Commercial real estate circles — particularly those with stakes in multifamily markets — have been abuzz since Sunday, when U.S. Treasury Secretary Henry Paulson announced that the government was taking over government-sponsored and beleaguered mortgage intermediaries Fannie Mae and Freddie Mac. Under a new plan, the Federal Housing Finance Agency is now tasked with overseeing both entities.
Overall, the consensus is positive, but it is early yet and many questions remain over both the short- and long-term effects on the apartment industry as well as the takeover’s ability to ultimately help tighten CMBS spreads.
Doug Bibby, president of the National Multi Housing Council, issued a formal statement to members of the apartment community on Monday. “Fannie Mae and Freddie Mac have played a critically important role in the apartment industry, and we do not expect that to change with the recent actions taken by the Treasury Department,” said Bibby. “The impact of the Treasury Department plan on the apartment sector remains to be seen as the details are worked out, but we are optimistic that there will be little to no disruption in the companies’ multifamily operations.”
Most observers expect the Treasury action to prop up investor confidence, which could help jumpstart the mortgage-backed securities and commercial mortgage-backed securities markets in the days ahead. “It will tighten spreads, bring down rates, get homes bought and sold and just get the economy going again,” says Kieran Quinn, chairman and CEO of Column Financial Inc. in Atlanta and chairman of the Mortgage Bankers Association in Washington, D.C. “We just want the business to come back. It’s just crazy that commercial defaults are low and new starts are in check, and yet our spreads are still through the roof.”
Randy Mundt, president and chief investment officer of Principal Real Estate Investors, agrees. “To the degree that those broader efforts to improve capital markets stability are successful, there should be a favorable impact on securitized commercial real estate debt markets in the form of a gradual reduction in spreads.”
Guy Johnson, CEO of Johnson Capital, a Los Angeles mortgage banker, sees the takeover as a positive development for the credit markets, one that will help bring down mortgage interest rates. “Ultimately, it should mean that it should have a positive impact on interest rates, not only for homeowners but the important multihousing sector,” he predicts. “Rates will be less than they otherwise would be. They will not necessarily go down since they are tied to a global, dynamic market.”
As to the long-term view, others are a bit more circumspect. “The obvious effect of the takeover for the commercial real estate markets is positive, but there is still a lot of pain to be felt by the banks and other financial institutions over the coming months,” says Tim Mazzetti, executive vice president with Cohen Financial in Chicago. “The economy may still get worse before it gets better.”
Mazzetti believes there may be “unintended” consequences to the Fed’s actions this weekend. “A number of smaller banks hold Freddie and Fannie preferred stock on their balance sheets that is now — as I understand it — worthless, so more write-downs are probably forthcoming and this may accelerate the number of banks taken over by the Fed.”
He also believes that apartment lending could get more expensive in the short term. ”We have already heard of Fannie and Freddie raising their rates with stricter underwriting criteria and it wouldn’t surprise me that the Feds will tighten it even more so in the coming months. Longer-term, you have to imagine that Fannie and Freddie will slow down their multifamily lending volumes, as it appears one of the key goals for the Feds is to reduce the size of the GSEs portfolios,” says Mazzetti.
Joshua Kamin, a partner with King & Spalding’s real estate capital markets group in Atlanta, views the development as one that will help instill confidence in the credit markets but is cautious about how Fannie Mae and Freddie Mac’s focus might change. “Will their focus and intention be altered in some way so that the focus is more on the single-family residential market as opposed to some of the larger commercial transactions? That’s just a wait and see.”
Longer term, Bill Hughes, senior vice president and managing director at Marcus & Millichap Capital Corporation, says there are more questions than answers. “There is still a question as to what this guarantee means,” he says. “Are they going to guarantee the securities through maturity or only through 2009? How long are we going to have an economy that’s sputtering along? How much is Congress going to do and how much will the taxpayers have to absorb?”
On Monday, Hughes emailed Marcus & Millichap’s brokers with a bifurcated message. “I said today was good news but I’m not sure what’s going to happen tomorrow and I can’t guarantee you that spreads are going to narrow. This is chapter one, and there are probably a half-dozen chapters going to be written on this material.”
As a prologue to this evolving story, both Fannie and Freddie are already under new management. Herb Allison, former chairman of Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), takes over at Fannie, while David Moffett, vice chairman and chief financial officer of U.S. Bancorp, takes the reins at Freddie.
In interviews this week, Paulson said he did not know how much the government’s plan would ultimately cost taxpayers, but that wasn’t the point. He and other regulators hope that the move gives much-needed assurance to the mortgage markets, causing a drop in mortgage interest rates. That movement alone might spur a revival in the downtrodden residential mortgage markets and lift the overall U.S. economy from its doldrums.
“This is an important step that will be helpful because we are stabilizing these companies,” said Paulson. “A good viable mortgage market is an important ingredient in the housing recovery.”