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Krawitz: As Michael said, the one thing that really concerns me is the proliferation of these residential loan products that have spilled over into the commercial world a lot of by competitors offering the -- you know, the 95% options and the low interest rate going in, which we'll all be pumping up soon.

So the fallout that I expect on the smaller -- in the smaller property segment is going to come from the creative lending practices that have occurred and in properties that just can't sustain the debt that's been placed on them.

Gamzon: Unfortunately, there is going to be an overhang in some markets, and we're located in south Florida, and clearly areas off of Miami Beach are going to be hit pretty bad, and some projects on the beach are going to be hit.

But all around the country the interesting phenomenon that I've been talking about recently is that with the potential problem here in the condominium business is actually an opportunity in the seniors housing business. There are sites that many of you in this room have that you're contemplating conventional condominiums on or, obviously, rental apartments.

But our users, our investors in our industry are looking at projects, properties all around the country as alternatives to the conventional condominium product. Our buyers, the end user, is a person 75 years and older. They're a cash buyer. They're not susceptible to interest rates -- increased interest rates. We can get higher densities, lower parking requirements. It's an interesting time of opportunity in our industry as some of the condominiums may falter.

Bibby: This has all happened before. We have pushed the envelope with homeownership before. We've done it again. The reason that the homeownership rate got up as high — over 69% — was that the lenders were willing to lend in any way, shape, or form. LTVs are going up over 100% in some cases where you're gifting the down payment to people who don't have the credit history or the financial resources to get into the home on their own. And we have pushed the envelope so far.

Ron, I'm going to make a bet here with you that the homeownership rate actually goes down over the next five years, maybe down into around the 68.5%. That beats 69 and a quarter. But this past year I think it was close to half of the mortgage loans were made with either interest only or teaser rate arms, low basis arms, and if you -- all on the bet that you're going to have 15, 20, 25% home price appreciation each year. That's been the bet. And when that bet changes, a lot of people are going to fall out.

Shashaty: Let’s switch gears and talk about financing. Money is cheap and underwriting is loose for mortgages and mezz debt on apartment properties. I don't think too many people would argue with me. The question is, how long do you think this good situation is going to last?

Bowen: On the financing side, we're sort of getting used to [low cap rates] and figuring out how to work with it. And although we don't necessarily like to express it directly, in fact, we're getting comfortable with things that we didn't used to get comfortable with as lenders, things like a lack of amortization, things like low-debt coverage ratios. And there's interesting reason for it, too.

If you have a 6% interest rate and you apply a 30-year amortization, you end up with a mortgage constant of about 7.4. If you have a 9% interest rate and you apply a 30-year amortization, you're about 965 on the constant.

So the thing is, when interest rates are low, adding that amortization factor to the interest rate has twice as big a difference at low rates as it does at high rates. And if you're looking for debt coverage ratio, and everybody likes debt coverage ratio, it's not just a safety factor for the lender, it's where the borrower gets his equity return, too, if you look at it from a mortgage perspective.

So that interest-only aspect becomes critical to make a deal work when the cap rates are low. The lenders like to still use the amortization factor in their underwriting, even if they're giving two, five, 10 years interest only, but they'll go down to 120, 115 coverage instead of the 125 that they used to require.

There's also sort of a feeling that values have gone up so much, you know, do we really need amortization? Things will be worthwhile. And that's sort of a head-in-the-sand kind of approach, really.

Especially if you consider very easy to identify issues, like Dan mentioned before. The 7 and a half cap rate giving you what you need in value to get out of an investment after ten years with modest income growth.

Berman: Over the short term, sort of over the next, probably, let's say, 18 to 24 months, I don't see any reason that the flood of money into this sector would abate.

We probably have a disproportionate amount of multifamily, particularly a few areas like Texas and the Southeast where we've seen loans go into special servicing and even into REO. But it's not a monolithic market, and so lenders, like ourselves, what we look at is weaker markets, weaker borrower sponsors, weaker assets. Those are the ones where most of the problems are. No secret.

So if you've got solid B-quality assets or better, if you're in pretty good healthy markets, and we've all talked about the NOIs and so on that are looking pretty healthy in many markets and concessions burning off, there's still a huge drive to put capital there, and as long as that's the case, lots of money flooding into the sector.

