SACRAMENTO, CA-The high demand for multifamily properties in today’s market should be a symphony to the ears of lenders like Thomas Dudley Jr., the chairman of the California Mortgage Bankers Association. Yet uncertainty and anxiety seem to lie beneath the surface of this robust market. Fannie Mae and Freddie Mac remain in the crosshairs of Congressional scrutiny as single-family foreclosures continue to mount up. Meanwhile, other lenders, notably CMBS and life insurance companies, are not as forthcoming with debt as many originators would like. Trouble with European sovereign debt and/or election-year politics over the federal debt ceiling could collapse the current lukewarm recovery. In this edition of Six Questions, Dudley, who is also the principal of Newmark Realty Capital in Irvine, CA, steps back and looks at some of the “macro” issues affecting multifamily lending.

GlobeSt.com: What are currently the top sources of funding capital for commercial/multifamily properties?

Dudley: In no particular order, insurance companies, Fannie and Freddie, US banks, foreign banks, CMBS, and some thrifts/savings banks.

GlobeSt.com: What does the future look like for Fannie Mae and Freddie Mac in regard to multifamily lending?

Dudley: With Congress in session and focusing on reform of housing financing, it’s hard to predict the long-term future for these agencies. However, the short-term to intermediate-term future looks favorable. During the first half of 2011, Fannie closed around $10.5 billion and Freddie closed about $8 billion in multifamily loans. These figures are well above their volumes for the similar period in 2010. While the single-family sector is still generating huge losses for the GSE’s multifamily has not been the problem. The multifamily side of the agencies have default rates of less than 1%, which is well below market, and the agencies continue to remain profitable during the economic downturn. I think it will be business as usual for Fannie and Freddie’s multifamily lending. These agencies have been and will continue to be critical to the stability and recovery of the multifamily market. The availability of capital from the agencies is one of the main reasons why multifamily has recovered more quickly than other property types.

GlobeSt.com: What factors will affect the recovery in the commercial real estate and commercial/multifamily lending markets?

Dudley: Housing economists say that residential real estate lags the general economy by one year and that commercial real estate lags residential by one year. We are obviously in a period of economic uncertainty and slow growth. But modest economic growth has been enough to start a property market recovery. The most important factor will be job growth; that’s the number one topic in Washington and there’s a reason for that. The low interest rate environment will help. Challenges to the recovery include the debt crisis in Europe and the level of federal and state debt and budget deficits. We are in a de-leveraging cycle.

GlobeSt.com: What is the current state of insurance company lending?

Dudley: The insurance companies together with the agencies have been leading the way in funding mortgages on commercial and multifamily properties. Commercial mortgage production for insurance companies is projected to be approximately $50 billion in 2011. This figure is about double 2010 production; and 2010 production was about double that of 2009. Insurance companies are increasing allocations to commercial real estate debt. That said, insurance companies are avoiding risk and, therefore, for the most part are only interested in lending on core, well- located properties that are stabilized and cash flowing with good and experienced sponsorship. I’m guessing that 2012 loan production for insurance companies will probably be flat or a little less than 2011 levels. This is not due to a lack of capital, but rather a lack of qualified projects. Many insurance companies have reported a lower level of loan activity during the last 60 days.

GlobeSt.com: Are banks playing a major role in lending on commercial/multifamily properties these days?

Dudley: According to the MBA there is $2.4 trillion in commercial and multifamily debt outstanding and banks hold the largest portion with 33%, so banks will play a major role in lending on commercial real estate projects.  However, there is a good news/bad news aspect to this: banks have increased interest in lending on commercial real estate, but the bad news is that most deals probably won’t qualify. Banks are concentrating on lending to their existing customers who have survived since 2008 in a relatively healthy financial position. Banks must still deal with nonperforming loans in their portfolios. The banks are in a better position to lend as they have been able to rebuild their balance sheets during the last couple of years, and they have completed many successful loan modifications and extensions. Construction loans are only available for some multifamily projects.

GlobeSt.com: What role will CMBS have in tomorrow’s commercial/multifamily lending market?

Dudley: In 2007, CMBS originations comprised approximately 50% of loan production and this year it’s closer to 20%. According to the MBA, after the banks, CMBS still holds the second highest amount of commercial real estate debt at about 26%. There is a strong need for CMBS to resume and increase lending activity as the requirement for capital cannot be fulfilled by insurance companies, the agencies and banks. But CMBS originations have slowed considerably since the summer as spreads rose significantly due to concerns about the US and European economies, sovereign debt and volatility in the stock market. Perhaps CMBS with higher coupon rates can be a solution for the properties on which banks and insurance companies are not willing to lend.