As apartment fundamentals continue to erode, lenders are hoping to stop the increase in multifamily delinquency rates through a variety of portfolio management efforts.
While the multifamily delinquency rates at Fannie Mae and Freddie Mac remain very low relative to their single-family business, each agency expects the number of delinquent loans to jump this year. So they are working on several strategies to help thier troubled borrowers ride through the downturn, including extending maturities, providing favorable rates and leverage levels on refinancing, and offering aggressive financing for real estate owned (REO). None of these programs have formal names, however, as the details are still being ironed out.
“We’re eager to work with lenders who need help to do refinancing and loan modifications,” says Mike May, senior vice president of multifamily for McLean, Va.-based Freddie Mac. “We’re considering all the different aspects of loan workouts and refinances and financing of defaulted properties.”
For loan modifications or higher loan-to-value refinances, Freddie Mac needs to see an owner that’s committed to the success of the property, is keeping the property in great shape, and whose property is performing at market levels. “If we have that, we’re going to work with them to make it happen,” May says. “And we’re looking for skin in the game: We expect them to be willing to put some equity in to make the deal work.”
Freddie Mac’s Web site lists just six REO multifamily properties, four of which are in Georgia. Should the level of REO rise in the coming months, the agency hopes to entice new buyers with favorable financing.
“We will offer loan financing to REOs at credit terms that are more aggressive than our standard program,” May says. “We are offering this on a couple of properties, and it's clear that financing is the key. You get a lot more interested inquiries if financing is available.”
Balance-Sheet Strategies
Fannie Mae and Freddie Mac lenders say that while they work with the agencies on modifications and refinances, the decisions are mostly made by the agencies themselves. But for loans on a lender’s balance sheet, companies are exploring several options to stop the bleeding.
One big concern from lenders is the equity gap that exists in the industry today. Borrowers with maturing construction loans looking for permanent financing may have to put more equity in to make the deal whole, for instance. But questions linger about where that equity will come from.
To address this, KeyBank is doing something it's never done before: The lender is exploring the idea of raising an equity fund just to clear some loans out of its own books. “We’re looking at forming our own fund with third-party investors to put the equity into these types of deals, to move them off the balance sheet and into Fannie and Freddie,” says Dave Shillington, director of agency lending at Cleveland, Ohio-based KeyBank Real Estate Capital.
One of the largest balance-sheet lenders in the business, Chase Commercial Term Lending (formerly Washington Mutual), is also trying to get in front of the issue by expanding its asset management capabilities. “We’re reaching out more than people are reaching out to us,” says Al Brooks, president of New York-based Chase Commercial Term Lending.
Owners who are keeping the property up—through maintenance, landscaping, and graffiti abatement—are at the top of the list. “We’re not as inclined to do a modification if we see that a building has a lot of deferred maintenance,” Brooks says. “During a difficult period is when people really earn their stripes as property owners. We want to make sure they’re doing right by their residents.”
The strategies that lenders are looking at should go a long way toward reducing the amount of distressed assets on the market. And delinquency rates for multifamily are currently very low. The number of Fannie Mae loans at least 90 days past due is just 0.34 percent (versus nearly 3 percent in the company’s single-family book).
