One of the biggest issues facing multifamily lenders today is determining the “V” in LTV (loan-to-value).

In the past, lenders could easily turn to the acquisition market to get a current read on valuations. But since there are very few transactions taking place this year, lenders have nothing to measure against: In the absence of a trade, there’s no market-determined value.

Anecdotally, everyone knows that values are falling in most, if not all, markets today. But how do buyers and sellers measure the rate of descent for that falling knife?

“No one knows what loan-to-value is because there are no sales comps,” says Will Baker, a vice president at Bethesda, Md.-based Walker & Dunlop. “The appraisers are pulling their hair out trying to figure out what a cap rate is.”

To Look Locally Or Not

Unfortunately, finding a recent transaction in a local market with which to compare current deals is impractical. Today’s cap rates just can’t be trusted. “You have to really dive into cap rates and see why the sale happened,” Baker says. “Was it a distressed sale? Did they have to sell? Or was this a normal deal? You can’t just look at a cap rate anymore.”

Appraisers are expanding the box to get a read on the market, especially in secondary markets. To determine the value for a deal in Springdale, Ark., for instance, an appraiser may have to look to recent transactions in Little Rock, Ark.—200 miles away—for a comparable deal that would support a given cap rate.

Instead, most lenders are taking a closer look at the trailing and current collections numbers to determine a trend. “That’s why cash flow is so important,” says Mike May, vice president of multifamily at McLean, Va.-based Freddie Mac. “We get appraisals now, and there are no comps or the comp is two years old or three counties away. So cash flow is king.”

But scouring the past three months of collections data won't make it easier to figure out where things are headed, as lenders seek to hit the moving target of values. “That’s the trickiest thing; in a lot of markets, we really are seeing collections where the most recent month is not as strong as the past three,” says David Durning, senior managing director for Newark, N.J.-based Prudential Mortgage Capital Co.

Growing Confusion

This valuation mishmash makes shorter-term loans much more difficult to pencil out. Fannie Mae and Freddie Mac are taking a hard look at exit strategies on five- and seven-year deals. The shorter the horizon, the less confident Fannie and Freddie are that the market will pick up and the loan will get repaid at maturity.

Refinancing transactions are particularly tricky. As apartment values continue to descend, the LTV ratio of existing debt gets skewed. A loan that was made at 75 percent LTV two years ago may now be at 85 percent LTV.

“We’re left to estimate where cap rates are today,” says Jeff Patton, a senior vice president at Charlotte, N.C.-based Grandbridge Real Estate Capital. “And if we can’t figure out the true value, and a borrower wants to pull out cash through a refi, that makes us nervous. And that has led directly to Fannie and Freddie being more of a 75 percent LTV player on refinance transactions.”

The process—a blend of hard data and best-guess forecasting—can sometimes feel as precise as reading tea leaves, lenders admit. Since a property’s current cash flow may not be as strong as it was just three months ago, lenders are left to divine exactly where all of this is headed.

“In many cases, we can see declines, but we can’t see the bottom, so we don’t know how much further we’re going to go,” says Don King, head of national agency lending at Needham, Mass.-based CWCapital. “It’s extremely difficult.”