Multi-Family Real Estate: Fannie and Freddie's Next Headache?

Three weeks ago, we asked whether multi-family REITs will continue to do well relative to the beaten down REIT sector, or join other REITs in the dumps? What will happen to Fannie Mae (FNM) and Freddie Mac (FRE) if there is major deterioration in this market? The GSEs are among the main sources of liquidity for multi-family real estate. From Investors Real Estate Trust's FQ209 conference call: (IRET)

In the coming 12 months, the majority of maturing debt is secured by multi-family assets. Our multi-family markets are performing as well as at any point in the last decade. Additionally, the multi-family loan market is still functioning with numerous lenders and, of course, the recently nationalized lenders, Freddie Mac and Fannie Mae.

IRET has completed loan agreements with Freddie Mac covering three apartment complexes in Topeka, Kansas, as well as one project in Billings, Montana, Castle Rock Apartment.

From mortgage industry trade magazine Originator Times, Dec. 10:

Mortgage Bankers Association: "Commercial/Multifamily mortgages have not seen the same kind of deterioration in performance witnessed among other real estate loans, and at the end of the third quarter, delinquency rates for every investor group remained at the lower end of their historical ranges. That being said, delinquency rates for nearly every investor group did see increases during the third quarter, and economic and credit market stress is likely to continue that trend.”

Between the first and second quarters... the 60+ day delinquency rate on multifamily loans held or insured by Fannie Mae rose 0.05 percentage points to 0.16%. The 60+ day delinquency rate on multifamily loans held or insured by Freddie Mac fell 0.02 percentage points to 0.01%. The 90+day delinquency rate on loans held by FDIC-insured banks and thrifts rose 0.29 percentage points to 1.47%.

The MBA analysis looks at commercial/multifamily delinquency rates for five of the largest investor-groups: commercial banks and thrifts, commercial mortgage-backed securities (CMBS), life insurance companies, Fannie Mae and Freddie Mac. Together these groups hold more than 80% of commercial/multifamily mortgage debt outstanding.

To put these numbers in context, of 35,135 commercial/multifamily loans in life company portfolios, with a total unpaid principal balance of $253 billion, only 36 loans with an aggregate UPB of less than $144 million were 60+ days delinquent at the end of the quarter. Of $1.2 trillion of commercial/multifamily mortgages at FDIC-insured banks and thrifts, only $18 billion was 90+ days delinquent.

Comments

[Redfish Mark:]

One of the biggest upcoming risks to the multifamily sector will be declining occupancy rates over the next year (national forecast in the range of -1%) which will impact NOI negatively. That said, we’d agree with the IRET comment above that in many markets around the country (we track over 220) multifamily fundamentals are as strong as they’ve been in years, and Fannie and Freddie are backing good projects (with rock solid ops numbers) in strong markets.

2008 Dec 18 08:58 AM

[Tom in RI:]

Housing, Small Business, Ponzi scheme.

Well, in view of the recent Madoff (Get it he “made off” with everyone’s money) scheme, the bailouts, housing defaults etc I am still asking this question, I believe it is an important one too. Why hasn’t anyone identified the housing bubble as a “Ponzi Scheme” too as that is what it was? I know that several million people “bought” with subprime mortgages with no money down, no doc and some others were just “speculating.” But many of us are what might be called “mom and pop” small businesses that were playing by the rules. We put 25% or more down, provided documentation, had good credit scores and our crime is that we bought at the end of the Ponzi Scheme before the bottom fell out. Just because someone is not “incorporated” does not mean they are not a small business. Anyone filing a Schedule C is a small business. Aren’t they? Don’t we always hear how the backbone of the US economy is “small business?”

However, there is no program around that is attempting to assist this “small business” and we are getting hit badly. This is surely a trillion dollar problem that could be averted by considering what I am suggesting here. One evening this week there was a man on CNBC who was saying that he had 3 rental properties that were upside down and the anchor on the program (A woman whose name I do not recall) lambasted him saying that he had no business buying the houses in the first place. I do not know his situation but if he is like millions of us who put down hundreds of thousands of dollars in down payments into a market that was artificially inflated due to the “Ponzi” balloon that had been created, he (like me) was robbed just like the folks who invested with Madoff.

So, I ask why no program is being established that would let people like this fellow, myself, and thousands of others who have invested life savings, provided regular jobs to 5-15 people, spent money on improving properties, etc renegotiate the loan amounts to a fair value. After all isn’t that is what a foreclosure or short sale does? Only with these options the property owner has no option in most cases to file bankruptcy.. isn’t that great; 800 credit score last year, 300 now.

I have properties that, due to the economic environment, are like this man’s… upside down. However, the simple program would solve this problem and save thousands of homes. Two questions should be asked:

1: How much is the property really worth.

