When Freddie Mac unveiled its new mezzanine financing program recently, it captured a great deal of attention from those in the industry. After all, one would not expect to see a new financing program offered at a time when the debt markets are tight to begin with, particularly with so many properties underwater on their mortgages. But will Freddie’s new program—which would allow borrowers to finance properties at up to 90% LTV though a combination of traditional and mezzanine debt—be a game changer, a non-issue or make the current situation worse?
That was what GlobeSt.com’s poll question last week endeavored to answer. Some 85 readers responded to the survey, with 68% saying Freddie’s new mezz program will elongate the pain and write-downs that are ultimately necessary, and 32% believing the program will help stabilize the market.
If Apartment Realty Advisors’ Mark Leary’s view is any indication of broader market views, it’s possible that the majority of survey respondents were investors or sales brokers. At first glance, says the San Francisco-based principal, the program “seems like it’s another version of pretend and extend.”
But it all comes down to the details of the loan. If the mezz piece runs co-terminus with the first mortgage, says Leary, “it’s a really good thing for owners because the value of the property may come back over the term of the loan.” It won’t necessarily lead to pain, he says, but it will give the borrower more time to get out of hot water.
Yet while the program is great for owners, he adds, it’s bad for those in investment because it will continue to keep transaction volume low. “There’s an incredible amount of capital chasing properties that are underwater, but if buyers can’t get their hands on them and the owner can stay in place, then it’s bad for new investors.”
Meanwhile, Jerome A. Fink, managing partner of Irvine, CA-based investment firm Bascom Group, says the new program is a step in the right direction toward stabilization and will help lower potential losses on apartment properties. But those funds will likely be available only to well-located properties in strong markets, with excellent sponsors and strong in-place cash flows.
Hence, its true impact may not significant enough to change the market. “Liquidity is needed more in the distressed markets, like Phoenix, Atlanta and Las Vegas, as well as on lesser-quality properties and locations and more challenged cash flows,” Fink explains. “ Providing more aggressive financing for these types of situations will do more to stabilize the market than increasing the leverage on only the best deals, most of which do not currently need this help.”
Rather, Fink believes a financing program for acquisition and repositioning for lesser-quality properties would do better to help rehabilitate those properties that have been hit by the downturn. Plus, he notes, it would help to create jobs.
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