CMBS Back at the Party

At the height of the recession pretty much the only financing available to apartment developers were government-sponsored enterprises Fannie Mae and Freddie Mac. Since then commercial lending has made a comeback, but just recently commercial mortgage backed securities (CMBS) have started to really heat up. From the Wall Street Journal:

In all, lenders made $94 billion in loans bundled together and sold off as bonds to investors in 2014, the most since 2007 for the product known as commercial mortgage-backed securities, according to trade publication Commercial Mortgage Alert.

Real-estate executives and bankers are predicting that figure will rise in 2015.

That’s good news for some developers.

Growing demand from investors, in turn, has had a magnetic pull on lenders, causing them to pile into the sector. In 2014 there were about 35 active lenders that contributed to CMBS deals, according to Commercial Mortgage Alert. By contrast, there were just 18 in 2011.

As more companies have been jousting to lend, borrowers have been benefiting. Developer Eric Blumenfeld last month secured a $25 million loan for a 205-unit Philadelphia apartment building from an affiliate of Cantor Fitzgerald LP, which then sold it off in a package of commercial mortgage-backed securities. Mr. Blumenfeld said there was more competition among lenders for the loan than he expected and there “was a little bit of a bidding war” before he ultimately went with Cantor, which he had used before.

“Money is more readily available, and for performing assets that have cash flow, there’s a lot of different options,” he said.

Freddie Mac Tapping Into Trailer Park Business

This item from the Wall Street Journal is interesting:

Freddie Mac FMCC -1.01% is financing residential trailer park developers, a sign the mortgage giant is facilitating more types of affordable housing by expanding in the commercial real estate market.

The U.S. mortgage finance firm on Wednesday launched a program to purchase loans made to owners of manufactured housing communities and package them into securities for sale to investors, said David Brickman, an executive vice president of Freddie Mac’s multifamily lending group. The loans are mainly backed by rents paid by the people who live in the homes on the property…

Freddie Mac’s move into manufactured housing communities also comes as it is doing less funding for other types of multifamily dwellings, such as apartment buildings. Banks and other lenders are also stepping up their financing of developers of manufactured housing communities, Mr. Brickman said.

Freddie Mac has issued about $5 billion in securities backed by other types of multifamily housing this year, falling behind the pace of last year when it issued about $28 billion in the bonds, according to Credit SuisseCSGN.VX -2.78% The Federal Housing Finance Agency last year directed Freddie Mac and Fannie Mae to rein in their multifamily business by 10%, as the regulator sought to reduce the companies’ roles in U.S. housing finance.

Mortgage Bankers on the Role of GSEs in Multifamily Financing

The Mortgage Bankers Association’s Multifamily Task Force has issued a white paper titled “Ensuring Liquidity and Stability: The Future of Multifamily Housing Finance and the Government-Sponsored Enterprises.” In it they make five recommendations:

  1.  Fundamentally, our nation’s housing policies should reflect the need for liquidity and stability in all multifamily market cycles.
  2. Private capital should be the primary source of financing for multifamily housing with support from a well-defined government-backed insurance program that ensures the market has access to liquidity in all cycles.
  3. Well-regulated entities should be eligible to issue government-backed multifamily securities. These entities should be mono-line, funded by private capital, focused on securitization and serve the workforce rental market.
  4. Stewardship of the existing GSE assets and resources on behalf of taxpayers should be a core consideration of any policy action.
  5. And finally, the long-term liquidity and stability of the multifamily finance system in all market conditions should be the core driver of whether or not the GSEs’ multifamily business should operate on a standalone basis relative to their single-family credit guarantee businesses.

A full PDF copy of the white paper can be found here.

What Does Potential FHA Bailout Mean for Housing in the US?

The Wall Street Journal is reporting that the Federal Housing Administration’s (FHA) reserves are close to being depleted and that the agency might need help from the US Treasury.

The Federal Housing Administration is expected to report this week it could exhaust its reserves because of rising mortgage delinquencies, according to people familiar with the agency’s finances, a development that could result in the agency needing to draw on taxpayer funding for the first time in its 78-year history.

