Category Archives: Banking - Page 2

Investors Share Strategies for Finding Equity

By Linsey

Cultivating strong relationships and looking at properties with an investor’s critical eye are key to attracting equity.

It’s always difficult getting that first equity deal closed with a new investor. The process takes relationship building and a tremendous amount of trust. And your task only becomes more difficult if your deal is located off the beaten path.

Yet, the relationships you’ve already cultivated at the local level can serve as one of a project’s best selling points—even if other aspects of the asset, such as its location, are less than stellar.

Having a tight connection with local financiers is a big plus. And having a successful history with that market’s leading brokers reflects very well on a sponsor’s ability to close a deal.

“I love the fact that there’s a relationship with the broker,” said David Valger, founder of New York–based DVO Real Estate, at the AFT Live conference April 9 in Las Vegas. “I can probably get past [a] suburban location.”

Valger voiced his opinions at a panel session on which several mock transactions were acted out between fictional sponsors and investors. Despite the fact that the Class B, suburban property in question was in a secondary market, the strong relationship between the sponsor and the broker earned a hypothetical thumbs-up.

“Having certainty of close for a broker is worth a lot,” said Eric Silverman, founder and managing director of Boston-based investor Eastham Capital. “Knowing people, and having worked with them before—seeing that they come to the closing table, and the deal closes, and the money funds, and they get paid—that means a lot to these ­brokers.”

Diamond in the Rough

Such seasoned broker–buyer relationships are especially important in uncovering hidden gems.

“I think [it’s an] art form to identify a market that has some growth driver to it,” said Mitch Siegler, managing director and co-founder of Pathfinder Partners, a real estate investment firm based in San Diego.

For example, areas where there’s growth potential stemming from a new employer, large hospital, or university can shine a favorable light on a tertiary market.

“[Some place] that’s creating spin-off companies and jobs, or something else that’s causing it to have a tailwind—that’s the only way we’d go into a true tertiary market,” Siegler said.

And yet small markets without their own growth engines can actually offer good yield opportunities, too. Eastham Capital has found success in under-the-radar Midwestern markets such as New Albany, Ind., outside of the Louisville, Ky., submarket—a smaller suburb featuring high cap rates but proximity to a job center.

Smaller cities such as Boise, Idaho, and Albuquerque, N.M., can also be worthwhile for investors, especially since they have solid fundamentals but are often overlooked by larger investors.

“We like markets like that because they’re not on everyone’s radar,” Siegler said.

A Thorough Vetting

Some of the typical due diligence items on an investor’s checklist include property management, access to financing, and title issues.

Whether or not a property is professionally managed can speak volumes about its relative appeal.

“If the property isn’t professionally managed, there might be an immediate value-add opportunity,” Siegler said.

On the financing end, projects under $3 million aren’t very attractive to most equity investors—it’s inefficient to allocate capital in such a piecemeal fashion. And smaller properties can have a more difficult time finding debt financing, which can turn off potential investors. Yet if a property is eligible for an agency loan, it’s a big plus.

“If you can get FHA financing, it’s a much more compelling opportunity,” Valger said.

Property reports ranging from environmental assessments to title histories can present another investment hurdle if the costs to remedy the issues outweigh the benefits.

“No one wants to buy a property that has a bad title,” Silverman said.

Looking at a project critically with an investor’s eye can reveal the pluses—and minuses—that translate to either a deal or a missed opportunity.

FHFA: Fannie, Freddie M-F Businesses Not Independently Viable

By Scott Baltic, Contributing Editor –

Without their government guarantees, “the multi-family businesses of Fannie Mae and Freddie Mac have little inherent value,” according to the Federal Housing Finance Agency, which on Friday released two reports, one from each of the government-sponsored enterprises. The reports also conclude that “the sale of these businesses would return little or no value to the U.S. Treasury and to taxpayers.”

The reports, which had been completed in December but not released until now, had been written at the direction of FHFA, in connection with its goal of contracting Fannie Mae and Freddie Mac’s market footprint and potentially generating value for taxpayers. The two GSEs had been directed to analyze the viability of their multi-family businesses in the absence of a government guarantee and review the likelihood of these models operating viably on a stand-alone basis.

The two reports are “Analysis of the Viability of Fannie Mae’s Multifamily Business Operating without a Government Guarantee” and “Report to the Federal Housing Finance Agency: Housing Finance Reform in the Multifamily Mortgage Market.

The reports “represent the first objective, rigorous, quantification of the effect of the GSEs on the multi-family market,” David Brickman, senior vice president and head of multi-family for Freddie Mac, said in a release.

“The high-level findings,” Brickman continued, “are that we could provide financing to the multi-family market without a government guarantee, but the markets would feel the cost … apartment owners, operators and low-income renters would be the hardest hit.

