The Bubble Has Formed
A weekend topic starting with Delaware Business Now. “Gary Hindes is continuing his battle with the boards of home lenders Fannie Mae and Freddie Mac. Hindes is the managing partner of New York-based Delaware Bay Co. and has been active in Democratic Party circles in Delaware. Delaware Bay specializes in securities of distressed companies like Freddie Mac and Fannie Mae. The two companies package mortgages for sale. to investors. Amid recent press reports that, because of the reduction of the corporate income tax rate which took effect on Jan, 1, Fannie Mae and Freddie Mac may require a one-time Treasury draw, Hindes says any such payments by Treasury should be characterized as ‘a return of stolen money.’”
“Hindes had previously filed suit in an effort to get a better deal for shareholders, reduce principal on debt and thereby boost the value of securities. On September 6, 2008, the federal government seized Fannie and Freddie and placed them into conservatorship. ‘The original takeover wasn’t the ‘bailout’ it purported to be; it was a stick-up,’ Hindes says.”
“‘It was a mafia-type ‘loan’ from the beginning,’ Hindes says. ‘What responsible board of directors – or in this case, a ‘conservator’, no less – would borrow $187 billion and agree that no matter how much money they repay the lender, not a dime can be applied towards principal? I mean, who does that? And here’s a reality check for you: who borrows that kind of money and pays it all back in just four years? Answer: someone who never needed it in the first place. It was ‘cookie jar accounting’.”
“Under the terms of the FHFA/Treasury deal, both companies were to have seen their capitaldrained downto zero by year-end 2017. However, on December 21, Treasury agreed to allow each company to maintain $3 billion in capital. Everything above that will be swept to the government – in perpetuity, Hindes says. ‘The idea all along was to saddle them with a concrete life preserver so that they could not ‘escape, as it were’, Hindes said, quoting from an August 18, 2012 White House email to a Treasury official. ‘And so far, it’s worked.’”
From the Commercial Observer. “Lenders under the umbrella of the Fannie Mae Multifamily Delegated Underwriting and Servicing (DUS) program have been setting records over the last couple of years, stepping to the forefront of the lending arena and delivering substantial amounts of debt across all multifamily property types. Freddie Mac funded 198,000 apartment homes in the third quarter and took on $43 billion in mortgage funding in November 2017 alone, according to a Freddie Mac monthly volume survey.”
“In the current multifamily market environment, that volume and competition could create a problem, and a slowdown may be on the way. Analysts warn of overly competitive markets, stagnant rents in gateway cities, compressed cap rates, plateaued absorption rates and an oversupply of certain assets (such as luxury condominiums) culminating and pumping the brakes on the sector in 2018. Add to the mix the demand to meet millennial taste and you have quite the conundrum cocktail.”
“The amount of outstanding debt guaranteed by Fannie Mae has increased each year since 2013 to $246 billion through the second quarter of 2017—or roughly 20 percent of the market share of outstanding multifamily debt, according to a second quarter debt market report from the agency. Freddie Mac Multifamily—which doesn’t rely on DUS financing and focuses more on home ownership and affordable housing—held 16 percent of the market share to complete a 36 percent piece of the total multifamily debt pie.”
“The Federal Housing Finance Agency (FHFA) twice adjusted the lending caps for Fannie Mae and Freddie Mac in 2016, leading Fannie Mae to set a record for deal volume at $55.3 billion—up from $42.3 billion in 2015—while supporting 724,000 units of multifamily housing—the highest volume in the history of its DUS program. Fannie swiftly surpassed its 2016 record in November 2017, registering $57.7 billion in new business.”
“‘At the beginning of the cycle, lenders like Greystone and Arbor Realty Trust and others recognized the need for multifamily bridge product in order to prepare a borrower or property for agency financing,’ said Joseph Cafiero, the president of New York-based firm CREMAC Asset Management. ‘You can see that [Net Operating Income] growth is in negative territory in some cases and growth in NOI is diminishing in others—through the tapping out on dollars per square foot or because expenses are exceeding the growth of NOI.’”
