Freddie Mac had one of its best years in 2011, capturing more than 30 percent of the total market for multifamily permanent debt, once again.
While its market share remained stable, the McLean, Va.–based company’s overall volume increased, as the total market for multifamily debt continued to grow. In 2010, Freddie Mac processed about $15 billion in multifamily debt, but it's on pace to record more than $18 billion for 2011. And the organization doesn’t look to be slowing down any time soon.
Apartment Finance Today
recently sat down with David Brickman, who leads Freddie's multifamily division, to get his thoughts on where the capital markets are heading in 2012.
AFT: So, how was business in the fourth quarter? Was it as crazy as it was in 2010, or are things going at a more measured pace?
It’s equally as crazy in terms of how much business we’re doing. But it’s perhaps a little less crazy in that we actually anticipated it reasonably well this year.
There’s no two ways about it—we are running at capacity. But we’ve made real strides in terms of improving our processes. We added some people in the middle of the year and reshuffled a little bit within the organization, and I think that’s made a difference. And we’ve implemented some outsourcing arrangements as well as some new technology that is starting to provide benefits in terms of expanded bandwidth.
We still have a long journey in front of us to completely transform how we run our business processes. But we have made improvements in our early rate-lock process. We’ve sped up some of our timing from quote to application to commitment and are looking hard at how we can continue to do that.
AFT: How much of the market did you capture in 2011?
Our best guess is, we think we’re about 30 to 35 percent. Despite all of the noise in the world, the noise about the GSEs, the noise in the economy, I think we're going to have one of our biggest years ever. It’s entirely possible that it will be our largest year ever in terms of one-off newly originated mortgage purchases.
AFT: The yield on the 10-year Treasury, and LIBOR, has been low for some time. Do you expect the benchmarks to stay low this year, as well?
I think so. I am a believer in animal spirits ultimately driving the economy as much as any economic policy. And I think there will come a day when those animal spirits turn positive. And just as we saw an abrupt reduction in rates, I think we’ll see a run-up in rates. I don’t know when that [will be]; I’d be foolish to try to predict that. But it could occur in 2012. Nobody could’ve guessed how steeply rates would fall coming out of 2010, and you have to run that in reverse and just say it’s always possible they could go back. You know, what goes down must go up.
And it’s not even just when everybody is blowing the trumpet and announcing the recovery is firmly at hand. It’s when the Fed just says, "We see green shoots." There’s such significant central-bank influence in terms of rates that it just increases the likelihood that things can move faster based on policy decisions and policy statements. If the Fed just comes out with a statement in June that says, "We see strong signs of growth in the economy," that could move things very abruptly.
AFT: When you look at some of the cap rates on recent transactions, do you feel like the multifamily industry is getting a little overheated in some markets?
I do not. I think it is perfectly rational where cap rates are now. The cap rates are driven by financing costs, and what you’re really saying is, can cap rates go up? Of course they can, and if [interest] rates go up significantly, cap rates would likely go up, but it’s not one for one. What you have to look at is [that] the spread of cap rates to Treasuries is actually quite wide.
AFT: It’s probably more than 400 bps now, on average.
Exactly, and historically it has not been anywhere near that wide—it’s been more like 250, 300. And so you’ve got a very healthy risk premium to real estate right now, and you’ve got strong growth forecasts. There are very positive influences lining up behind demand and a relatively anemic level of supply. So, I think you can legitimately sign up for pretty healthy rent growth. And that [in] itself justifies a low cap rate even independent of the interest rate.
AFT: What are your biggest concerns for 2012? What keeps you awake at night when you think about this year?
Certainly, for us, it's managing through the growth, and keeping people focused. It’s managing through the uncertainty of—as much as anything—the regulatory and organizational environment. We think and expect that there will be a future for the organization in some form—we don’t know what that form will be. So it’s really focusing on what we’re able to do and worrying a little bit less about the form that it’s going to be in.
The best road to success for us is to continue to deliver results. As far as the income we’re able to generate, we contributed approximately $1 billion net to the bottom line in 2010, and we’re on a similar run rate [now]. So, we're contributing money back, providing liquidity to the market. We’re innovating even within the constraints we work under, and our people see that. And they also see that the uncertainty on the other side will eventually be resolved.