FEATURE ARTICLE, JUNE 2012

FANNIE MAE TAKES A STEP FORWARD
The agency’s multifamily loan portfolio assists in the first positive quarter since conservatorship.
John Nelson

Trimont Real Estate Advisors, acting as a special servicer on behalf of Fannie Mae, sold the 856-unit Bristol Apartments in Houston to Resource Real Estate Opportunity REIT for $11.4 million. Fannie Mae’s activity in the multifamily market has helped the agency have the first positive quarter since it went into conservatorship in 2008.

The government-controlled mortgage lending agency Fannie Mae posted net income of $2.7 billion in the first quarter, the first positive quarter since the company was put into conservatorship in 2008. Fannie Mae had fewer real estate owned (REO) single-family properties on its books this quarter and there was a less significant decline in sales prices for REO houses.

The agency’s single-family inventory headlined the turnaround, but the firm’s multifamily loan portfolio had a hand in the company’s recovery with a minimal delinquency rate and an increase in loan originations. Fannie Mae lenders have financed 117,000 multifamily units in the first quarter alone, compared to 83,000 units financed in the first quarter of 2011.

“2012 is off to a strong start with $7.2 billion in financing through the first quarter,” says Manny Menendez, vice president and head of multifamily customer engagement at Fannie Mae. The dollar amount is up 44 percent from the same period last year. “Multifamily is profitable on a segment reporting basis with low credit losses and delinquencies, and our market fundamentals are generally favorable.”

CONSERVATORSHIP AND UNWINDING

The positive momentum and low delinquency rate of Fannie Mae’s multifamily loans — 0.37 percent as of March 31, 2012 — is made all the more impressive considering the uncertainty of Fannie Mae and Freddie Mac’s fate. “To say the least, it’s remarkable,” says Alex Inman, a loan officer in Walker & Dunlop’s Dallas office. The agencies’ assets and operations have been under the control of the Federal Housing Financing Agency (FHFA) since 2008. The FHFA has put constraints on the agencies and is in control of their operations for the foreseeable future.

In addition to conservatorship, Sen. Bob Corker (R-Tenn.) and Sen. Johnny Isakson (R-Ga.) have proposed legislation in Congress that — if passed — would elimate Fannie and Freddie after a 10-year transitional period that would end in the privitization of the resulting agency.

To combat this and similar legislation, the National Multi Housing Council (NMHC) has attempted to educate Capitol Hill on the differences between the single-family and multifamily markets, according to Inman.

Also, several key members of Fannie Mae’s executive staff — including CEO Michael J. Williams — have decided to step down, changing the makeup of the company and casting a shadow on the future. In the meantime, the members of Fannie Mae’s staff is churning out business.

“We are still seeing Fannie play a significant role in the multifamily space, and the staff that remains are working extremely hard to get things processed and deals closed,” says Inman.

Despite the headwinds, Fannie Mae is conducting business at a high level. Fannie Mae’s mortgage origination volume in the multifamily sector totaled approximately $24 billion in 2011, a 46 percent jump from 2010. Additionally, Fannie Mae controls 21.2 percent of the $840.8 billion market share of multifamily debt outstanding, according to the Federal Reserve.

“We try to focus on the things we can control — operating our business soundly, being a constant source of liquidity for our lenders and making sure we’re supporting the multifamily market,” says Menendez. “Ultimately, decisions about the future will be made by others. Sometimes that is a challenge, but we try to remain focused on our role and the important work we have to do every day.”

MULTIFAMILY: A HOT TICKET

The multifamily space in general remains an attractive product type for investors because of its solid real estate fundamentals and strong renter demand, which is augmented by an ailing housing market.

“The rent versus own equation has dramatically shifted over the past few years, reversing an unsustainable run-up in home ownership rates,” says Jamie Mullin, director at LMI Capital.

Construction is anticipated to remain minimal for 2012 so vacancies will continue to trend downward, according to Marcus & Millichap, which forecasts only 85,000 units will be delivered in the U.S. this year. That figure is far less than the conservative demand forecast for 120,000 units. The firm is also forecasting national vacancy to drop to 5 percent, a 40 basis point drop from 2011.

The prime-renter age cohort is attracted to multifamily living, especially in Austin. The job opportunities, lifestyle and demographics all support the increase in demand for Austin multifamily properties, so much so that Marcus & Millichap is forecasting the city to add 3,000 units this year, up from a 20-year low of 542 units delivered in the past 12 months.

“Austin has by far been the hottest market from an effective rental rate increase standpoint. The occupancy levels have stayed strong,” says Inman. “One can expect Austin to outshine all other Texas markets.”

Other markets such as Houston are a bit more fractured, with pockets of solid core products and overbuilt properties alike. Fannie Mae has placed Houston on a pre-review status, which will require borrowers to have more equity for a Fannie Mae loan in Houston. On the opposite side, Fannie Mae also has a “strong market” list where underwriting standards can be relaxed somewhat to streamline activity. These strong markets include New York City, Boston and Washington, D.C.

The multifamily market as a whole has experienced a surge in financing activity. According to the Mortgage Bankers Association (MBA), originations for multifamily loans jumped 45 percent from the first quarter of 2011 to the first quarter of 2012.

A COMPETITIVE FORECAST

Fannie Mae competes against life insurance companies, banks and CMBS conduits for business. Commercial banks posted a 104 percent increase in financing across its entire portfolio in the first quarter of 2012 on a year-over basis, the biggest gain among lending sources, according to the MBA.

“We have seen the return of other private capital sources to the market and competition for multifamily loans remains strong from insurance companies and depository institutions,” said Menendez. “If the CMBS market comes back we can expect a more competitive landscape.”

“As the conduits and securitized lenders come back into the market, they will be nipping at the heels of the agency providers,” continues Scott Lynn, founding principal of Metropolitan Capital Advisors. “There will be more alternatives besides agency, if agency were to change or fade.”

Todd McNeill, senior director of Metropolitan Capital Advisors, concurs that Fannie Mae may not operate in its current format forever but the agency is unlikely to dissipate entirely.

Fannie Mae remains a major player in the multifamily mortgage market and is off to its strongest start in years. The agency remains the lender of choice for most multifamily borrowers, according to Mullin.

Inman concludes, “Even with what’s going on globally and domestically, the agencies continue to take a ‘business as usual’ approach and seem to be stronger than ever.”

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