COVER STORY, JUNE 2012

FANNIE MAE STEPS FORWARD
The agency’s multifamily loan portfolio assists in the first positive quarter since conservatorship.
John Nelson and Savannah Duncan

The government-controlled mortgage lending agency Fannie Mae posted a net income of $2.7 billion in the first quarter, the first positive quarter since the company was put into conservatorship in 2008. The feat was made possible due to the agency’s gains in the single-family arena, including fewer REO properties on its books and higher sales prices for houses. However, the firm’s multifamily loan portfolio had a hand in the company’s turnaround with a minimal delinquency rate and an increase in originations. Fannie Mae’s lending clients financed 117,000 multifamily units in the first quarter alone, compared to 83,000 units financed in the first quarter of 2011.

“2012 is off to a strong start with $7.2 billion in financing through the first quarter,” says Manny Menendez, vice president and head of multifamily customer engagement at Fannie Mae. “Multifamily is profitable on a segment reporting basis with low credit losses and delinquencies and our market fundamentals are generally favorable.”

In the Southeast, several companies have successfully secured Fannie Mae loans for a variety of multifamily property types. In May, Centerline Capital Group arranged a $19.32 million refinance loan for the 309-unit Highlands at Alexander Pointe, a garden-style apartment complex located in Charlotte, North Carolina.

Beech Street Capital closed a $17.66 million Fannie Mae conventional loan in March for the 312-unit Wellington Manor Apartments, a luxury multifamily community located in Alabaster, Alabama. The fixed-rate, acquisition loan has a 10-year term.

In Chesapeake, Virginia, a 53-unit seniors housing property received a $6.21 million loan. Greystone Servicing Corp. arranged the 10-year refinance loan, which has a 5.56 percent variable interest rate.

Chad Hagwood, executive vice president of originations based in Beech Street Capital’s Birmingham, Alabama, office says acquisition financing has increased significantly during the past 2 years. “Two years ago, approximately 80 to 90 percent of our loans represented refinances,” he says. “Today, refinance represents closer to 60 percent of the business and acquisitions are closer to 40 percent. Investors are seeing growth in the economy and strong fundamentals for multifamily across most markets nationwide.”

When deciding what kinds of properties to finance, the key performance metric that lenders examine is debt service coverage, says Bill Posey, head of Greystone Servicing Corp.’s Fannie Mae DUS lending business in Memphis, Tennessee. “Since the financial crisis, the underwriting standards that we and all DUS lenders use are much more conservative than they were 5 years ago.” Additionally, there are other factors such as the experience of the sponsor and the market and status of the property.

Prior to the recession, Fannie Mae debt-service coverage ratios were typically at 1.15 for quality deals in strong markets, Posey says. Once the recession hit, Fannie Mae required DSCRs of 1.25. However, Fannie Mae recently identified several well-performing markets such as Boston, New York City and San Francisco where debt-service coverage ratio requirements have been more on the order of 1.20.

Stormy Waters Ahead?

The positive momentum and low delinquency rate of Fannie Mae’s multifamily loans — 0.37 percent as of March 31, 2012 — is made all the more impressive considering the uncertainty of Fannie Mae and Freddie Mac’s fate. The agencies’ assets and operations have been under the control of the Federal Housing Financing Agency (FHFA) since 2008. The FHFA has put constraints on the agencies and is in control of their operations for the foreseeable future.

In addition to conservatorship, Sen. Bob Corker (R-Tenn.) and Sen. Johnny Isakson (R-Ga.) have proposed legislation in Congress that — if passed — would eliminate Fannie and Freddie after a 10-year transitional period that would end in the privatization of the resulting agency.

Also, several key members of Fannie Mae’s executive staff — including CEO Michael Williams — have decided to step down, changing the makeup of the company and casting a shadow on the future.

“My biggest concern is that because of all the noise there will be a talent drain,” Posey says. “There are a lot of bright, talented people at Fannie Mae. What they are doing is so critical. There’s not someone in the private sector who is going to sit down and do a workforce housing deal or a small balance loan. Without the talent there, I’m not sure where that leaves us.”

Despite all these headwinds, Fannie Mae is still conducting business at a high level. Fannie Mae recorded approximately $24 billion of multifamily mortgage volume in 2011, a 46 percent jump from 2010. Additionally, Fannie Mae controls 21.2 percent of the $840.8 billion market share of multifamily debt outstanding, according to the Federal Reserve.

“We try to focus on the things we can control: operating our business soundly, being a constant source of liquidity for our lenders and making sure we’re supporting the multifamily market,” says Menendez. “Ultimately, decisions about the future will be made by others. Sometimes that is a challenge, but we try to remain focused on our role and the important work we have to do every day.”

John Beam, managing director of Centerline Capital Group’s Atlanta office, says the company has zero concern about the future of Fannie Mae and Freddie Mac. “What you have is two lending areas that did $44 billion last year and they are paced to do more this year,” he says. “That makes them around 55 to 60 percent of the total market in lending. They are such a key part of the market and there’s no replacement for them. Not even the banks could fill the gap.”

Outlook for the Remainder of 2012

The multifamily space in general remains an attractive product type for investors because of the space’s solid fundamentals and high demand. “With home ownership down, people will always need a place to live,” Beam says. Construction is anticipated to remain minimal for 2012 so vacancies will continue to trend downward, according to Marcus & Millichap.

The multifamily market has also seen a surge in financing activity. According to the Mortgage Bankers Association (MBA), originations for multifamily loans have jumped 45 percent from first quarter 2012 compared to first quarter 2011. Fannie Mae is up against life insurance companies, banks and CMBS conduits for this business. Commercial banks in particular have significantly increased activity from first quarter 2011 to first quarter 2012 with a 104 percent increase in lending across all product types, according to the MBA.

“During the extended period of domestic and global market volatility, the government-sponsored enterprises (GSE’s) have demonstrated the consistency, liquidity and stability they provide, not to mention more affordable financing,” Hagwood says. “The GSEs continue to provide a dominant share of multifamily financing across all markets and we see their role continuing to be active for the foreseeable future.”

Fannie and Freddie have posted an increase in originations across all product types as well, with a 40 percent increase from first quarter 2011 to first quarter 2012. A boost in Fannie’s multifamily originations assisted the jump.

Menendez adds, “We take comfort in the fact that on the multifamily side we have performed well through the downturn and our business continues to do well.”

©2012 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.