Freddie Mac continues to report significantly stronger performance from its multifamily housing portfolio compared to its other forms of real estate. Amid the ongoing political discussion about government-sponsored enterprise (GSE) reform, the apartment performance of GSEs Freddie Mac and Fannie Mae continues to be impressive, comparatively speaking.
Freddie Mac held just 14 foreclosed properties at the end of last year, and its delinquency rate stood at 0.26 percent, according to its Vice President of Asset Management, Daryl Hall. Freddie Mac reported nearly $1 billion in net income from its multifamily business last year, versus a $511 million net loss in 2009.
When some private lenders retreated from the multifamily loan business in 2007 and 2008, Fannie and Freddie ramped up their purchases of apartment-building loans. The firms’ share of multifamily loan purchases jumped to 85 percent in 2009 from 29 percent in 2007, according to the Mortgage Bankers Association, as reported in The Wall Street Journal (WSJ). Last year, Fannie Mae and Freddie Mac accounted for 56 percent of such loans, replaced in part by an increase in lending by the Federal Housing Administration.
The firms’ apartment portfolios are seeing strong returns. Fannie actually recorded net income of $216 million from its multifamily business last year, up from a $9 billion net loss in 2009, WSJ reported. About half of that loss was due to write-downs on low-income-housing tax credits.
Units magazine spoke briefly with Hall about the state of loans and financing for the apartment industry. Following are highlights:
Q: Why has multifamily housing proven profitable for the GSEs compared to other forms of real estate?
A:At Freddie Mac, we’ve really been careful about whom we do business with, especially the past few years and before the market turned. We look for strong borrowers and operators and lean toward those who have local expertise in their market, not absentee owners who manage their assets from other parts of the country. We pay attention to owners who have or will put money back into the property for repairs or upgrades. We like to do business with operators who have a solid credit history and who provide safe places to live. We also require our Program Plus lenders to have local market expertise. That, coupled with the regional offices we have, ensures strong underwriting and credit analysis before doing a deal.
Q: Is the trend for foreclosures of multifamily properties increasing, decreasing or stabilized? What direction could the trend line go one or two years from now?
A:Stabilizing. Nationally, we think the worst has passed for the overall economy. We currently find economic conditions much more stable than they were 15 to 18 months ago, and lending standards have tightened. However, considering all that, we expect to see foreclosure activity in the industry continue because taking REOs will continue even as the recovery continues.
Q: Are there types of loan structures or types of owners or properties that are most susceptible to foreclosure right now or could be in the future?
A:Maturity risk is certainly high for all lenders. Most of the problems we’ve seen are in “B” or “C” assets in weaker submarkets. In the industry, commercial mortgage-backed securities (CMBS) loans are most susceptible right now. Their maturity profile and asset and borrower quality overall are riskier than ours and that is showing up in the numbers. Their delinquency rates were roughly 13 percent at the end of 2010, compared to our multifamily deliquency rate of 0.26 percent.
Q: What advice do you have for owners who are interested in purchasing distressed assets directly from the GSEs?
A: There might be the perception that this housing downturn has created a lot of great deals for investors. But for us, we’re not looking at selling for cents on the dollar. Investors want solid “A” and “B” assets in strong markets, but they are hard to find. When they are identified, there is a lot of demand for them, and their owners aren’t always looking to sell them. There are distressed deals for sale, but more are B and C assets in tertiary markets. That’s not where the big guys have wanted to be so far.
Q: Do you have any thoughts on what direction GSE reform might go on Capitol Hill or a potential timetable for Congress taking action?
A:I can’t speculate. But for multifamily asset management, we are focusing on our business of evaluating loans on a day-to-day basis. Laws and regulations are not something we have control of, so we focus 100 percent on what we are here to do—provide liquidity and effectively minimize risks.
–NAA’s Paul R. Bergeron III