The long-term impact of the government's takeover of Fannie Mae and Freddie Mac remains unclear, but some short-term advantages for multifamily borrowers have already become apparent.

The government-sponsored enterprises (GSEs) had been raising their prices on both long- and shortterm debt throughout the summer, but the infusion of capital from the federal government has neutralized that trend.

The rate for a standard 10-year deal Sept. 5 was around 6.3 percent. A week later—after the bailout was announced—that figure was down to around 6.1 percent. Five-year deals similarly dropped roughly 20 basis points, to between 5.8 percent and 5.9 percent, in that span.

While the benchmark Treasury rates continue to remain low, “the cost of capital for both Fannie and Freddie has gone down since the takeover, and that savings is what you'll see passed through to the borrowers,” said Don King, national program director of agency debt for CWCapital.

Both GSEs continue to insist that it's “business as usual” in the days following the federal government's intervention. And many industry watchers agree that in the first week post-takeover, deals were still flowing freely to Freddie and Fannie.

“I've been kind of stunned at how the mantra they've been singing has been ”˜business as usual,'” said Byron Steenerson, president of Alliant Capital, a Delegated Underwriting and Servicing (DUS) lender. “But so far, it has been absolutely that.”

To illustrate that mantra, Freddie Mac told its lenders it had a nearly $550 million transaction under review last week and approached its new regulator about whether it should close the deal. The regulator said that approval was not necessary and to do what the company has always done. The deal, a $548 million tax-exempt bond securitization done in conjunction with Citi Community Capital, was officially announced Sept. 17.

“My belief is that they have authority for at least $1 billion worth of deals in any one transaction,” said Peter Donovan, senior managing director of the Multi-Housing Group at CB Richard Ellis, on a conference call.

While the short-term impact for borrowers is positive, the Treasury Department's plan regarding the size of the agencies' portfolios has cast a dark cloud over the companies' longterm fortunes.

The good news is that, under the government's plan, each agency will raise its portfolio cap by between $50 billion and $100 billion, to $850 billion, until the end of 2009. This short-term infusion will be deployed mainly to help stabilize the single-family market.

But beginning in 2010, the agencies will have to diminish their portfolios by 10 percent annually, eventually shrinking all the way down to $250 billion. That's a staggering decline in capacity, forcing many in the multifamily industry to question the GSEs' long-term prospects. Another troubling question is, who will fill that $600 billion hole left by the GSEs when their portfolio capacity dwindles?

Even Fannie Mae was unsure how the tiered portfolio cap would play out. “We've got $100 billion of room immediately, and we're going to prudently make investments,” said Phil Weber, senior vice president of Fannie Mae's multifamily division, on a conference call Sept. 10.

“After we get to the $850 [billion], I don't know exactly how that will work,” he said.

Securitization push

To shrink their portfolios, both Fannie Mae and Freddie Mac will place more emphasis on their capital markets programs: Fannie's somewhat dormant Mortgage-Backed Securities (MBS) program and Freddie's Capital Markets Execution (CME) conduit program, which is currently under development.

Unlike conventional agency deals, which are held as investments in the companies' portfolios, these programs sell mortgages as securities.

Fannie Mae's DUS MBS program had lost steam over the years, mainly because a conventional Fannie Mae execution was easier to execute, more flexible, and was often priced the same as an MBS loan.

Many multifamily borrowers prefer portfolio executions because of the flexibility they offer, as opposed to securitized offerings.

“If a loan ended up having a problem, like the borrower changed his mind about a term after you ratelock, it was just easier to deal with if it was in Fannie Mae's portfolio,” said Steenerson. “I anticipate that Fannie will offer some incentive to go the other way now.”

Under the MBS program, Fannie Mae guarantees a one-off mortgagebacked security, and that guarantee doesn't add any volume to its portfolio. “There's no cap on how much guarantee business we could do, so longer term it's in our best interest to get the DUS MBS market reinvigorated,” said Weber.

That reinvigoration is already starting to show as investor confidence in Fannie Mae's securities renews, translating to lower rates for multifamily borrowers. “We're starting to see interest from MBS buyers again,” said King. CWCapital was shopping an MBS deal in the week following the bailout and received two bids indicating spreads of 242 basis points, a 14-basis point improvement over the previous week.

And Fannie Mae's Discount Mortgage-Backed Security (DMBS), a floating-rate loan for large deals of more than $25 million, also grew more competitive after the bailout was announced. King priced a $45 million DMBS deal at 30 basis points above the benchmark London Interbank Offered Rate (LIBOR) on Sept. 4, but five days later, after the bailout was announced, it traded at 31 basis points below LIBOR. “That's a huge differential, and it's all due to investor confidence,” he said.

Freddie Mac's pilot CME program would work like a conventional conduit execution. The company will bundle loans from its Program Plus lender network, work with the issuer to structure the commercial mortgage-backed securities (CMBS) offering, and then either purchase or guarantee the senior bond, while the subordinate bonds are sold to investors. The CME program offers supplemental financing, unlike most conduit loans, and is quoting some great rates and terms as the company pilots the program with a handful of lenders, including Holliday Fenoglio Fowler and Capmark Finance.

That program may actually grow in importance as a way to help shrink the company's portfolio cap after 2009. “There's going to be an even greater focus on their conduit program because, looking forward, they have to reduce their balance sheet, and one way to reduce a balance sheet is securitize the assets,” said John Cannon, an executive vice president of Capmark.

GSEs' outlook

Some programs under development may have to be suspended. Fannie Mae has been developing a construction-to-permanent loan program with some of its DUS lenders and planned to roll the product out in the second half of 2008. But given the additional regulatory scrutiny facing the GSEs, “I would not expect any new mortgage products coming out of Freddie or Fannie, certainly in the near term,” said Cannon.

Still, the GSEs' multifamily portfolios are in great shape. Freddie's 60-day-plus multifamily delinquency rate is a miniscule 0.03 percent, and Fannie's is at 0.11 percent. The multifamily operations are currently much more profitable than single-family and have the added plus of being “mission-rich” regarding affordable housing goals. All of these factors suggest that the multifamily divisions will be supported by their new regulators and conservators.

The long-term uncertainty hovering over the GSEs will be left for the next president and Congress to clear up. Speculation abounds in the industry regarding the GSEs' fortunes–will they be privatized, downsized, government-owned?— but the only thing that's certain is that nothing's certain.

“I feel reasonably good about the next week, the next month, the next six months,” said CWCapital's King. “The further you go out, the greater the uncertainty. I don't think anyone has any idea what these two entities are going to look like three years from now.”