The trouble stems from a growing pile of delinquent FHA-backed loans:

Though the agency guarantees fewer mortgages than either Fannie or Freddie, it now has more seriously delinquent loans than either of the mortgage-finance giants. Overall, the FHA insured nearly 739,000 loans that were 90 days or more past due or in foreclosure at the end of September, an increase of more than 100,000 loans from a year ago. That represents about 9.6% of its $1.08 trillion in mortgages guaranteed…

The FHA never relaxed its underwriting rules during the housing boom, and its market share plunged as private lenders offered loans on much easier terms. But the agency saw business soar as the housing bust deepened, first in 2007, as private lenders retreated, and later in 2008 and 2009, as Fannie and Freddie tightened standards.

Most of the agency’s losses now stem from loans made as the housing bust deepened. About 25% of mortgages guaranteed in 2007 and 2008 are seriously delinquent, compared with about 5% in 2010.

The situation is prompting debate about the agency’s role in the future:

Administration officials could announce measures that would either avert the need to draw on the Treasury or cushion the blow of such a move, such as raising mortgage-insurance premiums and finalizing additional legal settlements with lenders, industry analysts expect.

Republicans, however, have in the past argued for more aggressive action, including reducing maximum loan limits and raising minimum down payments. Another option would be to limit FHA-backed loans to borrowers below certain incomes.

Those steps would return the agency to its historic role of providing credit to first-time home buyers and underserved communities.

Talking to Our Leaders About “Frannie”

According to the Wall Street Journal the Federal Housing Finance Agency is trying to move forward with reforms to Fannie Mae and Freddie Mac despite a decided lack of direction from Capitol Hill:

Fannie and Freddie’s overseer, the Federal Housing Finance Agency, is contemplating new structures to hopefully prepare markets for whatever changes may ultimately come the mortgage giants’ way. Its latest thinking, detailed in a paper released Tuesday, talks, among other things, about creating a single, utility-like platform for selling mortgages to investors.

This could help lead to the creation of a single government mortgage-backed security. Along with other moves under way to standardize mortgage data and improve transparency, this could help prepare for a return to securitization markets that sell bonds with no or only a partial government guarantee.

Obviously there’s a lot of interest in “Frannie’s” fate from the apartment industry, and during next month’s NAA Capitol Conference leaders from the industry will be sharing their concerns with our elected representatives.  If you would like to participate there’s still time to register; simply visit the registration page and sign yourself up. This will be a pivotal year for the apartment industry so it’s important that they hear from as many industry leaders as possible.

WSJ – Fed Wading Into Risky Political Waters With Housing Paper?

Last week we had a post about the Fed Reserve’s foray into housing policy with a white paper that, among other things,  addressed the possibility of mortgage modifications and recommended looking at converting foreclosed homes into rentals.  In this past weekend’s edition of the Wall Street Journal David Reilly points out that this could be a dangerous precedent for the Fed:

But having broached the thorny issue of using government entities to boost housing, the Fed didn’t touch on questions surrounding a needed long-term revamp of housing finance. This left the Fed implicitly endorsing the housing status quo: a market that is almost completely dependent on the government and, in particular, Fannie and Freddie. Whether the government should be involved in housing, or to what degree, is of course a highly contentious political question for Congress.

The Fed’s paper suggested it may be worth pursuing more aggressive actions in terms of loan modifications, mortgage refinancing and sales of foreclosed properties even if they cause greater short-term losses at Fannie and Freddie, and so by extension to taxpayers. And the paper may have led some in markets to believe a new, government housing effort was coming. The Fed’s paper said a possible policy option would be for the government to expand existing refinancing efforts “or introduce a new program.”

Expectations of such action helped spark a nearly 8% rally in Bank of America shares Thursday, although nothing is reportedly planned. Still, the reaction shows many now see the Fed and White House potentially acting together. That underscores how perceptions of Fed independence have already been eroded.


Fed Endorses Converting Foreclosed Homes to Rentals

The Federal Reserve made an unconventional foray into housing policy due to concerns that housing troubles are stifling an economic recovery.  From the January 5, 2012 Wall Street Journal:

Housing policy is outside the traditional purview of the central bank, but Fed Chairman Ben Bernanke and others are clearly worried that housing has stymied the effect of the bank’s low-interest-rate policies.

