As reported by CoStar: “Given that the multifamily market’s reliance on the enterprises has moved to a more normal range, to move forward with the contract goal, we are setting a target of a 10% reduction in multifamily business new acquisitions from 2012 levels,” Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA) said. “We expect that this reduction will be achieved through some combination of increased pricing, more limited product offerings and tighter overall underwriting standards.”
While 10 percent doesn’t sound like much, Fannie Mae and Freddie Mac combined to finance about $62.8 billion in multifamily deals last year, meaning about $6 billion in liquidity will have to come from other sources this year said MultifamilyExecutive.com (MFE).
And that’s just the short term goal, long term the he wants to put Fannie and Freddie out of business altogether. (See DeMarco pushes for five-year wind down of GSEs on HousingWire.com) While there is nothing carved in stone yet many in the apartment industry are concerned that the GSEs multifamily lending baby will get thrown out with the much larger and far more troublesome single family bathwater.
It is true that banks, insurance cos. and even CMBS lending to apartment building investors is picking up but my major concern is what happens when TBTF banks blow up the economy again? A quick look at the chart above shows that when the economy cratered in ’08 Fannie Mae and Freddie Mac apartment building lending was what kept the business going in those dark days. Since the TBTF banks’ wholly owned subsidiary, US Congress has proven unwilling to address the banks continuing use of highly leveraged derivatives trading and negligible capital ratios it’s just a matter of time before it all blows up again. With no Fannie or Freddie in place the apartment building industry might just dry up and blow away in the wind.
It’s ironic too that DeMarco is putting apartment lending on the block when that side of the business has been profitable and trouble free for Fannie and Freddie. According to the NMHC/NAA : “[T]he very successful multifamily programs of Fannie Mae and Freddie Mac were not part of the meltdown and have actually generated more than $10 billion in net profits to the government since conservatorship. And as CoStar noted: “The Fannie Mae and Freddie Mac multifamily programs, unlike those for single-family, use stringent underwriting that has resulted in a default rate of just 0.25%. Private-market sources of multifamily capital like CMBS, on the other hand, have a default rate of 15%…” [Emphasis mine]
Net-net I guess rates higher and underwriting tighter in the future. It does help also that we are starting to see more competitive lending from banks and insurance cos., even on smaller apartment building investments.