Fannie’s, Freddie’s Woes Don’t Extend to M-F Side

New amendments to the GSEs, such as the percentage dividend payments to the Treasury and reductions to their investment portfolios, will still leave the multi-family market unscathed.

Lawrence Stephenson and Paul Cairns

By Scott Baltic, Contributing Editor

Given the attention put on new changes to Fannie Mae’s and Freddie Mac’s situation, Commercial Property Executive spoke with two Fannie/Freddie experts at NorthMarq Capital, Bloomington, Minn., to get some insights focusing on the two GSEs’ specific relevance to commercial real estate.

On Friday, the Treasury Department announced changes to the Preferred Stock Purchase Agreements between itself and the Federal Housing Finance Agency, which has been the conservator of Fannie Mae and Freddie Mac since September 2008. The modifications will accelerate the wind-down of the two entities.

One of the key changes ends the 10 percent dividend payments to the Treasury Department on its preferred stock investments in the two GSEs and replaces those with a quarterly sweep of each entity’s entire profit. The change will end the merry-go-round under which, in unprofitable quarters, Treasury would have to advance funds to Fannie and/or Freddie so they could pay dividends — back to Treasury.

The other major change requires accelerated reductions of Fannie Mae and Freddie Mac’s investment portfolios, at an annual rate of 15 percent, versus the previous 10 percent. This will result in the GSEs’ investment portfolios being reduced to the $250 billion target set in earlier agreements four years earlier than previously scheduled.

All of this has, naturally, garnered substantial media attention. What’s less acknowledged, said Paul Cairns, senior vice president at NorthMarq Capital, is that the multi-family arms at both GSEs have been steadily profitable, even through the credit crisis.

“That’s been the sweet spot for those entities,” Cairns said.

A key reason, said Lawrence Stephenson, senior executive vice president at NorthMarq, is that, in contrast to some notoriously shoddy underwriting practices for single-family mortgages, multifamily loans are underwritten in detail by both Freddie (in house) and Fannie (through its Delegated Underwriting and Servicing partners).

“Every loan is picked apart,” said Stephenson.

Fannie and Freddie are now the two largest multi-family lenders in the world, Stephenson noted. Between the two, they’re probably involved in roughly 50 percent of all multi-family lending in the United States.

The deals, said Cairns, tend to be mostly transactions of $7 million to $10 million and up, involving properties that are “middle of the road” in terms of quality.

As to what Fannie and Freddie will look like after the conservatorship has run its course, Cairns said that both GSEs have been told by regulators to look into spinoff options and that plans are due by the end of this year.

“There will be some kind of new Fannie and Freddie in the future,” Cairns said, but beyond that, it’s hard to say, though he guesses that there will be a partial level of government support, rather than full support or none at all.

Along the way, Fannie and Freddie need to educate Congress regarding the difference between the single-family and multi-family operations. Maintaining the multi-family side is crucial for the private multi-family sector and to maintain a national commitment to affordable rental housing, Stephenson added.