The executive cited a recently released study from Harvard University's Joint Center for Housing Studies that found household growth of 12.6 million between 1995 and 2005, and expects a 14.4 million increase between 2010 and 2020. Fannie Mae's projections have about half of those new households in the rental pool.

"The same study says that from 1995 to 2005, we added a million net units to inventory," says Weber. "If you just do the math, you can see there's tremendous need to increase the supply of affordable rental properties over the next 10 years." With lending standards tightening for the construction of rental housing in most of the market, Fannie "is very committed to providing the multifamily capital investment that's going to be necessary to meet the significant rental housing need over the next 10 years."

The firm's small loan business has ramped up and increased production a great deal this year, said Michelle Evans, VP of multifamily corporate affairs. That segment has become a critical component of the recovery and restoring liquidity to the market, she maintained. Fannie's done a good job for larger loans, but in the past three years, it's "been trying to perfect our small loan program--the way we can capture the small loans that are coming in from banks across the country, and looking at our guidelines to make some streamlined changes to the approach to the way we handle the underwriting of these loans."

The company rewrote its small loan guide and restructured its multifamily business to improve execution. Among the changes are streamlining its underwriting guidelines so it could work more closely with local banks; streamlining the appraisals process, the underwriting of the cash flow and the other third-party reports, such as environmental and engineering studies; and cutting down the cost of doing business. Earlier this year, it also introduced the Micro Loan product, which increases liquidity for small-balance multifamily properties with mortgages of up to $750,000.

All these changes allowed Fannie to increase its business in the first half; the firm bought about $5 billion in small loans between January and June, in both pool purchases and flow business. That's compared to about $3 billion during the same period last year. "The key to the small loan business is if you look at the small loan asset, it's really properties that tend to be extremely affordable in most of the urban areas" close to public transportation, noted Evans. "A lot of times, they're owned by individuals and basically serve working families of the community. It's a really important asset that speaks to our mission."

In terms of seniors housing, Fannie sees demand skyrocketing in this area in the next several years. Although credit conditions have made investment in this segment more difficult, the firm provided $1 billion in financing during the first half and has added more resources and staff to its seniors housing business. Market shifts have also reduced the number of transactions in the military housing space this year. The company reports that it intends to buy as much as $1 billion in military housing bonds, the proceeds of which are used to renovate existing on-base housing and build new units. Last year, the firm invested $773 million in military housing bonds.Lastly, the "affordable housing space is an area that continues to be in great need of financing," said Menendez. The Joint Center study found that while the national median gross rent went up 2.7% from 2001 to 2006, the median renter income fell by 8.4%. Under its Multifamily Affordable Housing initiative, Fannie's team will work with its lenders to provide financing for properties that also benefit from state and federal subsidies, including low-income housing tax credits, tax abatements and rental subsidies. The firm will also continue to offer its Bond Credit Enhancement product, which provides credit enhancement for tax-exempt bonds issued by state and local housing finance agencies, typically for LIHTC properties and older HUD assets.

Still, the firm has decreased its direct investment in tax credits, mainly because its level of taxable income has decreased due to the decline in general financing activity. However, as that income grows, the executives stated the firm will increase its buying of credits. And while the executives stated that the firm, like just about every other participant in the capital markets, has tightened its underwriting standards, it's not a complete retraction. "When we say we tightened our underwriting, we mean we brought it back to more traditional standards, as opposed to the aggressive approach of prior years," says Menendez.

"We are restoring and returning to solid lending fundamentals," adds Weber. "If you look at the multifamily business overall, the fundamentals of our business are very solid. Owners are still putting substantial equity into the property, so the LTV fundamentals are solid, if you look at debt service ratios, they are solid, the REIS report came out last week that showed rent growth in virtually all markets, and the demographic trends are positive."

This spring, noted Evans, the firm made some changes to its underwriting guidelines to strengthen its position in the market, including increasing its debt service. "We're also doing a lot less interest-only lending, which we were doing a lot of last year since that's where the market was," she said. "And in markets that are being challenged right now, we're looking at those loans very closely to make sure we're taking the right risks." The firm intends to release more details on its multifamily focus by the end of this month.