“We also concluded that any new sources of debt capital would not fill the entire gap left by the GSEs, and the market would experience more frequent and severe boom and bust cycles. In addition, we provided an analysis of a scenario where Freddie Mac could viably operate with a limited government guarantee,” Brickman said.

“There’s nothing surprising in these reports … This is pretty much what everyone expected them to say,” Willy Walker, chairman, president and CEO of Walker & Dunlop, Bethesda, Md., told Commercial Property Executive. Walker & Dunlop is the nation’s largest Fannie Mae DUS lender and one of the largest Freddie Mac servicers.

If Fannie and Freddie were spun off and had to lend without government guarantees, Walker said, they would lend just like private lenders. For example, they would avoid affordable housing and would operate predominantly in larger markets.

Fannie and Freddie would be worth something substantial on the market with their guarantees — but not without them, Walker concluded. “The reports basically reinforce why the federal government is in these businesses.”

Fannie Mae Marks 25 Years of Multifamily Market Financing Through DUS(r) Program

Brought to us by

Washington, D.C.—This month Fannie Mae marks the 25th anniversary of its Delegated Underwriting and Servicing (DUS®) program, a unique risk-sharing model that provides financing to the multifamily housing market. Fannie Mae relies primarily on the DUS network of 24 financial institutions and independent mortgage lenders to execute its multifamily business.  In 2012, 98 percent of the multifamily debt Fannie Mae acquired was delivered through the DUS platform. Since the program was formally announced to participating lenders on April 4, 1988, Fannie Mae and its lender partners have provided more than $270 billion in liquidity to the mortgage market under the DUS program to finance more than 5.8 million units of multifamily housing.

DUS lenders must abide by rigorous credit and underwriting criteria and submit to Fannie Mae’s ongoing credit review and monitoring.  They can underwrite, close, and deliver loans on multifamily properties to Fannie Mae and typically retain one-third of the risk on every loan.

Borrowers also value the liquidity and flexible loan structuring that is available through the DUS program and its lender network.

Fannie Mae’s DUS lenders include:

  • Alliant Capital, LLC
  • AmeriSphere Multifamily, LLC
  • Arbor Commercial Funding, LLC
  • Beech Street Capital, LLC
  • Berkadia Commercial Mortgage, LLC
  • Berkeley Point Capital LLC
  • CBRE Multifamily Capital, Inc.
  • Centerline Capital Group
  • Citibank, N.A.
  • Dougherty Mortgage LLC
  • Grandbridge Real Estate Capital, LLC
  • Greystone Servicing Corporation, Inc.
  • HomeStreet Capital Corporation
  • HSBC Bank USA, N.A.
  • JPMorgan Chase & Co.
  • KeyCorp Real Estate Capital Markets, Inc.
  • M&T Realty Capital Corporation
  • Oak Grove Capital
  • Pillar Multifamily, LLC
  • PNC Real Estate
  • Prudential Mortgage Capital Company
  • Red Mortgage Capital, LLC
  • Walker & Dunlop, LLC
  • Wells Fargo Multifamily Capital

Top and Bottom States for New Freddie Mac Financing

By Lindsay Machak -

Freddie Mac’s record year of $28.8 billion in new multifamily loans was spread somewhat equally across the country.

Big states took the largest share, including Texas which came to the top of the list with 13.9 percent of new loan transactions. Hot markets like Maryland also scored a big piece of the action, with loan volumes over $2.1 billion for the year.

Meanwhile, some states, such as Montana and Vermont, didn’t see much if any Freddie financing last year.

Here’s a breakdown of Freddie’s geographic concentration last year:

Freddie Mac’s Top New Business Volume in 2012

1. Texas 13.9 percent

2. California 13.2 percent

3. Maryland 9.1 percent

4. Florida 8.9 percent

5. New York 7.4 percent

6. Virginia 4.4 percent

8. Colorado 4.0 percent

9. Washington 3.9 percent

10. Georgia 3.8 percent

Freddie Mac’s Bottom New Business Volume in 2012

1. Maine 0 percent

2. Vermont 0 percent

3. New Hampshire 0 percent

4. South Dakota 0 percent

5. Montana 0 percent

6. Wyoming 0 percent

7. Rhode Island 0.1 percent

8. Idaho 0.1 percent

9. Iowa, Arkansas, West Virginia 0.2 percent

Freddie Mac’s Multifamily Unit Posts Banner Year

By Erika Morphy | Washington, DC for

McLEAN, VA-Fannie Mae and Freddie Mac may still be in government conservatorship, but they are not going under the sequester axe. That is because they are private corporations chartered by Congress—a fine distinction given their support by the government, but an important one as the sequester gets underway.

The GSEs, though, are posting strong performance, especially their multifamily units, which presumably would cushion any cuts if they were to be subject to them.

