Rate Increased .25% Wednesday with Promises of a Faster Pace of Rate Increases to follow

WASHINGTON, DC — The Federal Reserve raised interest rates Wednesday, a move that was widely expected but still marked a milestone in the U.S. central bank’s shift from policies used to battle the 2007-09 financial crisis and recession.

In raising its benchmark overnight lending rate a quarter of a percentage point to a range of between 1.75 percent and 2 percent, the Fed dropped its pledge to keep rates low enough to stimulate the economy “for some time” and signaled it would tolerate above-target inflation at least through 2020.

Information received since the Federal Open Market Committee (FOMC) met in May indicates that the labor market has continued to strengthen, and that economic activity has been rising at a solid rate. Job gains have been strong, on average, in recent months, and the unemployment rate has declined. Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-3/4 to 2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

The Fed has raised rates seven times since late 2015 on the back of the economy’s continuing expansion and solid job growth, rendering the language of its previous policy statements outdated.

Inflation is also snapping into line, with fresh projections from policymakers on Wednesday indicating it would run above the central bank’s 2 percent target, hitting 2.1 percent this year and remaining there through 2020.

Policymakers also projected a slightly faster pace of rate increases in the coming months, with two additional hikes expected by the end of this year, compared to one previously.

They see another three rate increases next year, a pace unchanged from their previous forecast.

The Fed now sees gross domestic product growing 2.8 percent this year, slightly higher than previously forecast, and dipping to 2.4 percent next year, unchanged from policymakers’ March projections. The unemployment rate is seen falling to 3.6 percent in 2018, compared to the 3.8 percent forecast in March.

The rate increase was in line with investors’ expectations and showed policymakers’ confidence in the economy’s growth prospects, continued low unemployment and steady inflation. Investors had given just over a 91 percent chance of a rate rise on Wednesday, according to an analysis by CME Group.

The Fed said its policy of further gradual rate increases will be “consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective.”

In a technical move, the central bank also decided to set the interest rate it pays banks on excess reserves — its chief tool for moderating short-term interest rates — at just below the upper level of its target range. The step was needed, the Fed said, to be sure rates stay within the intended boundaries.

“The labor market has continued to strengthen … economic activity has been rising at a solid rate,” the Fed’s rate-setting committee said in unanimous statement after the end of a two-day meeting.

“Household spending has picked up while business fixed investment has continued to grow strongly,” the Fed said.

While Fannie and Freddie have introduced rate hikes over the past few weeks and tightened underwriting as a means to slow lending activity. The rate increases have amounted to about a 50 basis point total increase in their rates.

Fannie Mae (FNMA/OTC) then announced yesterday “Green Rewards”, a new multifamily financing option that helps owners of apartment buildings and cooperatives invest in energy- and water-cost saving improvements. These investments can improve and preserve the quality of multifamily properties and lower utility costs, saving money for both property owners and renters. Green Rewards is available nationwide.

“Green Rewards does just that, it rewards borrowers for investing in smart property improvements by giving owners a lower all-in interest rate and access to more loan dollars,” said Jeffery Hayward, Executive Vice President and Head of Multifamily at Fannie Mae. “The resulting greener property really has rewards for all of housing’s stakeholders: it means increased cash flows for the owners, lower utility expenses and better quality housing for tenants, and a high quality asset backing our MBS for investors.”

Green Rewards provides property owners with both extra loan proceeds and a lower all-in interest rate.  For example, a multifamily property seeking to refinance a $10 million loan could receive an additional $250,000 in loan proceeds to make energy- and water- saving improvements that will reduce its annual $140,000 energy and water costs by 30 percent. Green Rewards includes a portion of the owner’s and the tenant’s projected energy- and water-cost savings in the loan’s underwriting, resulting in greater loan proceeds than a typical loan.  In addition, Green Rewards reduces the all-in interest rate by 10 basis points; on the same $10.25 million loan this could result in savings of more than $98,000 in total interest over the 10-year loan term.

With Green Rewards, property owners can make smart investments that reduce energy and water expenses, generate electricity or result in a third-party green building certification, including installing ENERGY STAR^® certified HVAC systems, electricity-generating solar panels, water-reducing irrigation systems, or applying for a Green Building Certification, such as ENERGY STAR^® or U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) certification.

Fannie Freddie have annual production caps for market rate multifamily lending set at $30.0 billion each for 2015. Both agencies are currently on pace to hit those caps by the third quarter, if not sooner. Freddie Mac reported that its multifamily lending volume reached $10.0 billion in the first quarter, while Fannie Mae issued $10.4 billion in multifamily MBS (mortgage-backed securities) during the same period.

The caps themselves are relatively new. Former Federal Housing Finance Agency (FHFA) director Ed DeMarco first put the annual caps in place in 2013 as a means to scale back the GSE’s lending on market rate properties and bring back more private capital to the marketplace. To be clear, the loan production caps apply only to the agencies’ market rate apartment loans. Both Fannie and Freddie do have other capital available that they use to fund affordable housing, small balance loans and manufactured housing that do not count against the cap.

The market rate lending volume is off to a booming start this year because of higher sales volumes, more loan maturities and construction loans that were done in recent years that are now rolling into permanent loans. For example, the $12.8 billion in apartment sales that occurred in first quarter of the year is an increase of 55 percent compared to the same period a year ago, according to Real Capital Analytics (RCA), a New York City-based research firm.

Both conventional and affordable multifamily properties are eligible for Green Rewards, as well as cooperatives, seniors, military and student housing properties. Properties may be located anywhere in the United States, and must be able to project a 20 percent minimum consumption savings in energy and/or water. To track energy performance over time, owners with a Green Rewards loan must report the property’s ENERGY STAR^® score annually. The additional loan proceeds must be reinvested in the property within 12 months of loan closing.

Green Rewards is the latest green financing innovation from Fannie Mae Multifamily. Fannie Mae announced in February that multifamily properties with an existing Green Building Certification will receive a 10 basis point reduction in the interest rate on new loans.  In 2011, Fannie Mae introduced Green Preservation Plus which supports the preservation of affordable housing, providing up to an additional five percent in loan proceeds to affordable housing owners seeking to make energy and water efficiency upgrades at the time of acquiring or refinancing the property.   Fannie Mae also recently reduced the all-in interest rate on its Green Preservation Plus loans by 10 basis points.   Fannie Mae is the market leader in green solutions for the multifamily industry, providing over $130 million in Green Financing as of the end of 2014.

For more information on Fannie Mae’s Multifamily Green Initiative, please visit www.fanniemaegreeninitiative.com