GSEs: Who Are They and What Do They Do?
Freddie Mac and Fannie Mae are known as "Government Sponsored Entities" (GSEs), established by Congress to promote stability, increase affordability, and provide liquidity to the U.S. mortgage markets. Together, they have a combined balance sheet in excess of $5 Trillion — roughly equivalent to a merger of JP Morgan Chase and Bank of America.
They control at least half of the multifamily debt in the United States. In 2020, they were expected to buy over $160B in new multifamily loans from a small circle of banks and mortgage lenders that brand themselves as Optigo (Freddie Mac) and DUS (Fannie Mae) Seller-Servicers — collectively known as "agency lenders."
Fannie Mae (FNMA)
Delegates credit & pricing to ~25 DUS lenders
Securitizes loans one-off (one loan = one bond)
Better on longer terms (>10 years)
One-size-fits-all pricing across markets
Better in rising rate environments
Freddie Mac (FHLMC)
Makes all credit decisions — no lender discretion
Pools loans into $1B MBS bonds (tranches AAA–unrated)
Better on floaters and interest-only
Nuanced pricing based on sponsor & market
Better in declining rate environments
"Always get bids from both and pit one against the other."
Fannie Mae (FNMA) Loan Terms
In originating a FNMA loan, the agency lender takes on some of the risk (delegation), with a split of 1/3 lender, 2/3 FNMA. Fannie bonds are issued per loan — one loan = one bond — and are 100% guaranteed by Fannie (and by extension, the U.S. government).
| Term | Details |
|---|---|
| Duration | 5–30 years (75% are 10-year) |
| Rates | Fixed or floating |
| Max Leverage | 80% LTV purchases · 75% LTV refi |
| Recourse | Both recourse and non-recourse available |
| Interest Only | Available on fixed rate products |
| Capital Reserves | Required >65% LTV; 6–18 months PITI (Covid) |
| Assumable | Yes, with pre-approval + 1% assumption fee |
| Prepayment Penalty | Yield maintenance |
| Additional | Assignment of rents required |
Freddie Mac (FHLMC) Loan Terms
Freddie makes all the decisions on loans — there is no lender discretion as with FNMA. Freddie pools loans into $1 billion MBS bonds broken into tranches from "AAA" to "unrated." Freddie only guarantees the top 85% of bonds (AAA-rated). All other bonds do not carry a Freddie or government guarantee.
Freddie holds 10% of mortgages in their own portfolio and sells 90% to bond investors. Freddie tends to offer more "vanilla" loan terms given that most loans end up in a REMIC structure — but can offer nuanced pricing based on Sponsor strength and market dynamics. A loan in Manhattan, Kansas will get a different price than Manhattan, New York.
| Term | Details |
|---|---|
| Duration | Usually 5–10 years (portfolio up to 30) |
| Rates | Fixed or floating |
| Max Leverage | 80% LTV |
| DSCR | Minimum 1.25x |
| Recourse | Non-recourse with standard carve-outs |
| Interest Only | Available on fixed and floating |
| Capital Reserves | Required; 6–9 months PITI (Covid) |
| Assumable | Yes — avoids defeasance/prepayment costs |
| Prepayment Penalty | Yield maintenance or defeasance (2-yr lockout) |
| Additional | Assignment of rents required |
How Lenders Make Their Money
In order to negotiate the best loan possible, you first need to know how lenders make their money. The GSEs add a spread over an index (such as the 10-year treasury or 1-month LIBOR) that includes the servicing fee and the GSE's profit. Here are all the lender profit centers:
Origination fee
Servicing fee — 6–15 bps (Freddie) · 50 bps (Fannie)
P&I float — collects 1st, pays GSE on 15th
Escrow float — monthly collection, biannual payout
Spread — hidden bps markup over GSE rate
Undisclosed premiums/buyouts — 10 bps × 10 yrs = 75 bps
Miscellaneous fees
How to Get the Best Deal
Once you understand how agency lenders make their money, you can negotiate from a position of strength. Here are the eight most important steps:
Demand Transparency
Ask the lender exactly how they make their money. You can negotiate origination fee, servicing fee, premium, and miscellaneous fees.
See the Wholesale Quote
Ask for a copy of the wholesale quote from Freddie and Fannie. If your agency lender refuses, you're working with the wrong lender.
Find the Top Producer
Find out who is the #1 salesman in the office. You want the person who originates $1 billion/year, not $20 million/year.
Regional Experience Matters
Make sure the lenders selected have experience in the region and asset class of your project.
Meet the Decision Makers
Ask to meet the decision makers at Freddie and Fannie. You get better terms face-to-face — the best advocate for your deal is you.
Dictate the Rate
Now that you know how loans are priced, dictate the rate you're willing to pay rather than letting them quote you. It's possible with the right people.
Fix Legal Fees
Tell the lender you want a fixed price on legal fees. The range should be $8,500–$12,000. If they refuse, find another lender.
Consider Banks & Credit Unions
After pitting FNMA and FHLMC lenders against each other, a bank or credit union may be your best option — often with shorter prepayment periods or no prepayment.
The Loan Process
After signing your loan commitment letter, the lender will request that funds be wired in for 3rd party reports. The amount varies from $16K–$25K to cover the cost of an engineering report, appraisal, title report, environmental report, and legal fees. If the loan doesn't close, it is unlikely you will get any of these funds back.
You will be submitting financial data (income and expenses) every month from the time the process begins until the loan is ready to close. The lender wants to make sure there have been no changes in occupancy or sudden increases in expenses.
What to Ask a Lender
Once you've selected a lender, here are the key questions you'll want answered. Regardless of whether the lender is big or small, demand that answers be put in writing.
How long is the spread good for?
When can the spread be locked?
What is the exact time frame involved (including key milestones)?
Exactly how is the mortgage banker getting compensated?
What are the estimated closing costs (including legal fees)?
When can you expect a commitment?
What are the insurance requirements?
Can you preview/discuss key loan document terms with the lender's counsel?
Who orders the appraisal and 3rd party reports?
Is the lender going to sub-contract out the underwriting?
Who will you deal with if there are post-closing issues?
A Word About Supplemental Loans
If the value of your asset increases and you want to take additional money out, you cannot get a second loan behind a FHLMC or FNMA first, nor can you refinance because of prepayment penalties. GSEs have answered this with supplemental loans — obtained through the same agency lender that arranged the original loan.
Freddie Supplemental
$1M+ loan amounts
Interest-only options available
Max 80% LTV · Min 1.25x DSCR
All bond tranches must approve (can be slow)
Fannie Supplemental
Original loan must be 12+ months old
Fannie approval only
Max 75% LTV · Min 1.30x DSCR
New 3rd party reports may not be required
Important: You can ONLY go through the Freddie and Fannie first mortgage lender for your supplemental loan. If you are not a good customer, you will literally be at their mercy in terms of fees and rates. This is where the trust factor comes in.
Need help navigating Freddie and Fannie loans for your multifamily investment?
Contact Marc — [email protected]