Fannie, Freddie Bolster Multifamily Homes As Delinquencies Up
June 30 2009 - 11:50AM
Dow Jones News
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