Foong on Finance: Relative Calm in the Midst of Turmoil

By Keat Foong

It was certainly hair-raising to
watch the stock market in the past week. By Friday, the Dow Jones
industrial average had fallen from 9,955.50 on Monday to 8,451.19
points—a drop that was reportedly even worse percentage-wise than the
17 percent plunge in the week ending July 22, 1933.

Part of
the current panic has to do with the suspended financing markets—which
one would think at its worse can lead to economic collapse. In this
regard, the Treasury’s announcement this week of the plan to inject
$250 billion into banks, guarantee inter-bank lending and backstop the
commercial paper market, hopefully will help unfreeze the credit
markets. Already, there are reports of the credit markets easing. We’ll
see.

Through this swirl of serious distress in capital
markets, it is good to be able to say that multifamily financing—that
is, on the permanent debt side—has not been adversely affected to the
same, severe, extent, for now.

The multifamily market is
backstopped by the now government-owned Fannie Mae and Freddie Mac
financing. And sources provide the assurance that the government wants
“full speed ahead” with multifamily lending through these two agencies.
Permanent, acquisition and rehab financing that can be obtained from
Fannie Mae and Freddie Mac programs are still relatively
available—though much more competitive now, and projected income is no
longer acceptable in underwriting. And the all-in interest costs remain
surprisingly attractive and historically low—being still in the low- to
mid-6 percent range.

Construction financing, however, is
another story. The banks have pulled back and it is now very difficult
to obtain such interim financing from banks. However, take notice that
FHA-insured financing is doing good business in this environment. And
if developers don’t mind the arguably longer time frames and greater
amounts of paperwork of HUD processing, they may want to explore
FHA-insured financing for new construction or substantial rehab.