Associations Warn of Systemic Failure in Apartment Sector

The National Multi Housing Council, in conjunction with the National Apartment Association, issued a four-point policy statement last week outlining necessary steps they believe the federal government must take to avoid "systemic failure" in the apartment sector. The associations commended the traction they saw this week with the passage of Obama's economic stimulus package, which addresses one of the four points in the paper.

The policy statement, which was born from a larger multifamily financial markets policy paper issued last month by Harvard University's Joint Center for Housing Studies, largely focused on reinvigorating the now anemic commercial mortgage-backed securities (CMBS) market and ensuring continued?if not broader?short-term and long-term lending to the multifamily industry by Fannie Mae, Freddie Mac, and the Federal Housing Administration.

"We know 'systemic failure' sounds dire, but look at how the markets are reacting [on any given day] to the [economic] situation," says NMHC president Doug Bibby. "The situation is extremely complicated, and the issues at hand are deep and wide."

According to the Harvard policy paper, titled "Meeting Multifamily Housing Finance Needs During and After the Credit Crisis," between $80 billion and $100 billion in multifamily mortgages will mature and need to be refinanced over the next 24 months. Borrowers who are otherwise meeting financial obligations stand at risk of being caught in the credit freeze and forced into foreclosure.

Federal action to restore liquidity to the debt markets would likely avert that crisis, NMHC and NAA contend. Their policy recommendations include: purchasing multifamily mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac; purchasing longer-term GSE debt issuances to support multifamily lenders' funding needs without having to rely on short-term debt; purchasing highly rated commercial mortgage-backed securities; and exempting multifamily loans from GSE mortgage portfolio limits through Dec. 31, 2010, or until a new secondary market structure for multifamily loans is operational, whichever comes first.

Positive movement was seen on those fronts on Feb. 10 as the Obama Administration authorized expanding the Term Asset-Backed Securities Loan Facility (TALF) up to as much as $1 trillion and allocating part of the program to purchase AAA-rated commercial mortgage-backed securities.

According to Bibby, the move could go a long way toward restoring investor confidence in the CMBS markets, setting a fair market clearing price for real estate assets of various classes, and jumpstarting trading activity, particularly for multifamily mortgage-backed securities. "If you can start to make a consistent market for multifamily mortgage-backed securities, that really begins to solve a lot of problems for our side of the industry," Bibby says.

Little if any short-term action was expected in terms of purchasing long-term GSE debt issuances, primarily due to the growing size of the federal deficit. "The government has borrowed so much money that the debt calendar for the Treasury is completely clogged," Bibby says. "That point might indeed be moot."

Still, Bibby characterizes official response to the multifamily policy points as extremely positive both from Capitol Hill and the Treasury. "The reception so far has been quite good considering they are besieged by everyone right now," Bibby says of his separate meetings with Federal Reserve vice chairman Donald Kohn and staff manager for Senate Banking, Housing, and Urban Affairs Chairman Christopher Dodd (D, Conn.). "There are lobbyists coming out the windows, but we have had a good audience so far."

Hopes remain high that high-profile presidential advisors with multifamily backgrounds?including U.S. Housing and Urban Development Secretary Shaun Donovan and senior advisor Valerie Jarrett?will ensure that apartment sector issues remain high on the presidential radar.

"We are still concerned that policy might be developed for the single-family sector that doesn't work for the multifamily sector," Bibby says. "That is what we have to guard against. It is what we are most worried about."