At the National Multi Housing Council's Apartment Strategies Update, a handful of apartment industry experts got together recently to go over the current state of the market, the factors weighing heavily against it and where they believe the sector is headed.First and foremost is the issue of the government-sponsored entities. After a glut of financial woes, federal officials took over conservatorship of Fannie Mae and Freddie Mac.

Doug Bibby, president of NMHC, characterized the GSE bailout as "a hybrid between the Continental Bank and Chrysler-type approach;" that is, somewhere between nationalization and giving the firms an equity infusion. "Secretary Paulson I believe was more concerned with the worldwide stability issues, particularly Asian holdings of MBS and agency debt," he related. "There's also a lot of political undercurrent in just putting an equity infusion into the companies as they're structured. The conservatorship approach is kind of like being in Chapter 11 versus being in Chapter 7."

In an effort to help stabilize the markets and keep it liquid, the GSEs may grow their MBS business without limits over the next 15 months. Their retained portfolios of whole loans and MBS, which currently are at less that $800 billion, may grow to $850 billion each. As Bibby told it, the plan will allow Fannie and Freddie to buy about $20 billion per month in agency MBS, barring subprime mortgages and Alt-A, and with an up to $100-million pledge to each firm from the Treasury, they should remain net-worth positive. In exchange, the government will own just less than 80% of each company; the Federal housing Finance Agency will essentially be the preferred shareholders, and those common and first-tier preferred holders are, in effect, holding penny stocks right now.

Come year-end 2009, the GSEs will be on their own and the economy, hopefully, will begin to recover. The expectation then is that they will start to pare down their portfolios from $850 billion to $250 billion over the next decade, and once again sow profits.For the apartment industry, few things have changed. "In my discussions with Fannie and Freddie, it's business as usual," said Bibby. "I've also talked with those doing Program Plus and DUS loans, and they're out trying to do deals right now. The Treasury has also pledged top buy for new MBS in the open markets going forward and we've already seen some tightening of spreads. We're hopeful that the handcuffs are pretty loose on Fannie and Freddie right now. We need them badly in this marketplace."

David Schwartz, managing member of Waterton Associates in Chicago, concurred that it's likely very little will change for apartment financing in the near term. The leadership at Freddie, he said, has indicated that it will remain 'business as usual,' and the firm continues to fund loans at the same pricing and underwriting levels as they have been.

[IMGCAP(2)]"Right now, I'm really not staying up at night," he said. "The new regulator, FIFA and the Treasury have told Fannie and Freddie that they're just as committed to rental housing as they are to single-family housing, so there's no change in their edict."However, he did add that a few side effects of the GSEs' issues that will benefit multifamily borrowers is that Freddie Mac reference notes are trading down. "There is also a chance we may see spreads come down," he said. "If anything, the securities are going to trade at better pricing from Freddie and Fannie's standpoint. That may be passed on to their borrowers. Net net, I think this is positive for our industry, although it's very early to tell."

Most of the concern, it seems, centered around whether the move to rescue the GSEs will help stabilize the firms and the housing market, as well as what will happen to the mortgage giants once they're back on their own two feet in 2010. "I imagine the GSEs have a tough tightrope to walk right now," said Tom Toomey, president and CEO of UDR Inc. in Denver. "between rates, the housing market's recovery and the Feds' new oversight. Our approach to the situation is to stay in contact and not try to press for deals. It seems like right now it's a stop-gap solution to get through this housing crisis. But it'll be interesting, once we're through this, to see what happens to Fannie and Freddie."

There was also some discussions regarding potential solutions being considered by the government and industry for the GSEs. One was the possibility of splitting them up from two entities into several in an effort to spread the risk, though that idea is still in infancy. One of the largest mitigating factors in any solution, however, the participants agreed, is the outcome of the upcoming election.

"We think this action raises a few key questions," said Toomey. "Is this going to really stabilize the housing market? People are not going to go back to consuming when they're worried about their jobs and their homes losing value. Will this arrest the home-value slide? Will that then lead to more rational lending practices? Will Fannie and Freddie be able to affect that result? They can't do a thing about jobs, but they certainly can do something about house prices. It seems to me that that's their first and primary objective, and they're going to do it by flooding the market with about as cheap a paper as they can afford. And if they have success, whatever administration wins will need to continue to support that objective."

Next week, the Multifamily Page will take a look at what these experts had to say on the economy and its effect on apartment fundamentals.