Since the credit markets crashed in the summer of 2007, Fannie Mae and Freddie Mac have carried the bulk of apartment transactions on their broad shoulders. As a result, multifamily operators are wary of what the recently unveiled nationalization plan will mean for the two financial giants — and the industry.
In 2007, Fannie and Freddie's $35 billion backing accounted for 7 percent of the year's $508 billion in commercial/multifamily originations, according to the Mortgage Bankers Association (MBA). This year, as the commercial mortgage-backed securities (CMBS) market dried up, Fannie and Freddie surged ahead, scooping up 64 percent more in originations than they had at the same time last year, according to the MBA. Today, they reportedly back more than 90 percent of multifamily loans.
Unfortunately, Fannie and Freddie have simultaneously been propping up the dismal single-family market. And that's what spurred the U.S. government's decision to turn the two government-sponsored entities into government-owned entities. On Sunday, the U.S. Department of Treasury and Federal Housing Finance Agency (FHFA) put the mortgage duo into conservatorship.
Now that the government has stepped in, there's fear that apartment transactions will be collateral damage in the war against the foreclosure crisis. The primary concern among apartment owners is twofold: First is the worry that minimum spreads will jump. More unsettling for some observers is the possibility that the government will turn the agencies' focus back to its core single-family mission, and Fannie and Freddie will pull out of the multifamily market altogether.
"If the political process results in Fannie and Freddie becoming a conduit to open up mortgage lending, then we could see a shift towards homeownership again, which would be negative," says David Fitch, CEO for Gables Residential in Atlanta.
Right now, multifamily seems to be the only thing profitable at Fannie and Freddie. Just look at delinquency rates for mortgages across the multifamily and single-family industries.
The 60-day-plus delinquency rate on multifamily loans held or insured by Fannie Mae is 0.11 percent; the delinquency rate on multifamily loans held or insured by Freddie Mac is 0.03 percent, according to the MBA. On the other hand, the average 60-day-plus delinquency rate on single-family mortgage payments nationwide rose to 3.53 percent in the second quarter of 2008, according to TransUnion.
"If you have something that works well, why mess with it?" asks Doug Bibby, president of the Washington, D.C.-based National Multi Housing Council. "It will be very much business as usual going forward. They'd be crazy not to make sure the markets function effectively. Those books [multifamily loans] have been profitable for them and helps them meet their mission very effectively."
Others don't think Freddie and Fannie will be leaving the multifamily market in the near future. "Since multifamily [affordable housing] is in the center of their charters, is profitable to the agencies, and any cut-back would restrict housing availability and cost, my guess is that it will continue to be funded by the agencies," says Simon Wadsworth, chief financial officer for Mid America Apartment Communities, a REIT based in Memphis that recently had a joint venture fund with Fannie Mae before the agency backed out. "Agency paper should start to trade at reduced spreads, reducing interest costs, and helping multifamily."
Bibby's primary concern seems to be whether the agencies will move more toward securitizing loans instead of buying portfolios. "If you read the information in the rescue plan, you can see a strong emphasis toward securitizing options and a de-emphasis on portfolio holdings," he says. "The problem we have in the multifamily business [is that] portfolio deals are the preferred execution."
With the presidential and congressional elections roughly two months away, no one wants to make a wager on what Fannie and Freddie will ultimately look like. Treasury Secretary Henry M. Paulson Jr., who will be stepping down in January, has already said that the ultimate fate of these agencies will be left up to someone else. "This is going to be thrown back to Congress and the new administration to deal with," Bibby says.
One scenario floating around Capitol Hill is that the two entries could be treated like the public utilities, where there's a cap on the returns they can make. They could also be privatized or split up.
"They need to be honest about what the mission is," says Dan Fasulo, managing director for Real Capital Analytics, a New York-based firm that tracks real estate transactions. "You can be public, or you can be private, but you can't be middle of the road. You will be squashed if you're middle of the road."
But considering where things stand right now—especially with the wipeout of Fannie and Freddie's stock prices—Fasulo thinks the government made the right move. "It was something that had to be done," he says. "It's unfortunate that Congress let those entities get as large as they did."
Bibby hopes the government won't turn Fannie and Freddie into an organization like Ginnie Mae, a much smaller government-owned agency and issuer of mortgage-backed securities. "I was hoping if Treasury did something, it would do something like this—it would not try to take them over and run them as government entities," Bibby says. "I'm relieved that they've taken the approach that tries to keep them going as private entities and hopefully will return them to profitability."
But what eventually happens is anyone's guess. "All indications are that it's business as usual, but that could change," Fitch says. "It's day-by-day."
Les Shaver is a senior editor at Multifamily Executive magazine.
Learn more about markets featured in this article: Atlanta, GA.