Freddie Mac just released its year-end figures for its multifamily business segment, producing record earnings of $2.1 billion, up 63% from prior year. It posted record annual loan funding of $28.8 billion, up 42% from 2011. Credit losses were $34 million, less than 3 basis points of the total multifamily mortgage portfolio.

For the fourth quarter of 2012, Freddie Mac’s multifamily segment had earnings of $494 million, compared to $710 million for the third quarter of 2012. The decrease was primarily driven by lower gains on mortgage loans recorded at fair value and lower gains on sales of mortgage loans in the fourth quarter of 2012, Freddie Mac said.

Freddie Mac recently issued its third multifamily-backed Structured Pass-Through Certificates–aka its K-Certificates–for 2013. This offering, at $900 million, was slightly smaller than the usual volume; however it was based exclusively on five-year paper. Such loans are not as popular now, with the low interest rates, and it takes longer to originate.

Recourse, Don’t Do It

By Jim Conway is principal and the chief credit officer of A10 Capital  for

BOISE, ID-The owner of a CRE property is exposed to multiple risks of both an operational nature and of a market/financial nature. Operational risks include the risk of loss caused by fire and other types of casualty or damage to the property caused by weather and other events, personal injury liability or risks caused by injury or death taking place on the property, or from environmental risk related to past, current, and future uses of the property. Fortunately, most of these risks may be mitigated by purchasing and maintaining appropriate insurance coverage.

Market and financial risks include the potential economic losses that may be incurred when challenges arise that prevent the CRE owner from fully implementing its business plan. This may result from tenant defaults, increased competition in the marketplace, dramatic reductions in tenant demand for space or related to the future availability of CRE mortgage capital and fluctuating interest rates. Interest rates are now at un-sustainably low levels, with nowhere left to go but up. When interest rates do inevitably increase, many borrower and sponsors will confront significant refinance risk.

Bridge Loans are often used by a borrower/sponsor to finance a “turnaround” opportunity in which a property is being acquired following foreclosure by a commercial bank or a CMBS special servicer. These loans may either be recourse or non-recourse to the borrower/sponsor.

Non-Recourse versus Recourse Loans:

The lender making a non-recourse loan, perhaps for some economic consideration, contractually agrees to limit the recovery of its investment to the economic value that might be realized through a sale of the CRE property following the lender obtaining title, thereby insuring any loss incurred by the borrower/sponsor is limited to its investment in the CRE property.

In the case of a non-recourse bridge loan if the borrower/sponsor is unable to re-finance the loan at maturity, the Lender is likely to foreclose upon the loan and the borrower/sponsor will lose ownership of the CRE property. While the equity investment made by the borrower/sponsor will be completely lost, the loss will be finite and is quantifiable. By obtaining a non-recourse bridge loan, the borrower/sponsor in essence bought an insurance policy limiting its potential loss.

By contrast, in a recourse bridge loan, the lender obtains a security interest in the commercial real estate property and obtains a pledge of 100% of the personal assets of the sponsor. Depending upon state law the lender can pursue multiple avenues to collect from the sponsor/guarantor including getting a judgment against the individual sponsor/guarantor with the most assets.

In the case of a recourse loan, it is the lender that obtained the insurance policy and the sponsor/guarantor who insured the lender. The bottom line is: Recourse—Don’t do it.

Economy Watch: Unemployment Claims Bounce Back Upward; CEOs, JP Morgan Fiscal-Cliff Wary

By Dees Stribling, Contributing Editor – Commercial Property Executive Magazine

Proving itself to be the volatile indicator that it’s frequently asserted to be, the number of initial unemployment claims spiked upward for the week ending October 13 to 388,000, according to the U.S. Department of Labor on Thursday. The previous week’s claims were also revised upward a bit to 342,000. The four-week moving average, which isn’t so volatile, was up only 750 to 365,500.

Also on Thursday, the Conference Board reported that its Leading Economic Index for the U.S. increased 0.6 percent in September to 95.9 (2004 = 100). That followed a 0.4 percent decline in August, and a 0.4 percent increase in July, so “bouncing around” might be a fair characterization of the index in mid-2012.

“The U.S. LEI increased in September, more than offsetting the decline in August,” Ataman Ozyildirim, economist at the Conference Board, said in a statement. “The LEI has been signaling an economy that is fluctuating around a slow-growth trend. The six-month growth rate has slowed substantially, but still remains in growth territory due to positive contributions from the housing and financial components.”

CEOs Worry About Fiscal Cliff

No U.S. politician is paying much attention to the fiscal cliff at the moment, considering that the election is dead ahead, so the nation’s moneymen decided to nag the politicos about the situation on Thursday. The Financial Services Forum, which represents the C-suites of the largest banks and other financial service firms in the country, sent an open letter to President Obama and Congress.

