Loans for multifamily housing, a rare bright spot in the portfolios of Fannie Mae (FNM) and Freddie Mac (FRE), are starting to suffer from rising delinquencies.

While the situation bears watching, the loans are still performing much better than residential mortgages. So far, at least, analysts don't think the rising delinquencies will imperil the companies' investments in this business, even as rising joblessness pushes down rents and fuels vacancies on rental properties.

"On a relative basis, this should continue to be a bright spot," says Rob Stevenson, an analyst at Fox-Pitt Kelton Cochran Caronia Waller.

As part of the companies' congressionally chartered mission to fuel home ownership, Fannie and Freddie provide funds for the purchase of apartment rental buildings, such as housing for seniors, students and low-income families across the U.S. The majority of apartment buildings the two companies finance are for low- to moderate-income individuals.

The two mortgage-finance giants have supported prices for multifamily housing through their purchases of loans that finance rental apartment buildings, preventing even steeper price declines. Real estate investment trusts investing in rental apartments lost 8.47% for the year to date as of May 31, according to the National Association of Real Estate Investment Trusts, a trade group. In comparison, office REITs lost 11.9%.

"If Fannie and Freddie stopped lending to the multifamily sector," says Michael Levy, an analyst with Macquarie Capital, "then the multifamily REIT stocks would be devastated."

The two companies, which don't lend directly to borrowers, buy apartment loans - comprising individual loans and pools of loans - from a list of approved lenders that follow guidelines set down by Fannie and Freddie. The majority of these loans reside in their broader portfolio of mortgage-related investments, most of which is made up of home mortgages.

Together, the companies fund more than 75% of the loans in the multifamily sector. Because they are the main sources of financing, they are also in a position to garner high yields on these loans.

However, apartment loans haven't been exempt from risk in the current economy. Delinquencies, defined as borrowers at least three months behind on payments, on Fannie's multifamily portfolio totaled 0.36% in April, compared with 0.09% a year ago, according to the company's monthly reports. Freddie's multifamily delinquencies totaled 0.12% in May compared with 0.03% a year ago.

"Yes, multifamily is getting worse, but the scale of the problem is much smaller than the problem in the single family sector," says Jason Yablon, an analyst with Cohen & Steers Capital Management, an investment firm specializing in real estate finance. For Fannie and Freddie, not only are delinquency rates for multifamily loans lower, but these loans are also a much smaller part of their broader portfolios.

Mike May, the head of the multifamily division at Freddie, says, "On a relative sense, we have one of the best performing multifamily portfolios in the market."

The overall delinquency rate for mortgage securities backed by multifamily loans stood at 4.56% as of the end of May, according to Moody's Investors Service.

Delinquencies on Fannie's portfolio of so-called single-family mortgages totaled 3.42% in April, compared with 1.22% a year ago; for Freddie, it was 2.62% in May, compared with 0.86% a year earlier.

Fannie and Freddie are the main providers of funding for home mortgages. Fannie and Freddie reported combined losses of about $108 billion for 2008; the government seized control of the two companies in September. The two government-backed companies now are being kept alive by capital infusions from the Treasury.

As of the first quarter, Fannie's average multifamily portfolio stood at $174 billion, a 15% increase from a year ago. Freddie's portfolio of multifamily loans totaled $91 billion in the first quarter, up 23% from $74 billion a year earlier.

"It's still very profitable for them to continue lending to the property REITs," says Yablon at Cohen & Steers. "They are making loans to the apartment REITs in the low 6% range, financing it at much less, making a big spread."

Heidi McKibben, head of Fannie's multifamily loan production, says, "Certainly, Fannie and Freddie have the bulk of the market at this point. It's very difficult for borrowers to find comparable financing or even find financing for other commercial property types."

-By Aparajita Saha-Bubna and Dawn Wotapka, Dow Jones Newswires; 617-654-6729; aparajita.saha-bubna@dowjones.com