2: If the mortgage amount were adjusted to this amount (especially at the new rates snakes that are buying up these foreclosed properties are being offered) would you be able to make the payment?

If the answer to question 2 is yes, then just rewrite the loan and get on with stopping this downward spiral.

Instead, in Rhode Island where I live, the governor is making available 200 million dollars for contractors to scoop up foreclosed properties and resell them.
The point that is being missed by all of the talking heads is that if individuals like this fellow, me, and perhaps thousands of others are not looked at as the assets to the economy that we have always been then what is created is a large group of citizens with bankruptcies, bad credit, etc, and instead of being fruitful members of a growing economy will become just the opposite. All because our crimes were the fact that we were lied to by mortgage companies who, as we all know, were leveraging out these notes to 40:1 odds and we were not fully informed. Believe me, had the banks, realtors, appraisers fully disclosed to me what the game was that was being played I surely would not have “invested” in this small business venture for my family’s future. I am not asking for a handout, I just want justice.

2008 Dec 18 12:41 PM

[420:]

The program in RI sounds like the right plan. Its encouraging new investors to make good decisions, not rewarding previous investors for bad decisions. You paid too much for your assets. I'm sorry, but your fault, you lose. The US tax payer should not bail you out. Unfortunately you should suffer the losses of your bad decision and you will likely think better next time. I bought a Range Rover last year for $100k. When gas prices went to $5/gallon, it lost 50% of its value. Can I get a baiout? Apparently it's no longer worth what I paid and I feel like crying too.

The con



On Dec 18 12:41 PM Tom in RI wrote:

> Housing, Small Business, Ponzi scheme.
>
> Well, in view of the recent Madoff (Get it he “made off” with everyone’s
> money) scheme, the bailouts, housing defaults etc I am still asking
> this question, I believe it is an important one too. Why hasn’t anyone
> identified the housing bubble as a “Ponzi Scheme” too as that is
> what it was? I know that several million people “bought” with subprime
> mortgages with no money down, no doc and some others were just “speculating.”
> But many of us are what might be called “mom and pop” small businesses
> that were playing by the rules. We put 25% or more down, provided
> documentation, had good credit scores and our crime is that we bought
> at the end of the Ponzi Scheme before the bottom fell out. Just
> because someone is not “incorporated” does not mean they are not
> a small business. Anyone filing a Schedule C is a small business.
> Aren’t they? Don’t we always hear how the backbone of the US economy
> is “small business?”
>
> However, there is no program around that is attempting to assist
> this “small business” and we are getting hit badly. This is surely
> a trillion dollar problem that could be averted by considering what
> I am suggesting here. One evening this week there was a man on CNBC
> who was saying that he had 3 rental properties that were upside down
> and the anchor on the program (A woman whose name I do not recall)
> lambasted him saying that he had no business buying the houses in
> the first place. I do not know his situation but if he is like millions
> of us who put down hundreds of thousands of dollars in down payments
> into a market that was artificially inflated due to the “Ponzi” balloon
> that had been created, he (like me) was robbed just like the folks
> who invested with Madoff.
>
> So, I ask why no program is being established that would let people
> like this fellow, myself, and thousands of others who have invested
> life savings, provided regular jobs to 5-15 people, spent money on
> improving properties, etc renegotiate the loan amounts to a fair
> value. After all isn’t that is what a foreclosure or short sale
> does? Only with these options the property owner has no option in
> most cases to file bankruptcy.. isn’t that great; 800 credit score
> last year, 300 now.
>
> I have properties that, due to the economic environment, are like
> this man’s… upside down. However, the simple program would solve
> this problem and save thousands of homes. Two questions should be
> asked:
>
> 1: How much is the property really worth.
>
> 2: If the mortgage amount were adjusted to this amount (especially
> at the new rates snakes that are buying up these foreclosed properties
> are being offered) would you be able to make the payment?
>
> If the answer to question 2 is yes, then just rewrite the loan and
> get on with stopping this downward spiral.
>
> Instead, in Rhode Island where I live, the governor is making available
> 200 million dollars for contractors to scoop up foreclosed properties
> and resell them.
> The point that is being missed by all of the talking heads is that
> if individuals like this fellow, me, and perhaps thousands of others
> are not looked at as the assets to the economy that we have always
> been then what is created is a large group of citizens with bankruptcies,
> bad credit, etc, and instead of being fruitful members of a growing
> economy will become just the opposite. All because our crimes were
> the fact that we were lied to by mortgage companies who, as we all
> know, were leveraging out these notes to 40:1 odds and we were not
> fully informed. Believe me, had the banks, realtors, appraisers
> fully disclosed to me what the game was that was being played I surely
> would not have “invested” in this small business venture for my family’s
> future. I am not asking for a handout, I just want justice.

2008 Dec 18 01:55 PM

[Tom in RI:]

RE: the reply to my posting by the "con."

