WASHINGTON, DC- Federal Housing Finance Agency Acting Director Edward J. DeMarco couldn't have been more specific about his plans for the GSEs' multifamily finance operations: there will be a 10% reduction target in business volume from 2012 levels—achieved through some combination of increased pricing, more limited product offerings, and tighter overall underwriting standards.
This is the first tangible sign that, after years of rumblings, the government means business with its plans to scale back the GSEs. For the multifamily space, this is no small consideration. GSE support has, in part, kept the sector robust even during the recession. With a 10% haircut in financial support, how will the sector fare?
The conventional wisdom is that it will be a blow or at least a setback for deals. Certainly a pullback is a reason for concern, says Steve Edwards, partner at Manatt, Phelps & Phillips in the Real Estate & Land Use practice group. " As the capitalization rates for multifamily properties continue to fall, one reason that the market has remained viable is the relative availability of low interest financing from Fannie Mae and Freddie Mac," he tells GlobeSt.com. "It can be expected that any curtailment in the availability of such financing will not have a positive market impact."
But while there undoubtedly will be some difficulties for multifamily borrowers, a case can be made that the sector will survive the pullback by GSEs -- and maybe even thrive. The move will likely bring discipline to marginal markets and could ultimately be a positive event, Jacob Frydman, chairman and CEO of United Realty Partners, tells GlobeSt.com. "In the long run, Frydman speculated, "it will probably be a catalyst for a new type of securitized mortgage bond, probably in the form of a multi-family bond offering, which will eventually take the place of the financing currently provided by Fannie and Freddie."
Sam Chandan, president and chief economist with Chandan Economics, also is sanguine about a diminished GSE role. "It has been suggested that agency financing always and everywhere results in better outcomes," he tells GlobeSt.com. "That's not the case."
"Non-agency competition to lend on multifamily assets is generally very strong. In highly contested markets, competitive forces have converged with the agencies' access to subsidized capital to strain underwriting quality. In these markets, where agency financing for high quality assets is sometimes crowding out banks and life companies, a slow adjustment to a more limited role for the agencies is consistent with long-term market health."
However, Chandan adds, it is important to keep in mind there are many other markets and market segments where multifamily credit needs are undeserved. " The challenge is that a smaller multifamily book of business may see agency lending pull back from underserved markets and not the markets where banks and life companies are actively engaged and already competing aggressively for lending opportunities." In the best case, the FHFA will work to define more clearly the circumstances in which an implicit or explicit guarantee is appropriate and when it is not, Chandan says.
Also consider this, says David Reiss, a professor of Law at Brooklyn Law School who has published papers on the GSEs: "We are living through a very abnormal time when the federal government dominates the market for single family and multifamily mortgages."
This is neither necessary nor optimal, he tells GlobeSt.com. "It is not necessary because there have been long stretches in the past when the government had a much smaller role in those markets. And other credit markets operate well with no or a much smaller government footprint."
This is not to say that there is no role for the federal government in the multifamily mortgage market, Reiss continues -- just that it is far too large at this point in time. "If the reduction in the GSE footprint is telegraphed over a reasonable time horizon to the other market participants, this change should be taken in stride by the multifamily market," he predicts.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
