Where would the multi family industry be without Fannie Mae and Freddie Mac?

Fortunately, we won't have to find out in 2009. The agencies will continue to provide liquidity to the market, albeit at tougher terms than a year ago.

Fannie Mae and Freddie Mac were offering 10-year loans in the 6 percent to 6.5 percent range in early December. A 1.25x debt-service coverage ratio is now as low as they are willing to go, and leverage levels have fallen from 80 percent to closer to 70 percent.

Rates from the agencies have been kept at reasonable levels thanks to the low 10-year Treasury, a benchmark used to set permanent loan rates. The yield on the 10-year Treasury tumbled from around 4 percent at the beginning of November to 2.7 percent in early December.

And rates from Fannie Mae are expected to hold fairly steady in 2009. Says Byron Steenerson, president of Alliant Capital, a Fannie Mae lender, “We are budgeting based on a 50-basis point rise for next year.”

Freddie pricing has been somewhat inside of Fannie's in early December, featuring rates closer to 6 percent. But both of the agencies have raised their lender spreads in concert with downward movements in the 10-year Treasury to keep rates at a constant level.

The repricing and underwriting changes reflect concern for the economy as well as a lack of competition. Many life insurance companies and banks scaled back their real estate lending in 2008, and their loan terms are expected to get tougher next year.

“I wouldn't look to insurance companies to be bigger lenders next year; in fact, there will probably be fewer in 2009,” says Robert White, president of market research firm Real Capital Analytics.

Insurance companies, traditionally very conservative on leverage, will likely require higher degrees of equity to be in any deal they fund in 2009. Life companies will feature loan-tovalue ratios of between 50 and 60 percent for permanent debt, and they will likely continue to cherry-pick only the strongest deals.

“Most of the insurance companies don't know what their credit box is yet or what their pricing is going to be,” says Phil Melton, a senior vice president at Grandbridge Real Estate Capital. “You're going to see lower debt percentages and significantly more equity requirements on the borrower.”

Local and regional banks unscathed by the subprime crisis will continue to be a source of loans under $10 million, though the real estate appetite of larger banks is unknown, as they struggle to balance their balance sheets.

Securitization push

Beginning in 2010, Fannie and Freddie will diminish their portfolios by 10 percent annually, eventually shrinking from $850 billion to $250 billion. To do so, both will place more emphasis on their securitization programs: Fannie's somewhat dormant Mortgage-Backed Securities program and Freddie's Capital Markets Execution conduit program, which is under development.

But many multifamily borrowers prefer portfolio executions because of their flexibility. Portfolio loans are held as investments on the agencies' books, as opposed to securitized offerings, which sell mortgages as securities. Borrowers looking to amend certain terms after rate-locking, for instance, have a much easier time doing so with a portfolio execution.

“Securities just inherently have limited flexibility in individual loan terms,” says David Cardwell, vice president of capital markets at the National Multi Housing Council.

Additionally, tying Fannie and Freddie's fate to the securitization market would severely limit their offerings. “If Fannie and Freddie were told today that they had to execute every multifamily loan in securities, they wouldn't be doing business,” says Cardwell.

For this year, though, it will be business as usual at Fannie and Freddie, the last men standing in a market once overflowing with competition.