Leon: With the challenging and creative deals that we've all done in the last year or two as cap rates have been so very low, we're seeing that with the firming up – or the firming up of the apartment markets with -- in terms of occupancy and declining concessions, you know, a lot of those deals that we stretched for are going to not be of concern.

Our watch lists tend to be shrinking, and just the general dynamics of everything seems to be pretty good right now. So I think that will propel us into making more lending decisions to match the competition and to creatively structure deals.

Where the rubber will really hit the road is about two or three years from now on some of these deals that we're going to stretch to do, and if we don't make the right decisions with respect to the markets, with respect to borrowers, and their liquidity, ability to support deals, if some shifts happen that we don't expect, I think that that will be of major concern.

Corbiere: Freddie Mac is the largest buyer of CMBS in the country. I don't think we have any risk of a principal loss. I think we have risk of -- I think there's an extension of risk issue. A lot of these mortgages that are being made today and a lot of the paper we're buying is 10-year paper, and when these deals can't pay off, there's going to be an extension risk. And all of a sudden we're holding a 13- or 14-year piece of paper, and we bought a 10-year piece of paper.

So it's extension risk, or lenders are going to call it refinance risk or balloon risk, and that's where the issues are going to come.

There's got to be some pain, and right now there's no pain. Nothing will tighten up until there's some pain.

Szydlowski: Of all the aggressive parts of the underwriting, the exit risk is the one we rationalize the most.

I think that the saving grace right now is high construction costs, the tough economics to build. In the near term, there will not be a lot of apartments built. So we're going to have a pretty good [rental] market.

What would really hurt us is if we had a big boom in apartment construction, especially on the high-end, and another softening market, and then we're going to see some trouble. But right now, everything we see in the demographics, everything we see in the cost, everything we see in the economy says it's pretty hard to see when that's going to happen.

Bibby: There are condos and there are condos and there are condos. I think we have to differentiate because of the broad brush really misses a point. In certain markets in California, for example, condos are entry- level housing, because the single-family housing prices are so high, that that's the only way that they can get on the train. And the boomers have the largest wealth ever known to man, and they're applying it to second homes, and condos are part of that equation. So we can't be too broad brush.

Shashaty: I want to go to the audience now. We've raised a couple of issues here. You can -- you can ask questions about what's already been brought up or bring up something knew. Does anybody have a topic for the panel? There's one over there. Can you identify yourselves to people.

Audience member: Yes. My name is Richard Kelly. Question, it seems that this homeownership rate -- I'm going to tell you, I think it's probably overrated, even if it contracts. The issue is, with the expansion of the number of housing units that were dropped on the ground in the last five years, you might have a contraction in the homeownership rate. And I'm from Texas. We're seeing foreclosures like you wouldn't believe because they got everybody in there by the skin of their teeth.

And I think you have a huge overhang of housing units that were put on the ground in the last five years, and we are not looking at any fast recovery. Personal opinion.

Bibby: I think the media are finally getting this. I don't know if anyone saw the New York Times this past weekend. It had three features on it, and one was just how over rated, you know, this whole situation is with homeownership and how over rated the mortgage interest deduction is, frankly, its genesis. It was a really fascinating article.

Terwilliger: Just on the issue of how many housing units are out there that are surplus. They're clearly surplus. This last year we started 2.1 million housing units; 1.7 million single family. The largest in history. So there's clearly, between the speculators who are going to dump them and the people who are going to get foreclosed on.

On the other hand, the reason I love being in the residential business in the U.S. is we've got 1.4 million families being formed every year, plus the ones we can't count, and we need, including second homes and demolitions, a million seven to 2, depending on the year. And so, it is going to take an adjustment period, but it's going to be -- there's going to be a demand for continued housing because that's the population growth in this country.

Audience member: Hi. My name is Les Mitterville. I'm the executive director of a company called USA Properties Funds based in Roseville. And we own about 9,000 apartment units pretty much in Northern California and Southern California and some in Las Vegas and some in Reno. They are all affordable. They are all subsidized, and they are all tax credit programs.

We are also in the process of selecting land for very dense market-rate subdivisions that we are trying to get at pricing that will be considered affordable. We're also setting up a market-rate division for -- to buy apartments, and we will absolutely not even consider a 4 or 5 or 6% cap rate.

Audience member: John from Alabama. We have property on the Gulf Coast, Mississippi and Alabama, et cetera, and I guess this is a broad based question about regional issues, especially living in the southeast, the Gulf Coast. [What do you think about] the market for single-family housing, which is quite still inexpensive there, versus the rental market in an area like that?

