As the U.S. economy continues taking steps toward recovering from the recession, major planned changes to government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac remain a significant wild card. What will these long-awaited reforms mean for multifamily housing finance? Furthermore, how can the commercial real estate finance industry ensure its unique needs are addressed in the final legislation?
‘With respect to multifamily housing finance policy, the government's objective should be geared toward providing a stable, counter-cyclical and affordable source of capital for affordable and market-rate rental multifamily housing, while effectively managing the risk to the taxpayer and without bias toward or against home ownership,’ the CRE Finance Council wrote in a comprehensive comment letter submitted in July to the U.S. Department of the Treasury and Department of Housing and Urban Development (HUD).
In an 11-page analysis and presentation of key recommendations, council president Lisa Pendergast and CEO Dottie Cunningham stressed the need for continuing government support in property finance for the multifamily sector.
Numerous new pressures – including a decline in the national homeownership rate, rental-friendly demographic trends, historically low overall supply levels and a particularly acute looming shortage for seniors housing – are expected to further increase the importance of a viable GSE secondary market.
‘Recently, the void left by private capital exiting the multifamily housing market was filled by the GSEs, which increased their multifamily activity starting 2007 to help ease the credit crisis,’ the CRE Finance Council noted.
Federal Housing Finance Agency data show that the GSEs' share of the multifamily housing market has dramatically increased over the past few years – from 33% in 2006 to 41% in 2007 to 79% in 2008. In the affordable-housing segment, their role has become even more pronounced.
However, despite Fannie and Freddie's obvious importance in propelling multifamily finance forward at a time when other CRE sectors have more severely stalled, the CRE Finance Council also recommended certain modifications to their existing model.
‘Certain elements of these programs contributed to the current situation in the housing market, and these deficiencies should be corrected so as to provide greater market stability, reduce taxpayer exposure and encourage broader capital markets participation in housing finance,’ the association wrote.
Specifically, the CRE Finance Council warned that the GSEs must not be structured in a way that forces them to use their balance sheets in order to remain competitive with capital-markets sources during ‘peak periods of the cycle.’ A counter-cyclical platform that encourages new private-sector partnerships will better meet market needs regardless of cycle timing, the group said.
Private-sector participation in the GSEs' operation already enhances their capabilities, the CRE Finance Council noted, emphasizing that the agencies must maintain some form of private or quasi-private ownership to continue these symbiotic benefits.
For instance, the private sector ‘provides GSEs the ability to lay off interest rate risk and minimize whole-loan balance-sheet exposure by selling government-backed securities’ and ‘helps maintain GSE pricing and credit discipline through secondary market executions,’ the association said.
The sector also ‘provides opportunities to sell off portions of credit risk not consistent with preferred GSE risk profile (e.g., Freddie Mac B-pieces in [Capital Markets Execution] program); shares risk with origination partners (e.g., Fannie Mae [Delegated Underwriting and Servicing] program or the Freddie Mac mezzanine program); and enhances the ability to attract and retain high-quality, sophisticated management through private-sector ownership,’ the group continued.
The comment letter also encouraged the GSEs to eliminate – or at least decrease – their interest-rate risk and consequent threat to their credit guarantees by avoiding involvement in various investments not associated with mortgage securitization. Fannie and Freddie's current portfolios – at approximately $800 billion each – must also be ‘carefully balanced with market risks and wound down to acceptable levels,’ the CRE Finance Council urged.
Perhaps most importantly, the CRE Finance Council's comments underline the crucial differences between the multifamily market and the single-family housing market – and the ways in which GSE reform must recognize these differences in order for reform to help rather than harm the dealmaking prospects for this vital CRE property type.
With the comment-submission period now closed, the focus has turned to how – and whether – the administration will take into account the views expressed by the CRE Finance Council and the other stakeholders that weighed in.
Although the implementation of major changes to the beleaguered GSEs is rumored to face extended delays (perhaps even through 2012), the Obama administration has stressed that steps toward GSE reform are, at least, moving forward.
In an August speech, Treasury Secretary Timothy Geithner noted that following a series of hearings scheduled to take place this fall, the Treasury – along with the Department of Housing and HUD – will be required to submit its plan for reform by January 2011.
Clinton Towers: Bronx, NY
What: Clinton Towers is a 45-unit complex.
Who: Arbor Commercial Funding, a wholly owned subsidiary of Arbor Commercial Mortgage LLC, funded the loan. Eastern Union Commercial, a New York-based commercial real estate mortgage brokerage firm, arranged the acquisition financing for the borrower. The loan was originated by Arbor's New York lending office.
$$$: $23.77 million.
Terms: The 10-year loan amortizes on a 30-year schedule and carries a note rate of 4.87%.
Arbor Commercial Mortgage: arbor.com
Long Beach Towne Square: Long Beach, CA; Bethel Junction: Port Orchard, WA
What: Long Beach Towne Square is a 113,319 square-foot retail center built in 1999. The center is anchored by Ralphs and is 97% occupied. The property is located at 2250 East Carson Blvd. Bethel Junction consists of two adjacent retail centers with 157,833 square feet. Located at Bethel Road and SE Lund Ave., the centers are anchored by Safeway and are 93% occupied. The two properties are cross-collateralized, and the proceeds were used to pay off two maturing conduit loans.
Who: Venture West Funding Inc., a mortgage company headquartered in Manhattan Beach, Calif., arranged the financing through Prudential Mortgage Capital for an affiliate of Robertson Properties Group, based in West Los Angeles.
$$$: $23.7 million.
Terms: The 10-year fixed, nonrecourse mortgages amortize over 30 years. The loans are open for prepayment after five years.
Venture West Funding Inc.: venturewestfunding.com
Red Oak Village: Marcos, TX
What: Red Oak Village is a 176,693 square-foot retail power center. Completed in 2007, it is 87% leased to tenants including Best Buy, Marshalls, Bed Bath & Beyond, PetSmart, Ross Dress for Less and Carl's Jr. The property is located at 2233 I-35 S.
Who: The Dallas office of HFF (Holliday Fenoglio Fowler L.P.) secured the financing on behalf of Lincoln Property Co.
$$$: $10.4 million.
Terms: The 10-year loan carries a 5.5% fixed rate.
HFF: hfflp.com