LAS VEGAS — What’s the biggest worry among multifamily lenders in 2010 and 2011? The usual suspects, jobs and interest rates, rank high on the list. But for Kenneth Bacon, executive vice president of Fannie Mae, the sharp drop in real estate valuations from peak levels just a few short years ago is most troubling.

Although determining value remains a difficult task because there have been relatively few transactions, the Moodys/REAL Commercial Property Price Index numbers show a 40% drop for multifamily properties from the market peak to the third quarter of 2009.

“Starting in 2010, we are going to see a lot of loans mature where the properties are well located. And given the economic climate, the occupancy level is acceptable. But the problem is the value is gone,” says Bacon.

Some owners whose equity has essentially been wiped out could begin to neglect properties, explains Bacon. “They don’t fix the roof. They start getting sloppy about who they let in. You end up with an asset in very bad shape, which can often create a political problem. Nowadays, we (Fannie Mae) get government funding. Everybody expects us not only to be the investor, but the manager of apartments in some sense.”

Ultimately, a raft of properties could be in need of being recapitalized, says Bacon, but it’s not clear where that capital is going to come from. “Who is going to be the white knight?”

Bacon’s insights came Tuesday during a lively panel discussion titled “And Now What?” at the annual Mortgage Bankers Association convention for commercial real estate and multifamily financing. The show, “CREF 10”, drew 2,000 attendees, up from about 1,700 the year before, according to an MBA spokesperson. The Mandalay Bay Convention Center is the site of the four-day conference, which ends Thursday.

Twin billing

David Twardock, president of Prudential Mortgage Capital Co. based in Newark, N.J. says he has two major concerns regarding the health of the apartment industry. One is that the job market won’t improve significantly to help fill up apartments and office buildings that are currently plagued by high vacancies. The other concern is the threat of rising interest rates.

“For almost all of my 28 years in this business, interest rates have been coming down. I don’t think anybody is prepared for that kind of [rising interest rate] environment,” says Twardock, whose company provided $7.6 billion in financing to the commercial and multifamily real estate industry in 2008.

“If I had to pick one [scenario], I’d rather have interest rates go up and jobs go up because that means rents are going to go up eventually and I can get out of this,” says Twardock. “But I straddle those two worries.”

Michael May, senior vice president of multifamily sourcing for Freddie Mac, is on alert for a potential change in borrower psychology. “Right now most people are looking to the future and seeing pretty positive real estate fundamentals. There is absolutely no supply coming on the market. The demographic trends are positive. There is a positive story, you just need to get to the other side,” explains May.

At the moment, some apartment owners running into major cash flow problems are reluctant to give back properties to the lender. In their view, the market is bottoming out. They’re willing to weather the storm and wait for more favorable pricing and fundamentals to return, says May.

If borrowers wake up one day and find themselves in a stagflation situation, the psychology could change in a hurry, cautions May. “If that happens I think we’re going to wake up overnight and have a serious asset management problem, and that worries me a lot.”

Carol Galante, deputy assistant secretary for multifamily housing with the U.S. Department of Housing and Urban Development, says what concerns her is the wave of borrower workouts that will inevitably occur over the next two years.

“I am doubly concerned that as a governmental entity, I don’t have all the flexibility and the tools that I’d like to have to work through this period,” says Galante. “On the other hand, I think it’s an historic opportunity for picking up assets, if we can figure out a way to unfreeze them and get them recapitalized. It’s an historic opportunity to recapitalize properties at historically low values.”