Deutsche Bank Commercial Real Estate is living proof of the need for multifamily lenders to offer a full spectrum of products.
In the first half of 2007, the company had great success through the commercial mortgage-backed securities (CMBS) market, which accounted for about 20 percent of its volume for the year.
But when the CMBS market dried up mid-year, Deutsche Bank began processing government-sponsored enterprise (GSE) loans hand over fist. By the end of July, the company had originated as much Fannie Mae volume as it had for the entire year before. And Deutsche Bank’s third and fourth quarter production of Fannie Mae and Freddie Mac loans was double its volume from the same period a year earlier, the company said.
“As the securitization market retreated, we saw Fannie Mae and Freddie Mac come back into the picture as the more dominant multifamily lenders,” said Jeff Day, managing director and co-head of Deutsche Bank Berkshire Mortgage, the company’s GSE and Federal Housing Administration (FHA) division.
The same goes for the company’s FHA program. Market-rate developers began flocking back to the FHA mid-year as both CMBS providers and traditional construction loan providers like small regional banks began to pull back from the market.
“Our FHA pipeline going into 2008 is bigger than it’s been in four or five years,” said Day. “With the dearth of available construction financing from traditional sources, a lot of borrowers are finding both the leverage and non-recourse nature of the FHA construction [program] very attractive.”
To ease the pain of the FHA’s painfully long closing process, Deutsche Bank typically provides interim financing in the form of a bridge loan for pre-construction while the FHA approval and closing process occurs.
The company’s proprietary Multifamily Plus product was rolled out at the end of 2006 but saw its first use in 2007.
Multifamily Plus is a hybrid product, a securitized loan that has characteristics of a GSE loan. The product allows for supplemental financing through the life of the loan, a feature typical of Fannie Mae but unusual for a conduit loan. Deutsche Bank also services the loan like it would with a GSE loan, another unusual feature for a securitized product.
But when the CMBS market disappeared mid-year, taking the Multifamily Plus product with it, the company’s breadth of products and structuring capabilities picked up the slack.
The company points to a $465 million financing package it put together in June for Hollywood and Vine, a 375-unit mixed-use development in Hollywood, Calif., as representative of its capabilities. The financing package consisted of $180 million in Fannie Mae credit enhancement of tax-exempt bonds, $135 million in construction financing, and $150 million in equity.
Day expects the 10-year Treasury, a key benchmark that lenders use to set permanent loan rates, to hover between 4 percent and 4.5 percent through most of 2008. And he doesn’t expect credit conditions to get too much worse than they were entering 2008. “My gut is telling me that we’re probably about where we’re going to be for 2008,” Day said.
The company expects the surge of Fannie Mae, Freddie Mac, and FHA deals to continue through the first half, if not for all of 2008. As of early January, the GSEs were quoting interest rates in the 5.7 percent to 6.2 percent range for standard new construction loans. By contrast, CMBS loans were being quoted at around 6.5 percent to 7 percent.