That calculation, if you will, that recalibration of cap rates to interest rates has historically taken about a quarter. So what you need to have happen, which we have not happened in any quarter through 2023, is rates to stabilize and cap rates to then move according to where rates are. And so if you play that out for 2024, if you were to get rates stabilizing somewhere between a 4 15 and a 5% 10-year treasury, you could then get cap rate movement to make it so that the acquisitions market is pricing assets at either slight negative leverage or potentially positive leverage, depending on how far cap rates move. And that’s when you’re going to get transaction volumes on the sales side coming back, and clearly the commensurate refinancing volumes that would come from an acquisitions market.
Jade Rahmani: That’s a great answer. Thanks very much.
Operator: [Operator Instructions] We go to the line of Kyle Joseph with Jeffries. Please go ahead.
Kyle Joseph: Hey, good morning, Will and Greg. Thanks for taking my questions. Just wanted to go back to the agencies. Obviously, they’ve been utilizing less than their cap. That sounds like that’s a lack of demand, not a lack of desire to put capital to work there. You know, I think based on my math, they’ve been using roughly two-thirds of their cap year to date. How does that compare to historical levels and given the outlook for REFI activity to improve into ’24, would you anticipate the GSEs moving back towards their cap rates?
Willy Walker: So, Kyle, how it compares to previous times, unfortunately I’m old enough to remember all this stuff specifically. If you think about the great financial crisis when all other topical providers moved out of the market, Fannie and Freddie and HUD stepped into the market and their volumes and percentage market share went up significantly. But we were in a decreasing rate environment, which meant that everybody who had a property that they wanted to either refinance or go buy and there wasn’t a lot of acquisition activity during the GFC, particularly 2008-2009. They had capital and Fannie and Freddie particularly were able to deploy. They didn’t have cap stack then, but they had deployed significant volumes of capital.
Fast forward to the pandemic, the exact same thing happened. Pandemic, other capital sources moved out of the market. Fannie and Freddie moved into the market and volumes went up. You may recall that Walker & Dunlop was the largest multi-family lender in the United States in 2020. That was due to JP Morgan and Wells Fargo, the two ahead of us in the league tables, stepping out of the market and Walker & Dunlop stepped in with agency capital. The difference this time is that we are in a raising rate environment. Therefore, all of those refinancings that happened in 2020 when rates went down and happened in 2009 when rates went down are not coming for refinancing in this market. And then you have, as I just described to Jade, a drying up of acquisition activity based on that gap between the cost of financing and where cap rates are on a lightning basis.
So what you have set up is the agencies should be the dominant source of capital in the market today, except in a raising rate environment, there just isn’t that much demand for their capital. So now go to 2024. First of all, we are talking extensively, we and the industry with the regulator to keep Fannie and Freddie’s caps at their current $75 billion level for each one of them or $150 billion combined, thinking that volumes will go up in ’24 as we get hopefully rate stabilization. That’s point one. We don’t know what the regulator will do, but it’s our hope that the regulator says, look, ’24 will be a higher volume year than ’23. Let’s leave them with the capacity that they had this year, even though they won’t use all of it. The second thing is that refinancing number that I put forth to you.
Only $75 billion in multi-family loans matured in ’23. That number steps up precipitously in ’24. Those deals must get done. So the agencies are positioned well to do those loans. And the issue there is how much of them are refinanced and how many of them hit the wall, which then requires potentially either a foreclosure on the loan, a sale of the property, or some other type of structured deal rather than just a straight out first trust refinancing. And then the final thing is if you get any kind of stability where cap rates move, as I said in my comments, there’s a lot of dry powder sitting on the sidelines waiting to get into this market. The issue with it is a lot of that capital is waiting for distress, and the distress just hasn’t shown up in ’23.
So if distress starts to come in ’24, and there is the opportunity for people to start deploying that capital, you would be able to put on new loans at lower bases in the properties when people move in to try and take advantage of a distressed market should it arrive. Final thing I would say that Greg underscored is just that we have a very, very low volume of loans maturing in 2024. As well as in 2025. So what that means for us is it’s great from a credit standpoint at Walker & Dunlop. We don’t have a lot of opportunities, if you will, for loans to hit the wall because of poor performance and because of high REFI volumes. The challenge, as I underscored in my comments, is to go out and find those loans and in Q3, 74% of the refinancing that we did at Walker & Dunlop were loans that we got from competitor firms and financed for Walker & Dunlop.
That’s the opportunity for us into ’24 and ’25.
Kyle Joseph: Really helpful perspective. Thanks. And then just one quick follow up on me. Obviously, you guys have done a phenomenal job growing your servicing portfolio, but given we’re called seven months out from Silly Valley and more rumblings of bank capital requirements on MSRs. Is that a bigger opportunity in your mind now or potentially to accelerate growth there? Particularly we’ve been hearing a lot on bank stepping away from the red, the MSR side of things, but just wanting to get your perspective more on the commercial side.
Willy Walker: So the growth of the servicing portfolio is all related to the growth and origination volumes. If you look at what we’re originating as it relates to quarterly origination volumes at these lower levels, which Greg just walked through, if we’re in a band of doing $8 to $10 billion of total transaction volume on a quarterly basis, Greg’s number was we’ve only got $3.8 billion in our at-risk portfolio rolling off in the next two years. So you will continue to add loans and MSRs to the servicing portfolio, but significant growth in the servicing portfolio is going to come when those quarterly volumes move from $8 to $10 to $10 to $12 to $16 and from $16 to $20. And the exciting part for us is we know that’s going to happen.
