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Agency loans offer a very attractive, nonrecourse option to multifamily investors. With fixed interest rates as low as three percent and loan-to-values (LTV) that may well be higher than the market average, there are several excellent reasons why agency loans have become so popular among multifamily investors over the past few years. They work particularly well for those with little credit or equity in the property they wish to buy. Even if the buyer has a decent credit score and a long history of paying rent on his or her apartment, a multifamily loan can help them obtain financing without a lot of hassle or expense.
Of course, agency loans can also work well for traditional homeowners seeking a mortgage. However, agency loans are particularly attractive to new investors because they come at very reasonable rates with almost no risk. When consumers are shopping for new residential mortgages, they are subject to intense credit risk. In other words, they are dealing with the possibility of their new purchase becoming delinquent - or even being declared bankrupt. This very real and significant risk weighs heavily on most new mortgage borrowers.
Agency loans reduce this significant weight from the shoulders of new buyers. Because the lender has already assessed a credit risk, agency loans can be more favorable. That's because agency loans carry much less interest rate risk than traditional mortgages. The agency will pay all of the interest rate risk. In turn, the agency borrower only needs to worry about the monthly payment amount.
Of course, even agency financing can come with risks. For example, there is always the possibility that the agency borrower will default on its loan. While it's true that commercial property loans carry very low rates of interest, this doesn't mean that the buyer can't default on its payments as well. As a result, buyers who obtain CMBS can run into significant difficulty in paying off their debts. A recent study found that nearly one in five UK residents who had already obtained CMBS had already defaulted on their loan.
So, what does all of this have to do with the future of non-agency mbs? The fact is that non-agency mbs are here to stay, at least in the UK. Even in the event of a significant decline in agency loans in the future, non-agency mbs will remain popular among UK buyers. There are several major reasons for this.
First, the UK government guarantees ginnie mae loans, so lenders need not rely on the guaranty of the federal government. Second, the guaranteed interest rates of ginnie mae loans make them affordable even for people with a bad credit history. And third, even if interest rates on agency loans decline sharply, borrowers of non-agency loans will still be better off financially by taking out a residential mortgage with a traditional lender than by taking out a CMBS mortgage. If rates drop further, though, homeowners will have to choose between a balloon payment and going without a mortgage.
While it is true that prices on agency loans may fall, they are more likely to fall because of market stagnation and low demand for property. While the Freddy mac mortgage meltdown has significantly damaged the housing market in the US, UK residents enjoy excellent mortgage rates. And even if rates do fall by the end of next year, they are expected to remain at current levels or rise slightly due to increased supply. That said, it is impossible to project how market conditions will evolve over the long term.
Buying pre-qualified (PCP) homes means you will save money on your monthly payments, but it also means you will have no credit risk. However, there is some downside to this advantage. Because most agents offer only a small number of pre-approved loans, buyers can face difficulty finding an agent willing to work with them. Many investors also complain about not having enough control over their loans. However, even if you don't find a good match, your money still could go to waste if you choose a subprime lender with high fees.