Though the current financial crisis originated in the single-family sector, as APARTMENT FINANCE TODAY readers well know, it has since spread to other sectors. Thus, there is a looming liquidity crisis that could seriously impair the apartment sector.
An estimated $60 million to $80 billion in multifamily mortgages will mature in the next two years and will need to be refinanced. But the credit markets have virtually collapsed. So apartment owners who are meeting their financial obligations but whose mortgages, unfortunately, mature in 2009 and 2010 face great uncertainty in refinancing their properties. In addition to facing a market with few capital options, lenders still in the market may require additional equity and will likely subject borrowers to more rigorous underwriting and tougher loan terms. As a result of the combined liquidity and market conditions, obtaining financing for multifamily properties will require further financial commitment on part of owners, and some may not be able to meet these terms, forcing the loan into default, a situation neither borrower nor lender wants.
In addition to this refinance risk, the lack of capital has all but stalled new apartment construction. At the same time, America will need to rely increasingly on rental apartments to house our citizens. According to Professor Arthur C. Nelson at the University of Utah, half of new homes built between now and 2020 will have to be rental units to meet emerging housing demands.
And a new report from Harvard's Joint Center for Housing Studies, Meeting Multifamily Housing Finance Needs During and After the Credit Crisis, tells us why: The largest generation of children younger than 20 in U.S. history reaches adulthood by 2020, and the number of seniors begins to skyrocket. But with financing and production shortfalls now, we could face a critical housing shortage just when our country needs apartments the most.
Fortunately, there is some good news: Our industry has a big advantage over the other commercial real estate sectors in that we have the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, to provide liquidity.
This chart illustrates the importance of the GSEs in multifamily lending. In the 12 months from October 2007 through September 2008, multifamily mortgage debt outstanding grew by $83 billion. And of that amount, a staggering $68 billion—82 percent—was provided by the GSEs.
So Fannie and Freddie are a critical liquidity backstop for the apartment market. At a time when the commercial mortgage-backed securities (CMBS) market has shut down and banks and insurance companies have sharply curtailed credit, Fannie Mae and Freddie Mac have provided liquidity, especially through their purchases of multifamily loans for their portfolios.
It is unclear whether they will be able to continue that role, however. Beginning next year, Fannie and Freddie are under a regulatory mandate to begin reducing their portfolios from $900 billion to $250 billion over 10 years. This is particularly problematic for the apartment sector because the GSEs hold most of their multifamily loans in their portfolios.
Freddie Mac retains 86 percent of its total multifamily in portfolio; for Fannie Mae, the share is 53 percent. Combined, the GSEs retain 62 percent of their multifamily business in their portfolios, securitizing the remaining 38 percent. By contrast, they securitize 93 percent of single-family loans—only retaining 7 percent in their portfolios.
In addition, while the GSEs are a critical liquidity backstop for the sector, they are not sufficient alone to meet the industry's capital needs.
The prescription
The National Multi Housing Council is promoting a four-point action to avoid systemic failure in the apartment sector. We are calling on the Federal Reserve and the Treasury Department to use their authority under the Troubled Assets Relief Program (TARP) and through the previously announced Term Asset-Backed Securities Loan Facility (TALF) to:
Purchase multifamily mortgage-backed securities (MBS) guaranteed by Fannie Mae and Freddie Mac. Federal Reserve purchases are important to invigorate the multifamily MBS investor market, which has begun to show very limited signs of activity.
Purchase longer-term (e.g., 10-year) debt issuances by Fannie Mae and Freddie Mac so that the GSEs can support their lenders' funding needs without having to rely on mismatched short-term debt. This is essential to align the GSEs' capital needs with longer-term multifamily loan products.
Purchase highly rated CMBS. This would restore investor confidence, restart trading in the frozen CMBS market and establish a market-clearing price for a variety of real estate assets, including commercial and multifamily mortgages.
Exempt (under the Federal Housing Finance Agency's authority) multifamily loans from GSE mortgage portfolio limits through Dec. 31, 2010, or until a new secondary market structure for multifamily loans is operational. Based on Fannie Mae's and Freddie Mac's strong multifamily loan portfolio performance, exempting these loans will have almost no impact on the overall portfolio risk of the two enterprises.
We have advanced the industry's agenda at high-level meetings with key lawmakers and senior executives at the Federal Reserve and the Federal Housing Finance Agency, the GSEs' regulator.
Those efforts are already producing results. The new Financial Stability Plan announced by the Obama administration Feb. 10 includes plans to expand TALF to purchase AAA-rated CMBS.
The apartment industry has become a collateral victim to the excesses in the single-family sector; fortunately, our industry has a strong case to make. We did not overbuild—indeed, we're the only residential real estate sector that did not. And unlike the single-family market, underwriting standards and loan performance in the $2 trillion multifamily sector consistently have been quite strong.
The fundamentals of our industry and the demographics of our residents point to good times ahead—as soon as we get through this rough patch. Restoring our industry's access to capital will position us well to meet the nation's growing demand for rental housing.
Doug Bibby is president of the National Multi Housing Council in Washington, D.C.
