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Weekly Thoughts by Jason S. Weissman for the week of February 8, 2010

What will happen to the “Multifamily Sector” if Fannie/Freddie are Abolished?

Are you serious Mr. Frank? In the past, one of Fannie Mae and Freddie MAC’s biggest advocates has been Congressman Barney Frank. Not anymore! According to statements quoted last week, Frank thinks that the agencies should be abolished and replaced with an entirely new system. My thoughts: Abolishing or greatly changing “agency debt” to the multifamily investment community would have terrible affects on the industry, and, more proximately, to “end users”, e.g., apartment renters.

Because of Fannie and Freddie's support , stabilized multifamily product has been the darling of the commercial real estate business. Cap rates for stabilized multifamily product has increased only by 100-150 basis points (10%-15% is a modest decline in value relative to theaverage commercial asset, which has declined 40-45% from its peak value). Even through the financial crisis, “agency debt” has been available to fund loans with up to 80% loan to value. Yes, there will be defaults in the multifamily space, but, all-in-all, Fannie/Freddie has relatively low exposure to losses and defaults with its loans in the multifamily sector. According to the National Multi Housing Council, as of 2009, Fannie Mae multifamily default rates (noncurrent) are less than .33% and Freddie Mac'sare .09%! Please keep in mind that the agencies make-up over 90% of the debt originated on multifamily real estate in the US. With this, most of the distress comes from the 10% of loans made that are not “agency debt.” Yes, Stuyvesant Town and Riverton Houses are very public “foreclosures” but these were atypical multifamily acquisitions.

Don’t confuse the “residential mortgage market” with the “multifamily mortgage market”

Mr. Frank should not confuse the on-going tsunami with Fannie/Freddie mortgage exposure on residential condos and single families, with loans to the multifamily sector. I absolutely agree that a “new system” is needed for residential mortgages. In regards to yesterday’s WSJ article (LINK enclosed), the extension on the loan modification program for residential mortgages is out right ridiculous! Freddie has 3.87% of their loans over 90 days delinquent, while Fannie has 5.29% delinquent. To “modify” these existing loans, will not work. Once the loans are modified,80%-90% of these loans will perpetually be problem loans—incurable. For once and for all, these loans should be flushed out of the system, not artificially maintained by the government and its administration.

Read the WSJ Article:
http://online.wsj.com/article/SB10001424052748704362004575001042824028862.html

Why everybody benefits from Fannie/Freddie debt for Multifamily Assets?

The availability of multifamily debt at on up to 80% of the value of the property, makes for a fluid, active multifamily sector. It also stimulates potentially more supply, and pushes the market to “continuously” up-grade its product. Who benefits from this? The investor and the end user. The investor can count on a stable sector in which one can buy and sell product, and “hopefully”, only have to deal with old school fundamentals, such as the quality of the apartments, the assets location, rents and historical occupancies. If you buy a large multifamily asset with agency debt, and your exit strategy is predicated amongst selling the asset in a set time period to another buyer financed by “agency debt”, with potential changes to the agencies, you can not count on that exit strategy. If “the market” can’t count on liquidity, all investment principals need to be thrown out of the window. The benefit for apartment renters is that supply will continuously be added to the marketplace, therefore self regulating prices, and if there is available credit, multifamily owners will continuously upgrade their product.

Posted at 02/09/2010 04:13 PM by Jason S. Weissman

Categories: Multifamily Real Estate, Boston Apartments, Boston Real Estate, Lending, Boston Real Estate Deals, Boston Luxury Apartments, Boston Residential Real Estate

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