It’s been quite a year for Michael Berman.
The president and CEO of CWCapital began 2010 with a parent company—Canadian pension fund Caisse de Depot et Placement du Quebec—that was slashing its investments in U.S. real estate. He’ll end the year with a new parent company—New York-based Fortress Investment Group—intent on growing CWCapital with an expansive business plan that should put the rest of the multifamily debt industry on notice. The acquisition closed two weeks ago.
As if that wasn’t enough, Berman is chairman-elect of the Mortgage Bankers Association (MBA), where he has led the organization’s efforts in helping to shape the future of our nation’s housing finance system. The MBA’s proposal on mortgage credit guarantor entities—or “McGEs”—has emerged over the last year as a consensus framework to replace the government-sponsored enterprises.
Apartment Finance Today senior editor Jerry Ascierto recently sat down with Berman to discuss his vision for the company’s future, the state of the multifamily industry, and the way forward for our nation’s housing finance system.
AFT: How did the acquisition of CWCapital by Fortress come about?
BERMAN: Some time around September or October of 2009, the Caisse made a decision to no longer make commercial real estate debt investments outside of Canada for an undefined time period. That didn’t have any impact on our Fannie/Freddie/FHA business, and it also didn’t impact our special servicing business. But we previously had access to up to about $1 billion a year for things like bridge loans and mezzanine investments and construction lending. So it did impact our ability to diversify our products within our lending. We went to them and said, 'Given that we want to grow our business, we’d like to bring in a new capital partner.' Ultimately Fortress was the winner, and we were absolutely delighted with that. We felt they had an understanding of our business and ways to help create synergies between what they do and what we do that would really help take us to the next level.
AFT: So Fortress will restore the balance sheet programs, the mezz and bridge loans, and construction lending? Any other platforms you're considering?
BERMAN: Let me make it a broader statement: We are looking at all pieces of the capital stack and all different kinds of capital executions. We are actively now working with them on creating a series of products. This is a whole new vision we’re working on. We’re looking at everything from equity, preferred equity, mezzanine, whole loans, B-notes, B-pieces, you name it. And we’re also looking at all kinds of executions, whether that would be securitizations or syndications or club-type transactions. We’re working with Fortress on putting a business plan together this fall and starting to execute immediately. We’re already working on a bridge loan program and trying to work through how deals would be structured. I’m hopeful that we’ll have that product ready in 60 to 90 days.
AFT: Do you expect to go into any new markets in the next year?
BERMAN: Fortress has a tremendous interest in the seniors housing space. They own Holiday [Retirement Corp.], and they also own a significant stake in Brookdale [Senior Living]. And one of the things we’re looking at is opening up some offices and bringing on some specialists in the seniors housing arena. We want to do more agency product for seniors and then bring in bridge loans and other products that fill out that platform. The second thing we’re working on is bringing in a multifamily equity brokerage operation. And we’re continuing to increase our joint venture business with Apartment Realty Advisors (ARA); we have plans to bring in some more people in the life company arena. We’re working on putting together half a dozen life company relationships focused on the multifamily space.
AFT: Some of your competitors have started rumors that CW is out of the lending game. Has that whisper campaign affected your business at all?
BERMAN: I don’t know where the rumors started, but last year was our biggest year in the agency business, where we did over $300 million of FHA and over $1 billion of Fannie and Freddie. This year, we think we’ll do over $800 million on the FHA side and Fannie Freddie should be over $1.4 billion through November. In addition, we are currently sizing about $600 million of Fannie/Freddie business. So we think we’re going to grow over 50 percent in Fannie/Freddie and over 150 percent in the FHA business. The predictions I was hearing from Fannie and Freddie earlier this year was that their volume would be down somewhere around 30 percent for the year, and yet our volume is going to be up 50 percent. So, we’re taking market share from our competitors and loving it.
AFT: Do you think we’ll see a healthier transaction market through the rest of the year?
BERMAN: In 2008, nobody wanted to do a deal. 2009 was finally a time when owners were acknowledging that maybe they didn’t have the values they thought they had. And 2010 is the other shoe: Now the buyers are capitulating, and sellers are recognizing that with interest rates this low and cap rates tightened up as much as they have, that this is a good time to liquidate. We met with ARA yesterday, and a couple of their offices are telling us that the volume of activity has tripled in terms of active deals they’re working on now.
AFT: Do you expect the cap rate compression that characterized this year to continue into next year?
BERMAN: I think they'll level out. By and large, if you look over the past decade or two, cap rates are a function of the 10-year Treasury more than anything else. And I think interest rates have bottomed out—it’s hard to believe they’re going to go much lower. And cap rates are a function in large measure of where interest rates are. I don’t think interest rates are going to dramatically increase over the short run, and so I don’t think cap rates will either. But I think the concept that cap rates have probably gone about as low as they’re going to go is as good a prognostication as any.
AFT: You picked quite a time to assume a leadership role at the MBA. Tell me about the experience.
BERMAN: In September 2008, the MBA put together a task force on the future of Fannie and Freddie, called the Council on Ensuring Mortgage Liquidity. I was asked to chair that and that has been one of the great honors I’ve had in the past two years. We cane up with McGEs—the mortgage credit guarantor entity proposals—and there is certainly more traction around that concept and our proposal than around any other. There’s a huge part of the industry—academia, trade associations, think tanks, practitioners—that believe the basic premise we put forward is the best. And we’ve had a lot of good feedback from the administration. The concept is to have a federal backstop, but something that’s funded with private capital. It would be aligned so that private capital is taking the risk, but it would feature a Ginnie Mae-type wrap, and there would be a series of buffers to make sure we protect the taxpayers.
AFT: When do you expect the next generation of housing finance entities to be in place?
BERMAN: There are two issues. The first is how long does it take to get legislation passed? And the second is, once it’s passed, what’s the transition plan? The mid-term elections could have a lot to do with whether we get legislation passed. The Republicans clearly will take more seats in both the House and the Senate; they may even take control of one or the other. So it will become increasingly difficult for the Obama administration to get anything through the 60 votes needed in the Senate. So one of the questions is whether there can be an effective bipartisan program put together.
The ability of the White House and others to create a bipartisan plan for this is a huge challenge. And even if that happens, I still think you’ve got a minimum of four years (maybe as long as seven) to transition to a new system. We’ve got more than $5 trillion of securities and portfolios in the GSEs. When you think about transitioning that massive book of business into a new system, and the secondary market impact of that, it’s just a very complicated issue.
One thing there is bipartisan agreement on is that the system is very fragile today. And until we have renewed investor confidence and renewed liquidity in the capital markets, they can’t dismantle anything or it would be catastrophic for the housing markets and the economy. So I think it’s going to be a very gradual process and again that process might not even begin until 2013 if we don’t get some bipartisan cooperation.