In recent months, commercial mortgage brokers, lenders and borrowers have routinely and happily pointed to multifamily as the sector in which a transaction is still most likely to go forward without running into that ruthless beast known as the credit crunch. Why? Fannie and Freddie, of course.
Recent data from the Mortgage Bankers Association provide solid statistical evidence of the government-sponsored enterprises' (GSEs') tremendous – and growing – role in commercial loan originations.
In fact, unlike commercial mortgage-backed securities (CMBS) conduits, banks, thrifts and life companies – which all saw predictable origination declines in the second quarter of this year – Fannie and Freddie actually set a record high.
But that was then. This is post-bailout now. With the GSEs now cocooned in their cozy conservatorship, what will become of multifamily lending and securitization – and the health of this essential housing segment?
Although the ultimate ramifications remain to be seen, multifamily market players can immediately take solace in the fact that their portion of the housing market was sound in the first place – or at least infinitesimally more sound than its troublemaking single-family counterpart.
‘The government's action is directly related to the companies' single-family investments and their efforts to weather the ongoing decline in that sector,’ notes Doug Bibby, president of the National Multi Housing Council (NMHC), in a statement.
‘The multifamily sector, on the other hand, remains strong and is actually producing profits for the firms that are helping rebuild their capital reserves,’ he continues. ‘As a result, we expect them to remain active in the multifamily market.’
NMHC notes that it does plan to keep a close eye on the Federal Housing Finance Authority (FHFA) and the government to spot any potentially disruptive changes to Fannie's and Freddie's modi operandi – especially to the ways in which multifamily loans are originated and serviced.
Meanwhile, Commercial Mortgage Securities Association also gives the GSE plan a general thumbs-up and believes the Treasury's plan to purchase mortgage-backed securities will be a critical step toward restoring mortgage-phobic investors' faith in the capital markets. Of course, that market includes the unfairly maligned – and still very quiet – CMBS space.
According to Gleb Nechayev of CBRE Torto Wheaton Research, although multifamily constitutes a relatively small percentage of the GSEs' overall business, failing to sufficiently take into account this essential sector would indeed be a mistake.
In a recent article titled ‘GSE Rescue Is An Opportunity To Benefit Multifamily Housing,’ he warns that the GSEs must ‘strike a delicate balance between containing the current housing crisis and supporting a fundamentally sound market for rental multi-housing.’
In other words, memo to the government: Don't tend to the sick so clumsily or exclusively that you inadvertently infect the healthy in the process.
Nechayev points out that at just six to 11 basis points, delinquencies on multifamily loans are currently 100 times lower than delinquencies on one- to four-unit residential loans, which are seeing a 6.4% delinquency rate. He believes this striking contrast merits close attention and reaction.
Single-family's and multifamily's disparate fundamentals should ‘prompt a discussion of risks and benefits associated with the GSEs' history in both housing segments and how it could be structured in the future, whatever form(s) the two entities eventually take,’ he says.
Should the GSEs be split off to reflect the inherent and emergent differences between single-family residential mortgages and multifamily mortgages? Would that significant a change interfere with deal flow on either or both sides? What other restructuring options make sense?
Business as usual remains the rule for now. ‘As conservator, FHFA expects each enterprise to continue underwriting and financing sound multifamily business,’ FHFA says in what it calls a ‘statement of support for multifamily housing finance activities of the enterprises while in conservatorship.’
But as grand plans are devised for the future of Fannie and Freddie, FHFA and the rest of the federal government must carefully consider the impact of any resi-healing on multifamily lending – or risk creating a brand-new crisis.
– Jessica Lillian, Commercial Mortgage Insight
