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Community Developments Investments (May 2015)

Small Multifamily Property Ownership, Management, and Financing Issues

This photo shows a four-story, brick apartment building.
Source: Thinkstock.
This photo shows a four-story, brick apartment building.

Elizabeth La Jeunesse, Research Analyst, Joint Center for Housing Studies of Harvard University

The housing finance system in the United States has long defined multifamily housing as properties with five or more residences under single ownership. Financing for multifamily properties is handled by separate divisions of Fannie Mae, Freddie Mac, and the Federal Housing Administration. For this reason, national banks and federal savings associations also tend to organize their operations and segregate their accounting into loans on single family (with single ownership of fewer than five residential units) and multifamily properties.1

For many years, policy makers and industry analysts have observed that small multifamily properties, defined either by loan size or number of units, are less likely than larger properties to (1) carry debt, (2) carry longer-term fixed rate debt when they do carry debt, (3) be professionally managed, and (4) be sold into the secondary market. Smaller properties are also more likely to be owned by individuals.

Unfortunately, 2001 was the last year a dependable survey of ownership, management, and financing of multifamily properties was done. Thus, there is currently no way to know how much the character of ownership and financing may have changed. In addition, no formal, commonly accepted definition exists for what constitutes the dividing line between larger and smaller multifamily properties. Most commonly, analysts consider properties with five to 49 units “small” and 50 or more “large,” though there is no such sharp dividing line in the average characteristics of multifamily properties tabulated by size. That said, differences seem to widen as the number of units in a property increases. Figure 6 illustrates two areas of difference, single-investor owners and share of properties with a mortgage or similar debt.

Figure 6: Multifamily Property Ownership and Lending Characteristics by Property Size
Figure 6: Multifamily Property Ownership and Lending Characteristics by Property Size

Source: 2012 Rental Housing Finance Survey, U.S. Department of Housing and Urban Development; Joint Center for Housing Studies of Harvard University.

Note: Fixed-rate mortgage information pertains to current first mortgage only and includes about 4 percent nonresponses.

Fortunately, we do have more up-to-date information on small multifamily properties from two sources that measure financing by loan size: the Home Mortgage Disclosure Act (HMDA) and the Mortgage Bankers Association (MBA), which draws on HMDA data and data for firms that service loans for larger originators. Neither data set, however, gives complete coverage of financing for multifamily properties, and neither provides information on the number of residences per property. Relying on loan size alone clouds conclusions about small multifamily properties somewhat because loan size is an imperfect proxy for units per property. Fannie Mae considers any loan up to $3 million to be a loan for a small multifamily property. But loans under this threshold skew strongly toward $1 million or less, and it is among these even smaller loans in particular that levels of secondary market securitization are extremely low.

Despite these data limitations, loan size data provide recent information on loan volumes and the channels through which the financing to small multifamily properties is being delivered. And HMDA data provide meaningful geographic detail on the loans of reporting entities. These data reveal that the smaller the loan size, the greater the drop-off of lending between 2006 and 2011, the sharper the withdrawal of secondary market funding, and the sharper the contraction of purchases by Fannie Mae and Freddie Mac (see table 6). Thus, the small multifamily loan market has been left increasingly to portfolio lenders and remains at levels that are significantly below 2006 volumes. In addition, smaller loans are a larger proportion of multifamily lending in low-income communities than other communities (see figure 7 ). While the incomes of the tenants are not reported by HMDA, Fannie Mae has stated that 86 percent of the unit rents in small-sized multifamily building loans it finances are affordable to people at or below the median income in their areas.

Table 6: The Smaller the Loan, the Greater the Falloff in Activity From Boom to Bust

Loan size All loans Sold to secondary market in calendar year If secondary market, sold to GSE
2006 2011 % change 2006 2011 % change 2006 2011 % change
Less than $500,000 17,662 9,374 –46.9% 3,482 291 –91.6% 515 58 –88.7%
$500,000–$999,000 9,486 5,880 –38.0% 1,797 151 –91.6% 250 64 –74.4%
$1 million–$2.49 million 7,251 6,069 –16.3% 1,510 392 –74.0% 460 279 –39.3%
$2.5 million–$24.9 million 5,181 4,979 –3.9% 1,734 1,335 –23.0% 869 1,197 37.7%
More than $25 million 289 342 18.3% 126 177 40.5% 69 167 142.0%
All 39,869 26,644 –33.2% 8,649 2,346 –72.9% 2,163 1,765 –18.4%
Source: Joint Center for Housing Studies of Harvard University.


Figure 7: Smaller Loans Are a Smaller Share of Multifamily Lending in Upper Income Census Tracts

Figure 7: Smaller Loans Are a Smaller Share of Multifamily Lending in Upper Income Census Tracts

Source: Joint Center for Housing Studies of Harvard University.

