How Crimping Fannie, Freddie Could Harm American Families

While Fannie Mae and Freddie Mac have been the subject of intense press coverage in recent days, there has been little discussion that these government-sponsored enterprises are responsible for financing billions of dollars in multifamily rental housing.These GSEs provide for the financing of apartment buildings, condominiums, and cooperatives containing five or more individual units through Delegated Underwriting and Servicing and other lenders. Freddie Mac said it has bought more than $189 billion in multifamily mortgages, financing rental housing for more than 4 million families, since launching its multifamily business in 1993.As I reported earlier this month, investment sales for New York City are down by at least 60% and few large, multifamily developments have traded during the first six months of the year. If Fannie and Freddie tighten their underwriting requirements and focus their efforts on single-family rental housing, the investment sales market for multifamily residential buildings will decline to a snail’s pace.“During this credit crisis, multifamily rental apartments is about the only asset class that can get reasonable financing,” William McCahill, a partner at my firm, Apollo Real Estate Advisors, said. One of the principal reasons is the presence of Fannie and Freddie, which together either hold or back $5.3 trillion of mortgage debt, or about half of America’s outstanding mortgages. Fannie Mae, created by Congress in 1938, and Freddie Mac, created in 1970, were part of the government’s efforts to expand home ownership and access to rental housing.“One must also remember that Fannie and Freddie are the lending sources of permanent financing for ‘affordable’ apartments. Thus, homeowners that will just lose their homes through foreclosure will not find a ready stock of affordable apartments to rent. It will be a double whammy on the consumer,” Mr. McCahill added.No asset class other than multifamily has the benefit of inexpensive long-term financing from a quasi-government entity. If Fannie and Freddie are severely restricted or taken out the market, the multifamily housing market will face the same fate as the commercial office market, as it now operates amid a dearth of financing.Take Starrett City, the 153-acre development that includes 5,881 apartment units spread across 46 buildings. It is the nation’s largest federally subsidized housing complex, and there are reportedly at least seven groups interested in acquiring the property. Some of them will likely seek permanent mortgage financing from Fannie or Freddie.One of the largest developers of “affordable” rental apartments in New York City is Atlantic Development Group. “We have numerous commitments for permanent financing from Fannie and Freddie,” the company’s executive vice president, Chuck Brass, said. “On one hand, they continue to be active in underwriting multifamily loans, while on the other, they continue to be more cautious in their underwriting, raising their annual guarantee fees for multifamily loans. Since they are the principal supplier of long-term capital for multifamily affordable housing, any doomsday scenario for Fannie and Freddie would have significant negative impact for the industry.”The senior vice president and managing director at NorthMarq Capital, Ernest DesRochers, said that multifamily lending “has been dependent on these entities especially over the past 12 months of this credit crisis.” He added that both Frannie and Freddie “have dramatically stepped up their production efforts and provided liquidity for investors, with Fannie providing over $20 billion in multifamily financing during the first six months of 2008.”He added that Fannie and Freddie “have set the rules in the multifamily lending market for the past several years, witnessed by the larger share each has underwritten. I dare say that every major multifamily owner-developer in the United States has transacted with them on a secured and unsecured basis. That said, as a business partner for both of these GSEs, I can tell you that while spreads have increased over the past couple of weeks and debt coverage ratios increased, each has continued to quote new loans and close commitments based on their terms. The changes they have made in underwriting are consistent with the changes in the economy. There is a deleveraging of the economy going on and this is a part of that.”Industry leaders have varied views on the state of the market in light of the turmoil taking place at these government-sponsored enterprises. “Despite all of the recent adverse press on the GSEs, we remain confident that Fannie, Freddie, and HUD will remain fully committed to the multifamily market,” the chairman and chief executive at Cushman & Wakefield Sonnenblick Goldman, Thomas McManus, said. “It does appear there will be some spread widening in the cost of capital for the GSEs, which will need to be passed on to the borrower. That said, the pricing and flexibility of the GSE lending programs for multifamily, student housing, and senior housing is still very attractive to most alternative sources of financing in the marketplace today.”Not everyone is a fan of the role that Frannie and Freddie have played in the multifamily market. “These entities had no right to provide financing