The nation's housing finance overseer and Freddie Mac are citing the strong multifamily investment market as a reason for pushing ahead on their agenda to gradually eliminate government guarantees in the multifamily sector business and replace them with new private capital sources well ahead of efforts to begin unwinding their single-family finance operations.
Earlier this year, the Federal Housing Finance Agency (FHFA), issued a strategic plan for Freddie Mac and Fannie Mae that envisioned different kinds of roles for the two big government-sponsored enterprises (GSE) within the single-family and multifamily financing business. Doing so, the FHFA argued, could help revive the lagging housing market.
Unlike their single-family credit guarantee business, the GSEs' multifamily businesses have performed quite well, generating positive cash flow. Last year, the GSEs multifamily businesses produced $1.9 billion in net income, with Freddie Mac accounting for 70% of this gain, as investors poured into the apartment sector. The trend continued in the first quarter of 2012, with Freddie Mac alone producing $624 million in multifamily net income.
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This week, David Brickman, senior vice president of the multifamily business for Freddie Mac, pressed the case further by outlining other reasons why multifamily finance should have a separate and distinct role in housing.
· With fewer people owning homes, Brickman said there is a clear need to support more rental housing.
· Private capital is beginning to flow back into the multifamily market.
· The business processes and systems for single-family and multifamily financing and development are not alike.
· Multifamily might aid in the recovery of single-family housing by transforming the large volume of distressed single-family properties into rental housing.
But for such a plan to work, the private sector would have to step up their role significantly in multifamily finance, CoStar Group's financial analysts argue.
In the past decade, the GSEs have played an important role in high-quality collateral underwriting and securitization, while lower-quality multifamily collateral was often securitized by conduit issuers, according to CoStar analyst Otto Aletter. However, even most of the better quality tranches of the private conduit issuers were created specifically for Fannie Mae and Freddie Mac to buy, increasing the role of the GSEs in the multifamily securitization market across the risk spectrum leading up to the credit crisis, both as originators and investors.
Since the crisis, GSEs have increased their dominance of the CMBS issuance market even more. This year, GSE issuance is on track to outpace 2011 and pre-crisis levels. While it's a dominant role, it also demonstrates the continuing strength of the multifamily market, Aletter said.
According to Freddie Mac's Brickman, during the economic crisis, most forms of private capital quickly beat an exodus from the multifamily market. That is now changing.
"Recently, the demand for multifamily housing has increased occupancy rates, operating income, and property values, creating an attractive environment for new sources of capital," Brickman argued this week. "For instance, at Freddie Mac, since the beginning of 2011, private investors have purchased $18 billion in new multifamily bonds of ours. Life insurance companies, bank conduits, and real estate investment trusts also have demonstrated increased investment activity. Going forward, the increasing availability of debt and equity capital makes possible a broad range of possibilities for the multifamily market, including us."
"I like that Brickman explicitly says that it has been private investors who purchased $18 billion of their issuance," CoStar's Aletter said. "One of my concerns was that the GSEs could be quietly buying back a lot of their issuance simply due to the preference for holding CMBS rather than individual loans in their portfolios.
"The resurgence of multifamily securitization demonstrates that investor demand is much stronger for multifamily debt than for debt in other property types," Aletter continued. "Multifamily issuance accounted for approximately 62% of all conduit and GSE issuance in 2011, in contrast to approximately 21% in 2006."
Because of that investor demand, Aletter argues, "with a slow and deliberate removal of government conservatorship in the GSE multifamily business and a clearer regulatory environment, other market participants and the privatized agency businesses could absorb the lending gap in most markets with minimal marginal costs to borrowers, establishing a healthier foundation for multifamily lending."
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