The broader MBA data, which include reporting from larger specialized multifamily lenders, show that while just 10 lenders dominate total multifamily loan volume (with a 45 percent share), smaller lenders dominate as a share of loans originated (see table 7). Indeed, the roughly 2,600 lenders that individually supply $500 million or less in multifamily finance account for just more than half of all originations (based on number of loans). Although these figures cannot be broken down by loan size, it is almost certain that smaller multifamily lenders dominate the small multifamily loan market even more. The small multifamily loan market is highly fragmented.

Table 7: Large Firms Dominate the Multifamily Lending Landscape

Size of lender, by multifamily lending volume Lenders Multifamily originations Multifamily loans Average multifamily loan size (in millions of dollars)
Number Share Amount Share Number Share
More than $2.5 billion 10 0.4% $49.9 billion 45.3% 8,503 27.3% $5.9 million
$1.0 billion–$2.5 billion 12 0.5% $21.4 billion 19.4% 2,123 6.8% $10.1 million
$500 million–$1.0 billion 19 0.7% $13.3 billion 12.1% 3,409 10.9% $3.9 million
$1 million–$500 million 51 1.9% $12.5 billion 11.4% 3,663 11.8% $3.9 million
Less than $1 million 2,561 96.5% $13.0 billion 11.8% 13,446 43.2% $1.0 million
All 2,653 100.0% $110.1 billion 100.0% 31,144 100% $3.5 million
Source: Mortgage Bankers Association Annual Report on Multifamily Lending, 2011; Joint Center for Housing Studies of Harvard University.


While the reasons for the differences in ownership, management, and financing of smaller multifamily properties relative to larger ones remain uncertain, most analysts ascribe the differences to the following:

  • The high fixed costs of originating multifamily loans and packaging the loans into publicly traded securities reduce securitization of smaller property loans (costs cannot be spread over as large a mortgage).
  • The relative ease of entry for individual owners because the required equity investment is so much lower.
  • The tendency for individuals to rely more frequently on their own sweat equity to manage properties.

Although there is a lower level of securitization in the financing of small versus large multifamily properties, a significant share of such loans are held in portfolio by banks. Because depository institutions’ loan portfolios are funded by short-term liabilities, bank lenders have reasons to favor serving this market with shorter-term adjustable rate loan products. Still, it is unclear whether the dominance of adjustable rate products in the smaller loan market reflects these supply-side concerns or whether small multifamily property owners choose adjustable rate loans because they may be disinterested in taking on the steep yield maintenance requirements (prepayment premiums) that typically accompany fixed-rate multifamily loan products. The fact that even in low-rate environments, however, fixed-rate small multifamily loan products are not that common suggests more a supply than demand side explanation. (See sidebar, “Challenge of Capital Access,” by Rebecca Cohen and Dennis Shea.)

In terms of loan performance, the only detailed information by loan size comes from Fannie Mae and Freddie Mac. Among their loans, performance deteriorates as the size of the loan declines. As of June 30, 2013, Fannie Mae reported a 0.7 percent serious delinquency rate for its smaller multifamily loans of less than or equal to $750,000. This was twice the rate of delinquency of its larger loans of $5 to $25 million and over five times that of its largest loans over $25 million. Freddie Mac’s smaller multifamily loans had a lower delinquency rate of 0.38 percent, but this too was over four times the delinquency rate experienced on its $5 million to $25 million loans, and over seven times the delinquency rate on its loans larger than $25 million.

Fannie Mae observed that small multifamily loans are more likely than larger multifamily loans to rely upon the borrower’s own financial strength and repayment history. In addition, Fannie Mae looked to the strength of the property cash flow. Cash flow in small properties is critical because the margin for error is very tight. Even one vacancy for more than 30 days could affect a borrower’s ability to repay the mortgage without tapping into personal self-worth. A recent examination by Fannie Mae of its loan portfolio found that 6 percent of all small multifamily loan delinquencies were directly related to borrower credit issues. It is possible that the loans that banks opt to hold in their own portfolios have very different performance characteristics. But there is no broad database that offers insight into any possible differences.

What emerges from this brief summary of what we know, do not know, and can only speculate about small multifamily properties is that available data permit only a partial picture to emerge when it comes to channels serving the market, products offered and used, and loan performance. And when it comes to information on ownership and management, only a dated picture emerges.

What does seem clear from the figures and tables in this article is that the anecdotal conclusions about small multifamily properties ring true. Most dramatically, the data reveal just how small a share of loans of up to $1 million and even of loans $1 million to $3 million are sold into the secondary market. Furthermore, the data show the degree to which all smaller loan originations fell in the wake of the financial crisis, but especially how dramatically secondary market purchases of these loans collapsed. Lastly, it reveals the importance of small multifamily properties in low-income communities as a source of rental housing for lower income Americans.

