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Freddie, Fannie, and the Apartment Building Financing Debacle

Fannie Mae and Freddie Mac stepped into the abyss that was the absence of financing for multifamily properties. Uncle Sam filled the GSEs’ coffers so that they could lend to buyers, when banks did not. The size of the abyss cannot be overstated: The firms were responsible for 84% of all multifamily lending last year, up from 34% of the market in 2006, according to the Federal Housing Finance Agency.

Fannie Mae’s delinquency rate, or loans that were 60 days or more past due, stood at 0.62% at the end of September, up from 0.16% a year ago. One troubling sign: one-quarter of the $180 billion of apartment-building loans on Fannie’s books were originated near the top of the market in 2007 and those loans account for nearly half of all its commercial-loan delinquencies. Fannie increased to $1.2 billion its reserves for losses on multifamily loans at the end of September, up from $104 million at the end of 2008.

Freddie and Fannie’s teamwork is not bearing good fruit: together, they lent $9 billion to finance the buyout of apartment operator Archstone-Smith by Lehman Brothers Holdings Inc. and Tishman Speyer Properties. The underlying strategy was to sell off Archstone’s assets individually. The sum of its parts would be greater than the whole. While that strategy might be sound in this market, the arithmetic behind it was not. Real estate values plummeted across the board.

In addition, Freddie Mac and Fannie Mae teamed up to purchase $1.5 billion in commercial mortgage-backed securities backed by the sprawling Peter Cooper Village-Stuyvesant Town apartment complex in Manhattan. Tishman Speyer led a partnership to pay a a record $5.4 billion in 2006. The property is probably worth about a third of that, or $1.8 billion.

Since Freddie and Fannie are beholden to Uncle Sam, expect our elected representatives to work out a deal for Stuyvesant Town, where principal is forgiven, Freddie and Fannie become majority stakeholders, and the apartment complex retains all the trappings of rent regulation.

Unless the government requires larger banks to mark their toxic assets to market, Freddie and Fannie will continue spending good money after bad. 97% of Freddie’s loans are still worth more than the value of the underlying properties.Multifamily properties will be unable to retain values because of rising vacancy rates, and falling rent prices. Joblessness will increase for the next six to eight quarters. We need serious job growth outside the public sector, and medieval marking to market in order to resuscitate our economy, and revive the CRE market.

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