for multifamily rental buildings,” a chairman of the board of a multibillion-dollar regional bank, who prefers not to be identified, said. “Their role was to provide financing for single family residential financing instead of extending their business to this marketplace.”Whatever you think of the role these GSEs have played, “given the existing uncertainties in today’s real estate marketplace, if confidence in Fannie Mae and Freddie Mac eroded, it’s clear that the ripple effects would be devastating,” the president of Citi Habitats, Gary Malin, said. “News this week of the U.S. Treasury’s rescue package will hopefully help to instill confidence by providing liquidity to the market and helping to stabilize rates. As long as adequate measures are included to protect the nation’s taxpayers, this plan should provide much needed reassurance to the housing market.”The senior executive vice president and chief credit officer at Emigrant Savings Bank, Patricia Goldstein, said the current situation “in the financing of multifamily rental market is very serious. If Fannie and Freddie do not continue to operate fully at this critical point, the economy will become much worse, especially since many loans are awaiting refinancing and sales, and there is barely a market or outlet to provide this type of financing. If these GSEs do not provide end loans for residential housing, the housing market will completely shut down. The additional fear that this problem is causing will cause more problems no matter what the government is planning to do. It is hard to see how this situation will turn around, and it will have a major impact on the commercial real estate marketplace.”The president of the City Investment Fund, Thomas Lydon, said that the impact of “major changes at these two agencies cannot be overstated. The flow of capital to the multifamily sector has continued with little disruption since the beginnings of the credit crisis last fall. Investment sales of all but the largest transactions have been closing with only slight upward pressure on cap rates and spreads. If Fannie and Freddie have to pay higher borrowing costs on their bonds and securitized mortgage products, it will trickle down to the individual sale or mortgage financing. At greater risk is reduced liquidity and a rationing of capacity, such as is going on in the commercial mortgage-backed securities and portfolio lending space. Liquidity and certainty of closing are two of the primary drivers of price. Fundamentals is the other factor, and the deepening economic statistics all point to a correction in value of multifamily portfolios, from rent-stabilized to luxury. Hopefully, the correction can be minor, and this part of the real estate investment business can remain a stalwart.”The chairman of the board at Signature Bank, Scott Shay, a partner at Ranieri Partners LLC, said that in terms of the multifamily sector, “it is not the ‘house on fire’ scenario, from the perspective of federal policy makers. Clearly, their focus is on the single-family market. There are many private sector players who argue that Fannie Mae and Freddie Mac have been overly aggressive in the multifamily market and have strayed from their original policy purpose of creating liquidity in the single-family sector. Given the current mayhem in the mortgage market, owners of multifamily properties would be wise to focus on the private sector for the time being. The situation is very fluid and could change even over the course of the next few weeks. Comprehensive governmental action in the multifamily sector will most likely be put off until after the elections and after the single-family sector has calmed.”An associate at Ackman Ziff Real Estate Group, Eli Weiss, said it is important to note “that the root of the turmoil lies in the performance of their residential mortgage portfolios — not the multifamily lending side of the business, which continues to be one of the few remaining pockets of liquidity in the commercial real estate market. In the last few months, the agencies have rolled out new multifamily lending programs, such as a conduit style execution and a program tailored to compete in the New York City market. These programs display both the commitment and creative approach the agencies continue to take on the multifamily platform.”One thing is certain: Financing for any real estate asset class is going to be much more difficult over the next 12 months. Nevertheless, commercial and savings banks with strong balance sheets and prudent underwriting will continue to provide multifamily financing for owners and investors. Additionally, I must concur with Mr. Weiss when he says that given the assistance of the federal government, as well as “the compelling metrics of the multifamily side of the business, I believe that both Fannie and Freddie will remain very active lenders for this market,” only with more stringent underwriting standards and higher spreads and guarantees.Mr. Stoler, a contributing editor to The New York Sun, is a radio and television broadcaster and a senior principal at a real estate investment fund. He can be reached at mstoler@newyorkrealestatetv.com.

How Crimping Fannie, Freddie Could Harm American Families

How Crimping Fannie, Freddie Could Harm American Families

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