Limits could leave multifamily, rental housing out in cold

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Perseus' Paul Dougherty warns of "disaster' if multifamily loan programs are shut down.

Any rescue scenario that restricts Fannie Mae and Freddie Mac's lending abilities could have dire consequences for a little-noticed area in the current turmoil: multifamily and rental housing.

Investors worry that nationalization or added government oversight of the two quasi-governmental agencies could cause them to stop lending to multifamily and rental housing projects because there would be political pressure for them to support single-family homes.

Last week, Federal Reserve Chair-man Ben S. Bernanke reportedly told Congress of a number of options facing the agencies, including nationalization, privatization and breaking them up. He reportedly said the short-term solution would be to keep them in their current form. A number of other proposals floated in Congress last week to save the ailing lenders included added oversight by federal regulators.

The ambiguity over Fannie and Freddie's futures has been enough to strike fear in the hearts of some real estate money managers.

Fannie Mae and Freddie Mac have become so integral to that sector meaning multifamily that if they were to stop lending, prices would sink and investor returns would dwindle.

Shutting down Fannie Mae or Freddie Mac's multifamily loan programs “would be a disaster for the market,” said Paul Dougherty, president of Perseus Realty LLC, Washington, a real estate investment firm that invests in multifamily and senior housing sectors.

What's more, the agencies' murky future is likely to deal a blow to other portions of investors' real estate portfolios as well, industry insiders say.

“Fannie and Freddie's troubles will create uncertainty, and this will have a negative impact on consumer confidence,” said Jahn Brodwin, senior managing director, The Schonbraun McCann Group, a New York-based real estate consulting firm.

Lack of consumer confidence will cause hospitality and retail sectors to suffer the most as consumers cut down on travel or shopping expeditions, he said.

Multifamily or apartments were bright spots in a dismal real estate landscape. When the credit crisis hit and commercial mortgage-backed securities disappeared, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. stepped in and made loans for multifamily and rental housing projects.

Demand for rental housing is expected to escalate as people default on subprime mortgages and as the offspring of the Baby Boom generation move to rental housing. These factors — in addition to the availability of insurance company debt, albeit at a higher rate — spared multifamily properties from some of the woes that befell other sectors and buoyed investor portfolios by keeping property values high.

The fear is that the possible nationalization of, or other fixes for, Fannie and Freddie could bring the agencies' commercial lending to an end. One byproduct: falling real estate portfolio values for those with exposure to multifamily and apartments.

Big into sector

Since August, the agencies have been in the multifamily sector in a big way. Fannie Mae alone invested $20 billion in the sector in the first half of 2008, providing debt financing for everything from large portfolio acquisitions to senior housing, according to data released by Fannie Mae earlier this month.

Should Freddie and Fannie be nationalized, investors fear that Congress or federal regulators would insist the duo use their capital to support homeownership for public policy reasons, diverting capital from their multifamily lending programs.

That would cause the value of multifamily properties in investors' real estate portfolios to fall, noted Richard K. Green, director of the Lusk Center for Real Estate at the University of Southern California, Los Angeles.

“But whatever Fannie and Freddie might look like, their whole role is to make sure there is a lender in the market, and I don't see any reason why that would change,” Mr. Green added.

The agencies' multifamily loans are still performing well and as of March, the most current public information available, default rates on apartment loans were still low, Mr. Green said.

Even so, uncertainty about what federal regulators and Congress will do next might prove to be a return killer, industry insiders say.

Real estate money managers might not pass on deals, but they are likely to underwrite them more stringently. “Underwriting” is real estate jargon for the risk/return projections buyers and sellers of property make on each transaction. If buyers try to play it safe, for example, by reducing rental growth rate assumptions and lengthening the expected time buyers will own the property, returns will drop.

“It causes me to think if they (Fannie Mae and Freddie Mac) were to leave the market, it would cause cap rates to spike overnight,” Perseus' Mr. Dougherty said. When capitalization rates rise, returns plummet.

Contact Arleen Jacobius at