While Fannie Mae has been saddled by big losses due to deterioration in the single-family market, its multifamily operations had a record year in 2007.
Last year, the government-sponsored enterprise (GSE) closed more than $60 billion in multifamily business, easily eclipsing the previous year’s mark of $34.3 billion. At the same time, Fannie Mae posted an overall $2.05 billion net loss in 2007 due to ongoing volatility in the capital markets.
The company said its multifamily business was mediocre in the first half of 2007, but the reduced competition from conduit lenders made for a torrid second half. “It was almost a tale of two years,” said Heidi McKibben, Fannie Mae’s vice president and head of multifamily production. “We saw a shift in August with much more volume directed toward the agencies.”
Many lenders in Fannie Mae’s Delegated Underwriting and Servicing (DUS) program expect to ride this surge throughout 2008. “More Fannie Mae deals have closed in January in our shop than were closed in all of last year,” said Dave Shillington, KeyBank Real Estate Capital’s new director of agency lending.
Last year, KeyBank closed about $100 million in Fannie Mae business, but in January 2008, it closed about $125 million. Based on the recent surge of interest, KeyBank’s target for 2008 is to close about $750 million in Fannie Mae business.
In the fall, Fannie Mae not only reaped a windfall of business from the conduit market’s meltdown, but also had a pricing advantage over rival Freddie Mac. Fannie Mae’s pricing on multifamily deals “had been inside of Freddie Mac pricing by 15 to 20 basis points,” in the fall and through mid-January, Shillington said, though the gap had dissolved by early February. Both GSEs are quoting typical multifamily deals about 200 to 230 basis points over the 10- year Treasury rate, a stark contrast to the commercial mortgage-backed securities market, where prices were running more than 200 basis points over the GSEs in early March.
Fannie Mae overhauled its DUS guide to make its program more competitive in 2007. The standard 1.25x debt-service coverage ratio (DSCR) became a 1.20x DSCR—even down to 1.15x in strong markets—and the guide was boiled down from more than 200 pages to just 50, speeding up deal cycle times by giving more authority to the GSE’s network of lenders.
Fannie Mae also released its Community-Investment Mezzanine Moderate Rehab product, which combines a mezzanine loan with a permanent DUS loan. Introduced last June, that product financed $180 million in mezzanine loans, and led to $1.7 billion in permanent DUS loans.
“When it was launched, we weren’t sure what the appetite for mezz was going to be because at that time the conduits were moving very aggressively at that part of the market,” McKibben said. “But we’re expecting to see a significant pickup in our mezz product this year.”
Other 2007 highlights included a huge jump in structured transactions, to $11.7 billion from $2.7 billion in 2006, and a significant increase in its seniors housing business, to $5.9 billion from $2.2 billion the year before. Structured transactions are typically large, customized, multipleasset deals, such as Fannie Mae’s purchase of a $7.1 billion credit facility in the sale of Archstone-Smith to Tishman Speyer/Lehman Brothers in October.
Fannie Mae kicked off 2008 by announcing a new small loan program, called Micro Loans, for loans of up to $750,000 on developments of five units or more (for more information on that program, see page 16). The company also plans on introducing new products in 2008 “that will make refinancing existing loans more attractive for our borrowers,” McKibben said, declining to offer specifics.
Overall, the company believes that problems in the single-family market will be a double-edged sword for the multifamily industry. More renters will enter the market, keeping vacancy rates and rental growth mostly steady through 2008. But markets such as Las Vegas and South Florida, which have an overabundance of unsold condos and single-family homes that may be repurposed for rental, are a cause of concern.
“We believe the overall condo supply coming online in 2008 will be about 250,000, up from 193,000 in 2007,” said Phil Weber, senior vice president of Fannie Mae’s multifamily division. “Some percentage of those units are going to get converted to rentals.”
In the long term, demographics favor the apartment market, Weber said, citing expected population growth of 14 million, job growth of 8.4 million, and the emergence of 1.2 million “echo boomers” (20- to 34- year-olds) entering the rental market over the next five years.