Agency Lenders

Agency Lenders

Agency lenders are privately owned or publicly traded commercial

mortgage banking firms that originate, underwrite, and fund commercial

real estate loans with their own money or with money borrowed

for the sole purpose of selling these loans back to one of the

two government-sponsored agencies: Federal National Mortgage

Association (Fannie Mae) and Federal Home Loan Mortgage

Corporation (Freddie Mac). Agency lenders, however, lend money

only for residential-related commercial properties such as multifamily

homes, senior housing, assisted living, student housing, and

manufactured housing. Fannie Mae and Freddie Mac were specifically

created by the federal government to provide a secondary market

for both single-family and multifamily loans, which in turn provides

greater liquidity and affordability within the housing market.

Unlike investment banks (conduit lenders) that make their

money selling bonds backed or secured by these commercial mortgages,

agency lenders (commercial mortgage banks) make their

money originating and underwriting commercial real estate loans by

charging a loan origination fee of 1 percent. They then sell the loans

to Fannie Mae or Freddie Mac para pasu, meaning that Fannie Mae

or Freddie Mac purchases the loan at the coupon rate or face value of

the note. If the loan amount is $1 million, then Fannie Mae pays $1

million.

An agency lender primarily makes its money by charging processing,

underwriting, and loan origination fees. Agency lenders also

make money servicing the loans they sell to Fannie Mac and Freddie

Mac. Loans originated by agency lenders are underwritten using

strict Fannie Mae or Freddie Mac underwriting guidelines. Agency

lenders that fail to follow these strict underwriting guidelines risk

having their loans rejected. When a loan is rejected, the commercial

mortgage bank is essentially stuck with the loan. It can either sell the

whole loan to another bank or private lender or just hold on to it.

Agency lenders must have years of underwriting and servicing experience

and be extremely well capitalized to participate in originating

and selling commercial loans to Fannie Mae and Freddie Mac.

Because of the stringent financial and capital requirements,

Fannie Mae and Freddie Mac have limited the number of preapproved

agency lenders to about twenty-seven nationwide. These

twenty-seven are approved by FannieMae as Delegated Underwriting

and Servicing lenders, or DUS lenders, which is a special designation

with many privileges. Loans purchased by Fannie Mae and

Freddie Mac are pooled, packaged, and converted into commercial

mortgage-backed securities (CMBS) the same way conduit loans are

converted to bonds. In fact, the very securitization process that conduit

lenders use today was originally created by Fannie Mae for the

residential mortgage market. The commercial mortgage industry

began emulating Fannie Mae’s securitization process in the early

1990s.