“‘The bubble has formed, it’s just a question of when it pops,’ Cafiero said. ‘The multifamily sector has long been recognized as the most stable or least volatile sector to invest in. The transaction volume in the sector, availability of cheap debt and extremely low cap rates fueled the bubble. Stagnant NOI growth, especially in the rent-regulated area will eventually lead to significant losses for those properties that experience compression in net cash flow. This will also lead to landlords reducing services they provide to multifamily properties, and then it will be more difficult to keep up properties like they should, which will erode the value of the property.’”
“‘What’s most interesting is the impact of this NOI compression,’ Cafiero said. ‘The point is it’s beginning to look as if the return no longer makes sense for an investor. If you buy multifamily today at a 3 percent cap rate, you’re getting 3 percent return. At some point, you have to charge less management fees and cut costs to maintain a return.’”
“With an oversaturated market in terms of assets and players, banks have been steadily tightening their standards for commercial real estate loans backed by multifamily properties, according to data from the Federal Reserve’s October 2017 Senior Loan Officer Opinion Survey on Bank Lending Practices.”
From the Real Deal. “Multifamily projects have been on the rise across Westchester and Fairfield counties for a while, so much so that sometimes it seems like it’s all anyone can talk about when it comes to suburban real estate. But experts say there’s been a slowdown in construction loans from traditional lenders for these developments in both counties, citing concerns about too much multifamily stock in some markets despite continued strong demand and high occupancy levels.”
“‘The market slowdown started maybe at the beginning of 2016, where lenders were more concerned with saturation in markets that have seen a substantial amount of multifamily growth,’ said Mark Fisher, senior vice president at CBRE. ‘Loan values and loan-to-cost [ratios] have dropped also. Banks that were willing to make 75 percent [recourse] loans are down to 60 percent.’”
“Another concern lenders have is that rents have leveled off, and landlords are increasingly having to sweeten lease terms with incentives. ‘In certain markets, we see one, two or three months’ rent [offered] to new tenants,’ said Marjan Murray, executive vice president for commercial real estate lending at People’s United.”
The Star Telegram in Texas. “A decade after the housing market crashed, foreclosures in Dallas-Fort Worth have slowed to a trickle. Fewer than 1,000 homes are taken each month from owners who haven’t kept up with mortgage payments in the Dallas-Fort Worth-Arlington area. But could they be on the verge of going back up? ‘We’re seeing a little bit of a hint, with increasing foreclosure activity,’ said Daren Blomquist, a senior vice president at Attom Data Solutions, a company that closely tracks foreclosures nationwide.”
“Blomquist is concerned about some small indicators he is seeing in North Texas since this past summer. Foreclosures remain historically low, but Attom Data’s monthly data figures show the number of foreclosures has been higher than the same month a year earlier in five of the past six months. It could be a sign that lenders are going back to their old ways and approving risky loans, he said.”
“‘In five of the last six months, we’ve seen a year-over-year increase (in auctions and bank repossessions) and that kind of pattern does indicate to me that there is some loosening of the lending standard,’ he said. ‘In the peak of the Great Recession, in 2009 and 2010 there was some regulation tightening, but it is gradually starting to loosen and we’re starting to see the result of that.’”
“Home values have skyrocketed 33 percent in the Dallas-Fort Worth area just since 2014, and the median home value in Tarrant County is now $249,000. That’s compared to $188,300 three years ago and $150,900 in 2007 during the housing bust.”
“With values steadily rising, banks may be content to hang on to the vacant properties and simply pay the property taxes until they find a buyer willing to pay top price, said J.R. Martinez, president of the Greater Fort Worth Association of Realtors. As an example, Martinez said one of his relatives lives in Haltom City across the street from a home that was acquired by a bank through a reverse mortgage. It has remained vacant for two years.”
“‘The lady died, and the house hasn’t been occupied for two years now,’ he said. ‘The bank foreclosed on it, but still hasn’t put it on the market. Banks don’t just give the houses away. Even at auctions, just because a house is available at auction and someone makes a bid and gets it, that doesn’t mean the bank will accept it.’”