For more information, e-mail Elizabeth La Jeunesse.


1The OCC also follows this organization for periodic call reporting and Home Mortgage Disclosure Act reporting purposes.

2See Fannie Mae’s Role in the Small Multifamily Loan Market (first quarter of 2011).

Challenge of Capital Access

Rebecca Cohen, Senior Policy Analyst, Bipartisan Policy Center, and Dennis Shea, Principal, Shea Public Strategies and adviser to the Bipartisan Policy Center Housing Commission

One of the most perplexing issues in housing finance is how to improve capital support for small multifamily properties (those with fewer than 50 units). Contrary to popular understanding, most rental housing is not situated in large apartment complexes, nor is it in urban areas.3 In addition, private individuals, not large multifamily developers, are the owners of most rental homes in America today. According to the 2001 Residential Finance Survey, more than 80 percent of rental units in properties with one to four units are individually owned, while more than 70 percent of units in properties with five to nine units have individual owners.4

A significant share of this individually owned rental stock is affordable to low- and moderate-income Americans.5 Yet most of these units receive no government subsidies.

Historically, smaller rental properties have had limited access to long-term, fixed rate financing and funding from the capital markets.

One reason for this capital access issue is that the process of underwriting smaller properties is typically more expensive for both the lender and the borrower. In some cases, good information about individual owners is not available to help lenders assess credit risk. The difficulties associated with underwriting are compounded by the fact that many of these smaller properties are in neighborhoods with weaker housing markets. Smaller rental properties are also generally older than their larger counterparts and change owners less frequently, often making it harder to establish resale values.

Access to capital through the secondary market for mortgage-backed securities is hampered by the fragmentation of the lender base serving smaller rental properties and the lack of loan standardization. Yet securitized lending offers the type of financing these properties often need: fixed rate, non-recourse, and longer term.6 Instead, owners of smaller rentals who have mortgages often have loans with variable rates and shorter terms (e.g., five years) with a “bullet” payment due at maturity. Operating on thin margins, in weaker markets that leave little room to increase rent levels (and therefore, cash flow), owners may find themselves unable to make larger payments when rates re-set and increase.

There are no magic solutions to these challenges, but improving access to capital financing for smaller rental properties is critical in the coming decade. The Urban Institute estimates that from 2010 to 2020, the number of renter households will expand by as many as 6 million. Preserving the millions of existing small rental properties in our nation’s housing stock can be a key component of a broader strategy to respond to this increase in rental demand.

As Congress considers proposals to reform our nation’s housing finance system, the Bipartisan Policy Center’s Housing Commission strongly believes there should be a greater focus on understanding the mortgage market for smaller rental properties and examining ways to facilitate financing to smaller properties. In its February 2013 report, Housing America’s Future: New Directions for National Policy, the commission also makes the following specific recommendations.

Explore opportunities to provide financing to small, scatter-site rentals on a bundled basis. The commission believes there may be untapped opportunities for the bundling of several non-contiguous properties into a single multi-site, multifamily property for purposes of financing the development and acquisition of these properties. To the extent that the Federal Home Loan Banks or Fannie Mae and Freddie Mac have experience with multi-site, multifamily finance, each government-sponsored enterprise (GSE) should use this experience to inform development of future financing products.

Review the impact of passive loss rules for small rental properties. The Tax Reform Act of 1986 disallowed the practice of using losses from “passive activities”—including investment in rental properties—to offset “active income” from other, unrelated areas. The limitation on passive losses, however, permits taxpayers with incomes under $100,000 (phased up to $150,000) to deduct as much as $25,000 of losses from rental property they actively manage. The federal government should assess the potential to attract greater investment in affordable rental homes by exempting rental properties with fewer than 50 units from the $25,000 limit and indexing the limit to inflation.

Pursue additional research to enable improved decision-making and underwriting. The Federal Housing Finance Agency, in conjunction with Fannie Mae and Freddie Mac, should conduct a thorough review of the two GSEs’ experience in supporting the five- to 49-unit multifamily rental market to see what lessons can be learned. The aim of these studies would be to identify factors that may have contributed to the poorer historical performance of these properties in terms of underwriting, valuation methods, product features, and other factors.

Facilitate partnerships with mission-driven lenders. A new system of rental housing finance should support and enhance the role of community development financial institutions (CDFI) and other mission-driven lenders. Such a system should encourage traditional financial institutions to work in partnership with CDFIs on risk sharing and other arrangements to expand capital support to small multifamily properties. While CDFIs typically provide pre-development and construction financing, access to long-term permanent financing—through direct issuance of securities or sale to an aggregator—would enable them to better support affordable rental housing of all sizes. The U.S. Department of Housing and Urban Development’s Small Multifamily Building Risk-Share Initiative presents a good opportunity to explore the potential of these partnerships.

