Government-Backed Lenders Tighten Mortgage Rules in Response to Mamdani’s Rent Freeze
S E E D E D C O N T E N T
The nation’s two most important buyers of mortgage loans have imposed new rules for New York City’s rent-regulated buildings in the wake of Mayor Zohran Mamdani’s rent freeze that are making it impossible or extremely difficult for landlords to get financing.
Government-backed Fannie Mae, which has become the lender of last resort for private rent-regulated buildings, has toughened its underwriting standards since the rent freeze passed in June . Freddie Mac, the other government-backed lender, has instituted a “pause” on new loans while it assesses the impact of the freeze, according to several real-estate sources who spoke to The City Reporter.
The decision will have severe consequences for two groups of buildings. Older, almost entirely rent-regulated buildings that are already under severe financial distress will struggle to refinance their mortgages and face foreclosure. They could be taken over by their lenders or sold for a fraction of their value. Buildings composed of all affordable units built with city help whose finances are also deteriorating will need ever larger city subsidies to find financing.
“I don’t think the new underwriting standard should be a surprise or controversial to anybody, because underwriting anything other than operating in a rent-freeze environment wouldn’t really be factually accurate,” said Rafael Cestero, CEO of the Community Preservation Corp.
Cestero says that because the rent freeze will exacerbate financial pressures on nonprofit affordable housing projects, his organization will make 50% fewer loans in New York City to all-affordable projects than it did two
Fannie Mae’s new requirements assume that rents will not increase on rent-stabilized units for four to eight years, covering Mamdani’s current term and a potential second term.
Fannie Mae and lenders like Community Preservation Corp. are also assuming that expenses increase each year by at least 5%, which means the operating margin for buildings will decline by at least that amount each year.
Numerous landlords, advocates and nonprofit housing executives, some with direct knowledge of the current terms, confirmed the changes in the loan standards. Many agreed to discuss the issue only if they were not identified, fearful of retaliation from either the government-backed lenders or the Mamdani administration.
Fannie Mae did not return a request for comment, and Freddie Mac said it “continuously reviews market conditions and makes real-time adjustments to offer responsible, risk-adjusted lending aligned with mission-driven objectives.”
“ Our city’s housing finance agencies support tens of thousands of affordable homes each year amidst a variety of ever-changing macroeconomic factors — including higher interest rates that are partially driven by federal monetary policy,” Deputy Mayor for Housing and Planning Leila Bozorg said in a statement to The City Reporter. “We are always prepared to work with our financing partners and explore new lending practices.”
She also pointed to initiatives to reduce landlords’ costs, such as a city-backed insurance program, reforms to cut the pre-development, permitting and lease-up timelines, and new financing tools, most of which are in the planning stage or very early in their rollout.
Lenders have also increased the expected shortfall in collections, anticipating that more tenants do not pay their rent. Cestero’s group, for example, has doubled the expected loss to 10%.
The combination of increasing operating expenses and shortfalls on rent collection means that the amount that will be loaned for any property will be less. Even so, lenders are also lending a smaller percentage of the value of the property, requiring more equity to be put up.
Lender of Last Resort
Buildings that are composed of a combination of market-rate and rent-regulated units remain in good financial shape because of the sharp run-up in market rents, especially buildings built in recent years with requirements settings aside 20% to 40% of units at below-market rents.
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Who could ever have foreseen this problem?
Don't worry, the next step will be the government incentivizing lenders to issue risky loans that are likely to fail and that will surely end well.
Looks like a lot of real estate is going to hit the market. Why would a little value depreciation to counterbalance operating inflation be a bad thing?