Credit Crunch Creeps into Multifamily Housing

Submitted by Ronald Tennant with Metrocities Mortgage:

MBA (5/22/2008 ) Murray, Michael
CHICAGO—The credit crunch has not been a major factor in multifamily housing at this point, but it could pose a problem if trends continues, industry analysts said at the recent Mortgage Bankers Association’s Commercial/Multifamily Servicing & Technology Conference.

Analysts said business from Fannie Mae and Freddie Mac “flatlined.” However, Tony Perez, senior vice president at Capmark Services, Horsham, Pa., said the credit crunch has been positive for HUD properties as FHA defaults declined while the commercial mortgage-backed securities (CMBS) market dried up.

Kevin Donahue, senior vice president of the special servicing group at Midland Loan Services Inc./PNC, Overland Park, Kan., said reasons for some maturity defaults included problems with the asset or borrowers underestimating market difficulties and the amount of time it would take to refinance or sell the property.

“It’s a problem in that if the capital markets don’t get back to some equilibrium and whether or not we have the same kind of excess capital that we had—but at least some more than we have today—it’s going to be a challenge for lenders and servicers who will need to know how to deal with it,” Donahue said. “So far, I don’t think anyone has seen a major increase in maturity defaults in their portfolios.”

Bruce Schiff, managing principal at Reznick Group PC, Bethesda, Md., said the equity market is nearly non-existent. Freddie Mac and Fannie Mae left the equity market and low income housing tax credits (LIHTCs) have not been applicable for debt. Schiff said Congress is trying to fix the problem and it could bring Fannie Mae and Freddie Mac “back to the fast track” if legislation will pass the White House.

“I’ve never seen a situation like this with the equity markets,” Schiff said.

Donahue noted that Midland’s portfolio in agency and CMBS shows less than a 1 percent default rate for a LIBOR portfolio.

“We did see some warning signs on the horizon. We have seen watchlist assets increasing…but in our portfolio, multifamily continues to be the most active sector of the special servicing side of the business, probably 65 percent of the 300 or so assets we have in special servicing today are multifamily,” Donahue said. “Those numbers have skewed a little bit.”

“Generally, we see an uptick. I would not say it is a deluge at this point, but it certainly is going up and we expect it to continue because commercial cycles—most real estate cycles—have always lagged general economic turns…so I don’t believe we have seen the bottom yet,” Donahue said.

Donahue noted significant problems in the upper Midwest and rustbelt areas with significant trends in Ohio and Michigan, parts of Indiana and some concerns in Pennsylvania. He said locations with major subprime concerns—Florida, Las Vegas, southern California —have not shown major distress in multifamily.

“We have not seen any real effect from the subprime crisis. In my mind, the bulk of it was really in five major markets,” Donahue said.

Multifamily occupancy trends held up well in most major markets despite some industry analysts saying multifamily would suffer because of the subprime market and single family homes bringing in renters.

Vin McMaster, vice president at Wachovia Multifamily Capital Inc., Charlotte, N.C., said Texas, California, Georgia, Florida and Ohio have the largest property concentration on the watchlist for assets.

For Perez, Colorado and Georgia have the largest concentration of assets on the watchlist. Texas, Ohio, Michigan and Florida represent higher multifamily delinquencies or default rates—not surprising from an economic perspective, Donahue said.

“Texas has always been a challenge,” Donahue said. “There is a lot of older inventory there.”