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

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 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. 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.

Another group that can refinance loans are landlords who built their buildings decades ago, have kept ownership of the properties and keep loans on the buildings at less than half the value, said Jon Estreich, who has been arranging loans for multifamily buildings for 40 years. He cites Rudin Management, the 100-year-old company now being run by its third generation, and the Litwins’ Glenwood Management Co. as examples of who can still get financing.

Estreich agrees new loans are virtually impossible for the rest of the private buildings composed of all rent-regulated units.

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.

In addition to increasing the expected revenue loss to 10%, Cestero is assuming no rent increases for four years, while expenses increase 5% for buildings that will be finished in the near future. He isn’t sure what he should do about buildings just beginning construction, since they won’t be finished for several years, and it isn’t clear if the mayor will be reelected and for how long he will support a rent freeze.

He adds that while the city imposed a rent freeze for three years under Mayor Bill de Blasio, that occurred when interest rates were much lower.

“It’s one thing to have a freeze when interest rates are at 3%,” he added. “It’s another when they are at 7%.”

The problem owners face with refinancing was on display last month when a lender filed a  foreclosure lawsuit against A&E Real Estate Holdings for failing to keep current on a $103 million loan tied to 22 buildings in downtown Jamaica that make up the residential complex known as Cunningham Apartments.

A&E is one of the largest owners of rent-regulated buildings and last year wound up in the crosshairs of the Mamdani administration as violations soared on its properties.

Last Friday, A&E injected $3 million into the project to bring the loan current. But its financial squeeze continues.

“The rent freeze is compounding a problem as owners were digging out of the post-COVID time when rent collections dropped,” said Michelle de la Uz, executive director of the Brooklyn nonprofit Fifth Avenue Committee, which has had to lend money to some of its all-affordable projects to keep them from defaulting on their mortgages.

“The risks to rent-stabilized housing is endangering the whole affordable housing mission,” she added. “It is not sustainable.”

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