Terwilliger: We're just about to start a large apartment project down near Panama City. You know, a big question is what the hurricanes are going to do to the growth in that whole area. Up until the hurricanes, it was really going gang busters. Americans' love [to live by] the water. But I can tell you that some of these insurance rates are starting to tick up and really bite.

So my own view is off the water there's going to continue to be significant growth. A lot of the people who might have gone to Florida are going to end up, I think, in other states because the cost of living is lower and the weather is good. And the water is the $64-question. We're still believing that people will come back with the new hurricane codes for construction, but only time will tell, particularly if we have a bad season again this year.

Berman: Yeah. We actually have a few borrowers who are on the HUD side who are looking at potential new construction, affordable types of transactions that are off the water but in that area.

The other thing that's probably worth mentioning, we've actually been pretty active in Alabama. Recently we looked really closely what was going on with the brat closings within the last year and what impact that might have on, you know, Montgomery and other -- other areas. Alabama actually ended up being a net positive.

I would just -- you reminded of I was in Atlanta two days ago, and the Bell South/AT&T merger sent a little bit of a tremor through Atlanta. Bell South has 6 million square feet of office in Atlanta. And AT&T announced that if they -- if they're successful in getting clearance for that merger, they're going to move 10,000 jobs, not all from Atlanta, but 10,000 jobs are going to move to San Antonio. Undoubtedly, a lot of those jobs are going to come out of Atlanta, and what that would do to the office market in Atlanta is not insignificant. Especially when you combine it with what's going on with the GM and Ford plants in that area.

Now, you know, what does this have to do with multifamily? You know, it doesn't take much to figure it out that if there's net job growth -- net negative job growth, sorry, in markets like that, what does it end up doing to occupancies? What does it do to single family? What is it going to do to multifamily? So those kinds of regional analyses, I think, are absolutely critical to all of us here.

Audience member: General question for the panel. Do you see vulture opportunities for busted condo deals? One. And two, if you're a lender, is there money out there for partial condominium acquisitions?

Bowen: It's an interesting question. There's been a lot of talk among the Fannie Mae DUS lenders. So it's time for Fannie Mae to break out a program to finance fractured condominiums because undoubtedly they'll be down the road, and there will be financing opportunities there.

Vulture opportunities, haven't seen them yet. You know, they're -- in general, it's like anything else. Even though Lee talked about a lot of defaults in the Midwest, have you seen anybody really be able to come in and pick them up that cheap? I don't think so. I think that people are so hungry for real estate that, you know, the bid is finally pretty high so that if you add the purchase price at a distress sale to the amount of equity that needs to go in to, you know, fix the place up, et cetera, you get to pretty much fair market price as opposed to a below-market great vulture opportunity.

Epstein: I was thinking about it quite a bit. There are one or two people that have raised some funds for it. I think of all the real estate that I've been associated with, there isn't anything more complicated than a broken condo conversion. It is a nightmare. It's a management nightmare. You've got buyers in there that bought a – in San Diego a one-bedroom for $325,000, but it's 612 square feet. And next door now they're lowering the prices, so they're going to be selling them at 250- or 225-. So that automatically would be misrepresentation, failure to disclose. The attorneys will get in. They'll start on the construction defects. You've got the lenders trying to figure out what to do, whether to move them out or whether you could make a deal with them. And then you're going to bring in this massive rental program for the next three to five years.

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Roundtable participants

Michael Berman, president,CWCapital

Douglas Bibby, president,National Multi Housing Council

Kenneth Bowen, senior managing director,Red Mortgage Capital, Inc.

Adrian Corbiere, senior vice president,Freddie Mac

Daniel Epstein, chairman,ConAm Group of Cos.

Mel Gamzon, president,Senior Housing Investment Advisors, Inc.

R. Lee Harris, chief operating officer, Cohen-Esrey Real Estate Services, Inc.

Charles Krawitz, managing director,LaSalle Bank Multifamily Finance Group

Holli Leon, executive vice president for production,ARCS Commercial Mortgage Co., L.P.

Andre Shashaty, editor, Apartment Finance Todaymagazine

Tom Szydlowski, CEO,Reilly Mortgage Group

J. Ronald Terwilliger, CEO,Trammell Crow Residential

Steve Wood, president, Berkshire Residential Development


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