If you buy a car at the sticker price it is the actual price. It is not an inflated price created by people with no insensitive to have truthful business practices. Obviously you can debate the sticker price at the lot but the example is not applicable. A car value will go down or up as did my '65 Mustang over time. And I am not debating the values of my business trucks either… I have diesels. So stick with apples and apples, not apples and oranges.

You are so wrong about real estate though. No one is crying, at least not me. Your reply is just emotional. You seem to miss the point... all home values will decline, yours included in your “bad decisions” comment. Face it; people were lied to about values by people with licenses to assign the values. It was a scam. And think about it. The investors who are getting burned in this scam had to have great credit and capital to invest in order to even get these loans. In your “too bad” world it is just spite driving your point of view.

So, maybe you are happy now because now these investors’ credit ratings are getting dragged down like maybe to where yours is?

People have a right to receive full disclosure when they make investments. Don't you think? Disclosure did not happen, investors were presented a smoke and mirror show about the real estate market with documented comps- that those in the industry created. So; as in any Ponsi Scam, those investing at the wrong point in the scam loose big. Sorry, it is not anything about bad business practice; it is about the nation being lied to on a huge scale. So, get unemotional and study what happened. Or is Madoff OK in doing what he did?

2008 Dec 18 09:15 PM

[420:]

Thanks for brining up Madoff, a great example. he should go to jail for the rest of his life. So should many brokers and banker who lied.
However just as your and my (tax) money should not go to bail out the fools who invested in him without due diligence (no-name auditor, inhouse custodian, opaque strategy), neither should that money go to bail out homeowners for not doing theirs. If you had read your loan docs, it was all spelled out for you. If you believed your mortgage broker also moonlighted as Fed Chief and had the the power to control interest rates when he said "you can just refinance when the ARM resets" or "just put $xx amount of income down and you'll qualify for more" or your agent who said "buy now before you're priced out of the market" then excuse me for not feeling bad if you're having trouble paying it off. In fact, you should appreciate the fact that these guys helped you live beyond your means for a little while, but now its time to get sober up. At the end of the day, people borrowed money they can't pay back. They are not "assets to the economy" they are a drain on it. Their credit should be damaged, because banks don't want to lend to flakes.

2008 Dec 19 03:07 PM

[User 322943:]

RE: Admin 1

Some people worked and saved thousands, used it as down payments on properties. They were lied to by the banks, brokers, and appraisers. You can not blame these people nor can you say they were living above their means. The "drain" was not created by the thousands who just happened to buy property with values that were falsely documented by smoke and mirrors. This has nothing to do with due diligence , the banks etc did not disclose what was going on... you did the research but were given lies.

Just like Madoff. People were sucked into a real estate drain that was well disguised. It was a big lie. So, if making these people candidates for welfare is what seems the right thing to do to you I guess you will be glad to get sucked down too when your time comes. Perhaps you will not sound so smug.

2008 Dec 19 05:21 PM

[420:]

Admin1 is right. Please protect me from the people that need protection from themselves.

Since when did mortgage brokers and appraisers get compensated on how honest they were? You wouldn't believe everything that a used car salesman tells you, right?...otherwise, boy do I have a beautiful minivan for you...only 10 years old for $50k. Or how about some brand new GM stock for $100/share? Maybe a vintage gallon of gasoline for $15?


On Dec 19 05:21 PM User 322943 wrote:

> RE: Admin 1
>
> Some people worked and saved thousands, used it as down payments
> on properties. They were lied to by the banks, brokers, and appraisers.
> You can not blame these people nor can you say they were living above
> their means. The "drain" was not created by the thousands who just
> happened to buy property with values that were falsely documented
> by smoke and mirrors. This has nothing to do with due diligence
> , the banks etc did not disclose what was going on... you did the
> research but were given lies.
>
> Just like Madoff. People were sucked into a real estate drain that
> was well disguised. It was a big lie. So, if making these people
> candidates for welfare is what seems the right thing to do to you
> I guess you will be glad to get sucked down too when your time comes.
> Perhaps you will not sound so smug.

2008 Dec 22 05:19 PM

[User 344326:]

When are people going to take responsibility for their own actions/decisions? If a you buy something you can't afford, then you should bear the consequences. If you are unable to understand the risks associated with investing your money, then you shouldn't be investing your money (hire a professional). If someone lied to you or defrauded you, then you have recourse against them in a court of law (if you can meet the burden of proof and have an actionable claim).

In a free society, it is not the job of the government (taxpayers) to bail people out that make bad investment decisions. If that is the case, then the government (not individuals) should be the one making the decision as to what individuals can and can't afford (which is what congress is doing with respect to the auto industry and the banks). That is not a free society.

Some bigger institutions are being bailed out because of the larger impact their failure would have on the economy as a whole. This is not fair, but no one ever said life was fair.

Jan 25 09:24 PM