on the underwritten amortizing breakeven rate. As a result, fully amortizing loans and full-term, interest-only loans will have a single strike rate for the duration of the loan, and loans with partial interest-only have two strike rates: one applicable to the interest-only period and another applicable to the amortizing period. For example, see the chart below regarding a 10-year loan with 5 years of IO:

As most lenders have moved to using One-Month Term SOFR as the base index for floating rate debt, the below link provides current indications for both One-Month Term SOFR and the daily 30-day compounded SOFR average used by Freddie and Fannie:

https://www.cmegroup.com/market-data/cme-group-benchmark-administration/term-sofr.html

Freddie Mac K Series – historical A2/A bond spreads

Freddie Mac charts its historical A2 (fixed rate) and A (floating rate) bond spreads and updates that report weekly. You can access it here.

Fixed rate benchmark 10-year Freddie Mac CMBS spreads have remained stable in the low to mid 70s since the end of June when demand bounced back from the lows seen during the banking crisis that started with the failure of Silicon Valley Bank. Spreads on floating rate K-series bonds have started to creep up.

2023 Agency Lending Volume Caps

2023 volume caps applicable to the multifamily loan purchases of Fannie Mae and Freddie Mac are $75 billion each, for a total of $150 billion during the calendar year 2023. This represents an aggregate reduction of $6 billion ($3 billion each) from last year’s caps of $78 billion each. FHFA will continue to monitor the market and will update the caps if market data warrants it. However, FHFA will not reduce the caps if it determines that the size of the 2023 market is smaller than initially projected.

YTD volume for the Agencies is down 23% from 2022. As seen below, Freddie Mac has roughly $46.5 billion in available volume, while Fannie Mae has approximately $39.7 billion. This allows for monthly volume to average $11.6 billion for Freddie and $9.9 billion for Fannie for the remainder of the year, compared to actual YTD monthly average volume levels of only $3.6 billion for Freddie and $4.4 billion for Fannie, leaving plenty of available capacity. The agencies also feel less pressure to hit their caps than in the past, as their focus is on achievement of their mission-oriented housing goals and profitability.

We expect Fannie and Freddie to finish the year with $50 billion to $60 billion of multifamily property loan purchases each — or roughly a quarter to a third below their $75 billion annual caps.

2023 Agency Housing Goals and Mission-Oriented Lending Requirements

2023 FHFA Multifamily Housing Goals

In December 2022, the FHFA issued a final rule for Fannie Mae and Freddie Mac establishing the benchmark levels for their multifamily housing goals for 2023 and 2024, moving from a specific unit count to a percentage-based methodology:

Low-Income Goal: 61% of goal-eligible units must have rents affordable at 80% of AMI
Very Low-Income Sub-goal: 12% of goal-eligible units must have rents affordable at 50% of AMI Small Multifamily
Low-Income Sub-goal (5-50 units): 2.5% of goal-eligible units must have rents affordable at 80% of AMI

2023 FHFA Scorecard

$75 billion multifamily loan caps for each agency based on current market forecasts.
Continuation of requirement for 50% of loan volume to be Mission-Driven.
Mission-Driven Loans
- Loans on targeted affordable housing - FHFA defines targeted affordable housing loans as loans to properties encumbered by a regulatory agreement or a recorded use restriction under which all or a portion of the units are restricted for occupancy by tenants with limited incomes and which restrict the rents that can be charged for those units. FHFA classifies as mission-driven a proportionate amount of the loan for properties in the targeted affordable category, depending on the percentage of units that are restricted by a regulatory agreement or recorded use restriction.
  - FHFA classifies as mission-driven 50% of the loan amount if the percentage of restricted units is less than 50% of the total units in a project, and 100% of the loan amount if the percentage of restricted units is equal to or more than 50%.
- Loans to preserve affordability at workforce housing properties - Units subject to self-imposed rent and/or income restrictions codified in loan agreements, such as Fannie Mae’s Sponsor-Initiated Affordability (SIA) and recently released Sponsor-Dedicated Workforce Housing (SDW) programs, have been added and will be classified as mission-driven based on the percent of restricted units, as follows:
  - Less than 50% of the units restricted: 50% of the loan amount will be classified as mission-driven.
  - 50% or more of the units restricted: 100% mission-driven credit.

Loans to finance energy or water efficiency improvements (Green financing) -
- At least 20% but less than 50% of the units with rents affordable at or below 80% of AMI (previously 60% of AMI): 50% mission-driven credit.
- 50% or more of the units with rents affordable at or below 80% of AMI: 100% mission-driven credit.
Loans on properties located in rural areas (Duty to Serve) – FHFA classifies as mission-driven the pro rata portion of the loan amount based on the percentage of units affordable at or below 100% of AMI.
Manufactured Housing Community Blanket Loans (secured by the land and the rental pads) - FHFA classifies as mission-driven the share of the loan amount of a manufactured housing community blanket loan that reflects the share that receives credit under the Duty to Serve regulation.
FHFA also classifies as mission-driven units whose rents are affordable to tenants at various income thresholds but that are not subject to a regulatory agreement or recorded use restriction. For conventional, small 5-50 unit, and seniors housing, FHFA will count as mission-driven the pro rata portion of the loan amount based on the percentage of units with affordable, unsubsidized/market rents, as follows:
- Loans on affordable units in standard markets:
  - Standard markets are those that are not located in designated cost-burdened or very cost-burdened renter markets. For properties located in these markets, the income threshold for affordability is 80% of AMI or below.
- Loans on affordable units in cost-burdened or very cost-burdened renter markets:
  - In cost-burdened renter markets as designated by FHFA, the income threshold for affordability is 100% of AMI or below.
  - In very cost-burdened renter markets as designated by FHFA, the income threshold for affordability is 120% of AMI or below.
  - Please see the chart below.

Please call us with questions, for specific rate estimates, or to discuss transactions.

Kevin, Charlie, Michael, and Joey

Please note that some of the information presented herein was compiled by our team and not circulated by Berkadia or its affiliates. The perspective shared herein is that of our team, not necessarily that of Berkadia or its affiliates.

Disclaimer: This email is for informational purposes only and none of the content is intended to advise or otherwise recommend a specific strategy. It is not to be relied upon in any way to predict market movement, investment in securities, transactions, investment strategies or any other matter.

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