In preparation for relaunching my newsletter, mfLoan Update, I was reviewing the number of old editions of the newsletter. The one edition that struck me most was the “Special Edition” from 9/18/01, written a few days after the terrible tragedy of 9/11/01. At that point I had been writing this monthly newsletter for just over a year on a monthly schedule and as with everyone else this tragedy changed my world view.
In the September 1 edition I noted that “The Fed continued its easing and consumer confidence dropping interest rates are down significantly this month. The 10-year treasury is near its low for the year. Most economic news is showing that we are close to a technical recession and the general feeling of most professionals is that we are in a recession.” At that point the 10-year treasury was at 4.82% and all in rates for a fully leveraged agency loan were about 6.75%.
While this tragedy upset the multifamily lending market it did not affect rates in any significant way. Treasury rates dropped about 20 Bps, but spreads maintained and after a few months things got back to normal, or at least what normal was in those days. One reason for this was that Freddie and Fannie were there and, except for a couple of days right after 9/11, they kept lending and quoting loans; maintaining stability in the marketplace. For those agency lenders who remember this it is especially interesting since most Freddie executives and senior lending partners were stuck in California at a Freddie event when every airline was grounded. In comparison, CMBS and much of the institutional market froze up right after 9/11. Banks and Insurance companies also pulled back on quoting and closing loans. It took a few months for these lenders to get back on track.
Today’s lending market is not the same as in 2001 and the agency lenders have changed. They fund their loans in a different manor, are lending on a wider range of properties and are a much more central part of the market. I do however believe that even in their current form they would still support the market in crisis which from my perspective is a good thing.
As we begin to hear more about the next steps for Freddie and Fannie and re-privatizing them, we need to remember their true purpose and how much the system relies on them. They were created to provide liquidity and stabilize the housing system (mainly on the single-family side, but eventually on the multifamily side). This they have done with gold stars. While there are economic risks with Federal backstopping their loans and I have some question of their impact on the current housing crisis (we will discuss this more another time) we cannot forget that they have don’t their primary job and done it well.
In each of the last 5 years the agency lenders have represented more than 50% of multifamily loan volume and currently hold about 50% of multifamily debt. As they have expanded their small loan programs their importance is not just to large well capitalized owners, but to mom and pop owners and entrepreneurs who own so much of the smaller multifamily in the country. Whatever the change is to these lenders will affect both main street and wall street.
Given the importance to the multifamily market whatever change occurs will affect the multifamily marketplace immediately as well as when the next crisis occurs. As these lending programs change it will affect not only loan pricing, but property values, how loans are originated and who makes those loans.
I am skeptical that our current political system can deal with the re-privatizing of these entities right now, but eventually this will happen. I can only hope that this is done with as much thought on how this will disrupt the multifamily marketplace as there is about how this will affect the taxpayer in the future.
If you would like to see some of the old mfLoan Update newsletters including the 9/18/01 special edition, please take a look at our mfLoan Update archive. Also, please sign up the newsletter you receive new editions when they become available.