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Multifamily Financing at Stake in Fannie Freddie Wind-Down

16 November, 2011

Winding down Fannie Mae and Freddie Mac, as proposed by President Barack Obama, would hit the multifamily property investment market smack in the source of its stability compared to single-family housing: financing.Oklahoma City-area brokers said apartment investing would regroup from this little considered aspect of housing finance reform, but not without pain.

Promoting capital and liquidity, especially to alleviate the high rental burdens that many low-income households face, and to the middle of the rental market would remain goals of the government even without Fannie and Freddie, according to a report to Congress by the Treasury Department and Department of Housing and Urban Development.

Private credit prefers high-end developments, the Feb. 11 report noted, leaving the rest of the rental market wanting. Absent adequate credit for midrange projects, Fannie and Freddie have become the go-to credit source for the middle of the market.

As we wind down Fannie Mae and Freddie Mac, it will be critical to find ways to maintain funding to this segment of the market, perhaps by increasing the Federal Housing Administrations involvement in backing private loans even while shifting more risk to lenders to reduce the risk to FHA, the Treasury-HUD report said.

Phasing out Fannie and Freddie would rock the multifamily market, said Mike Buhl of Commercial Realty Resources Co. in Norman.

The sector of our market that performed the best and shown the most price appreciation has resulted because of the availability of financing through these agencies. Without this financing option, I think that values in the short term could erode somewhat in an otherwise very strong market, said Buhl, an apartment specialist.

Winding down Fannie and Freddie, he said, could unwind the multifamily market the acquisition and construction of apartments reining in supply just as demand for rental housing is increasing on tightened underwriting for home mortgages.

The cost of long-term, fixed-rated financing would go up as private capital and credit moved in, said William T. Forrest, apartment broker, first vice president and managing director of CB Richard Ellis-Oklahoma.

Replacing Fannie and Freddie would be difficult, he said, but improving multifamily market fundamentals rents and occupancy would draw banks, life insurance companies and other private creditors back to multi-family finance.

Bring on private capital and its pricing based on real risk, said Jay Scott Brown, co-owner of Dobson Mortgage and Welcome Home Management Services LLC.

If it depresses prices, it is good for buyers. If lenders make money because their product is priced right, then they make money and can lend more money so that supply increases, putting downward pressure on rates and creating more capital to lend, creating more activity, Brown said.

Government intervention is a sleight-of-hand game. It gives you the illusion that you can do deals on the short run, but lending money on financially sound underwritten projects is sustainable forever. Thats what the market needs. There will always be activity so although it may take some time to shake out, it wont ever grind down to a halt.

Broker Andy Burnett isnt so suspicious of the governments role.

Theres a lot of noise out there today asking for smaller government and less government involvement in business. It will be interesting to see how they all feel after their housing costs start to rise, said Burnett, a broker with Sperry Van Ness/William T. Strange & Associates.

Burnett said he cant see the federal government getting out of housing finance completely.

Even scaling back, he said, will cause more heartburn than people realize.

Fannie Mae and Freddie Macs apartment loans actually produce a profit for the U.S. taxpayer due to a default rate of less than 1 percent. Its the single-family market that is so expensive, he said.

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by Kate Waylen

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