Government-Backed Lenders Tighten Mortgage Rules in Response to Mamdani’s Rent Freeze

Freddie Mac has paused new loans, and Fannie Mae is baking in the cost of the rent freeze, making it difficult for landlords to get financing, multiple real estate sources told The City Reporter. 

By Greg David of The City Reporter. Excerpts:

"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.

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 years ago.

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."

"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." 

"Loans for rent-regulated buildings, which are usually for five or 10 years, were plentiful before the 2019 rent law changes made it uneconomic for landlords to renovate rent-regulated units as they became vacant and collect a much higher rent. Many buildings were purchased before 2019 because of the possibility of raising rents and because interest rates were at historic lows.

But as the impact of the 2019 law took hold, major lender Signature Bank collapsed, in part because its loan portfolio was concentrated in rent-regulated mortgages that were expected to become distressed.

Another major lender, New York Community Bank, was acquired and exited the business. Other small lenders have also been acquired and no longer are making these kinds of loans.

Fannie and Freddie thus became the lender of last resort for brokers who continued to arrange loans.

“I don’t know of any one [who] is making loans on private rent-regulated buildings,” Cestero said."