Finally, there is a tremendous need for more comprehensive and timely data, including information on small rental loan originations, servicing, and performance. Better information is the critical first step in helping policy writers make informed decisions about how to meet the capital needs of this important segment of the rental market.

Visit the Bipartisan Policy Center to learn about the center and to view the report. For more information, e-mail Grace Campion.

3 See Joint Center for Housing Studies of Harvard University (JCHS), America’s Rental Housing: Meeting Challenges, Building on Opportunities (2011), p. 21.

4 Ibid., p. 22 (information based on JCHS tabulations of U.S. Census Bureau, 2001 Residential Finance Survey).

5 Ibid. In 2009, more than 10 million privately owned units had monthly rents of $599 or less. See also U.S. Department of Housing and Urban Development, Preserving Affordable Rental Housing: A Snapshot of Growing Need, Current Threats, and Innovative Solutions, (summer 2013).

6 For a summary of the unique financing challenges faced by small rental properties, see Enhancing Access to Capital for Smaller Unsubsidized Multifamily Rental Properties, Joint Center for Housing Studies of Harvard University, William Apgar and Shekar Narasimhan, March 2007.

Photo: The Federal Home Loan Bank of Indianapolis financed this series of 12-unit multifamily rental properties with multiple advances.Source: Federal Home Loan Bank of Indianapolis.
The Federal Home Loan Bank of Indianapolis financed this series of 12-unit multifamily rental properties with multiple advances.

Federal Home Loan Bank Advances

MaryBeth Wott, Community Investment Officer, Federal Home Loan Bank of Indianapolis

Chartered in 1932, the Federal Home Loan Bank System (the system) comprises 12 banks and the Office of Finance, which provide funds for mortgages and community lending. Each bank is in a different region of the country, and each has individual program goals based on local market conditions. Each Federal Home Loan Bank (FHLB) is a government-sponsored enterprise, federally chartered but privately capitalized and independently managed.

Each FHLB is a cooperatively owned membership organization. Community banks, national banks and federal savings associations, commercial banks, credit unions, community development financial institutions, and insurance companies are eligible for membership. FHLBs and their members represent the largest collective source of home mortgage and community credit in the United States.

One benefit of FHLB membership is access to low-cost secured borrowings, known as advances, which are funded by the FHLBs in the capital markets from the issuance of discount notes or term debt, collectively known as consolidated obligations.

In addition to providing on-demand liquidity to member financial institutions, the system also promotes community development through the Affordable Housing Program (AHP) and the Community Investment Program (CIP). According to the FHLB, “AHP subsidizes the interest rates for loans to member financial institutions, and provides direct subsidies to members making loans for the purchase, construction, or rehabilitation of very low- to moderate-income owner-occupied or rental housing. The CIP provides funds for community-oriented mortgage lending for families whose incomes do not exceed 115 percent of the area median. The CIP also directs lending towards economic development activities that are located in low- to moderate-income neighborhoods.”

Community Investment Program in Action

Berne is a small, picturesque community in northeastern Indiana founded by Swiss Mennonite immigrants in 1852. On the east side of Berne, Quad Properties, a local enterprise, has been building and managing small-scale apartment buildings since 2007. Over the last seven years, Quad Properties has completed and rented multiple new 12-unit properties. The apartment complex has five individual buildings. Each building was fully occupied, with a waiting list in place, before construction on the next building was started. The most recent building was completed in 2012. All units contain two bedrooms and feature a dishwasher, washer and dryer, and either a patio or a deck.

Thanks to affordable financing provided by First Bank of Berne, Quad Properties built each building without federal subsidies or tax credits. The $500 monthly rents are well within the 115 percent of area median income calculation required to qualify for a CIP advance from the Federal Home Loan Bank of Indianapolis (FHLBI). Along with owner equity, CIP advances funded several of the development phases, covering both construction and permanent financing. A 10-year, $760,000 CIP loan financed the most recently constructed building. The CIP advance allowed the bank to offer a longer-term loan at a rate of 0.75 basis points less than it would typically offer. Joe Caffee, Senior Vice President and Head of Lending for First Bank of Berne, said, “CIP is a wonderful opportunity to give back to the community by providing lower cost and longer term loans to local businesses to invest in projects like this housing. There are a lot of families living in these units. They’re very popular.” He said that First Bank of Berne has also used CIP for operating funds for a local boat manufacturer to save jobs during the economic downturn. Caffee reports that the boat company is doing quite well these days.

CIP provides FHLBI members with a continuous, favorably priced source of funds for a variety of uses, including affordable rental housing, first-time home buyer loans, small business loans, and community and economic development loans. CIP is designed to support FHLBI members’ efforts to undertake community-oriented mortgage lending and economic development in the communities they serve.

For more information, e-mail MaryBeth Wott.

Articles by non-OCC authors represent the authors’ own views and not necessarily the views of the OCC.