In a 26-page paper sent to top lawmakers on congressional banking committees, the Fed warned that tight mortgage- lending standards threaten to hold back the economy.

The Fed also signaled support for more aggressive use of Fannie Mae and Freddie Mac to support a housing recovery. The firms, which don’t make loans but purchase them from lenders, were taken over by the government three years ago and are overseen by a separate regulator, the Federal Housing Finance Agency, which has strictly interpreted its charge to limit the firms’ losses…

The paper endorsed converting foreclosed single-family homes into rentals in order to stem home-price declines. While housing is more affordable than at any time in the past decade in many markets, prices could sink further as banks dispose of thousands of foreclosed properties in the coming year. That has led Fed officials, the FHFA and the Obama administration to study ways to shrink the glut of bank-owned homes by selling them to investors to rent out.

The paper said some 60 metro areas had at least 250 foreclosed properties for sale by Fannie, Freddie and federal agencies—enough to efficiently execute rental programs. About two-fifths of properties held by Fannie could produce returns that justify converting them, it said.

It will be interesting to see what effect, if any, this has on lending standards and housing policies in general.

GSEs’ Single Family vs. Multifamily Performance

From Multifamily Executive:

Fannie lost $5.1 billion in the three-month period, while Freddie saw a $4.4 billion loss, resulting in the companies asking for a combined additional $13.8 billion in government aid. Sadly, the resulting uproar around the losses, coupled with the sizable compensation paid to the companies’ top execs, is nothing new.

What isn’t being talked about in the debate, however, is the phenomenal performance of the multifamily business lines of the government-sponsored enterprises (GSEs). Not only are the multifamily divisions profitable and making money for the taxpayers that bailed them out, but the delinquency rates and amount of REO are miniscule in comparison to the GSEs’ single-family business.

What’s more, the multifamily divisions are also mission-rich: While the multifamily book is only a fraction of the single-family portfolio, the amount of affordable housing units financed by the GSEs last year tilts heavily, and disproportionately, in favor of the apartment operations.

Apartment Builders Stymied by Wait for US Government Loans

We recently posted a link to an article about GSE’s trying to get more private sector action for the single family market and in that story there was mention of Freddie Mac’s earlier efforts to do the same in multifamily.  According to this article it looks like there might be a need to get more aggressive:

A surge in single-family foreclosures combined with tighter credit markets has given the federal government a dramatically expanded role in financing new construction and rehabilitation of multifamily units.

The result is a backlog of applications. Government officials and developers say the FHA — constrained by government austerity — has had a tough time handling the demands of its new role as a cornerstone of apartment lending.

Government-sponsored enterprises including Fannie Mae and Freddie Mac now hold 41 percentof outstanding multifamily mortgage debt, up from 34 percent in 2008, according to the Mortgage Bankers Association. And the FHA expects to endorse a record $12 billion in multifamily loans in fiscal year 2011, up from about $2 billion in 2008…

As its loan volume has quadrupled, the number of FHA staff devoted to multifamily loans has dropped through attrition to 1,414 nationwide, down 13 percent since 2005. In addition, the agency tightened underwriting standards last year and began requiring more documentation.

These factors have created a traffic jam of loans waiting for approval, according to David B. Cardwell, a vice president of the National Multi Housing Council, a Washington trade group representing apartment builders. Loans that should take 60 to 90 days are delayed as long as 18 months. Builders have told the group they are frustrated by the difficulty of determining the status of their loan applications and with the lengthy approval process, complicated by tighter underwriting…

Reliance on the government isn’t likely to decrease any time soon, Cardwell said. The Mortgage Bankers Association reported last week that outstanding commercial and multi-family mortgage debt increased in the second quarter of this year for the first time in seven quarters. Government agencies increased their holdings of multifamily mortgages by $4 billion, while commercial banks increased their holdings by just $1 billion.

“The dominance of the government participation in the market is still a major component of owners’ access to reliable debt,” Cardwell said. “I think that our members and the industry as a whole still have some concern about the way banks are going to respond to the current and near-term economic conditions.”

Click here to read the whole article.