The gist of the letter was a warning that the U.S. would see another downgrade to its credit rating if no deal was reached to avert the cliff. Also, it warned of another recession. “The consequences for inaction — for stability in global financial markets — for economic growth, for millions of Americans still without work, and for the financial circumstances of American businesses and households — would be very grave,” the letter stated.

The money panjandrums also asserted that merely avoiding the cliff isn’t enough. They call called for longer-term fixes to the nation’s fiscal problems. Their letter did not, however, articulate any specific positions on exactly what kind of action the government should take, either in the short- or longer term.

JP Morgan Says Watch for That Cliff

JP Morgan, for its part, said in a research note that it’s now estimating that the cliff–if unresolved–will pare 1 percent off GDP growth in 2013. That’s up from a previous estimate of a 0.5 percent haircut for the nation’s GDP. The banking giant is also predicting GDP growth in the first quarter of 2013 at 1 percent, and 1.5 percent during the second quarter.

Wall Street had a down day on Thursday, with the Nasdaq taking more of a beating perhaps because of irregularities in reporting Google’s underwhelming results. The Dow Jones Industrial Average lost 8.06 points, or only 0.06 percent, while the S&P 500 lost 0.24 percent. The Nasdaq, however, was down a full 1.01 percent.

Neighbors wait, worry as banks take longer to sell foreclosed homes

By Mary Shanklin, Orlando Sentinel – Florida Trend Magazine

A neighborhood’s chances of recovering quickly from the hung-over U.S. housing market depend not only on how many foreclosed homes it has but also, it seems, on which banks own the properties.

Bank of America, for instance, takes almost two months longer on average to sell a foreclosed property than EverBank Financial does, according to new, nationwide data from the research company RealtyTrac Inc. And BofA, the lending giant that inherited many of its troubled mortgages when it bought Countrywide Financial in 2008, has been taking longer this year to sell its foreclosure properties than it took last year.

A lot of things can happen when long-abandoned houses sit on the market for additional months. By slowly releasing their foreclosed properties, for instance, some lenders have benefited from rising home prices this year; in the core Orlando market, prices are up 16 percent since the start of 2012.

But those long-held properties also rack up more unpaid association fees, overdue property taxes, repair costs, neighborhood complaints and even code-enforcement fines as the months wear on.

At Cranes Roost Villas in Altamonte Springs, the first thing residents and visitors see as they enter the gated community is a leaky corner unit draped in blue tarp so long that the plastic sheeting has started to disintegrate.

Today’s Business: Check out the latest pictures from the financial world

“Bank of America put a bright-blue tarp on top of roof rather than repair it,” said longtime resident Richard Campanaro. “Half of it has blown off. It would make a wonderful haunted house if you wanted to do something for Halloween. It’s terrible — I wouldn’t even want to enter the property.”

Last year, it took Bank of America an average of 5.3 months to sell a foreclosure, according to RealtyTrac. So far this year, it has averaged 6.7 months. Deutsche Bank, Wells Fargo & Co., Ocwen Financial andCitigroup have also fallen further behind in selling their foreclosed properties. Through September, all of them were taking at least 20 percent longer than they took in 2011, based on RealtyTrac’s nationwide data.

Smaller banks appear to be more nimble when dealing with foreclosures, perhaps because they aren’t faced with nearly the same volume of properties, said Daren Blomquist, RealtyTrac vice president. And mortgage servicers with portfolios of higher-end properties are better able to sell those homes than are companies saddled with less-desirable houses.

But the longer a bank-owned house sits idle during the foreclosure process, the deeper it falls into disrepair.

“Banks are not typically too willing to repair these homes, particularly if there are property flippers ready, willing and able to buy the more scratch-and-dent variety of homes and fix them up,” Blomquist said. According to RealtyTrac, the number of flippers is up 25 percent nationally and 34 percent in the Orlando area compared with a year ago.

Two nonprofit housing organizations recently filed complaints with the U.S. Department of Housing and Urban Development, accusing Bank of America of failing to maintain foreclosed houses in 10 cities’ minority communities, including Orlando’s. The groups included photos of houses with unlocked doors, mold, interior walls spray-painted with graffiti, and piles of trash heaped outside.

The Charlotte, N.C.-based lending giant denied any wrongdoing and said it stands behind its property-maintenance-and-marketing practices. “Bank of America is committed to stabilizing and revitalizing communities that have been impacted by the economic downturn, foreclosures and property abandonment,” spokeswoman Jumana Bauwens said.

Orlando Code Enforcement Officer Mike Rhodes said he sees repeated problems in low-income areas and elsewhere with houses owned by various lenders. A review of code violations within the city found that Wells Fargo had the greatest number of code infractions among the nation’s top five lenders.

A year ago, for instance, Orlando cited Wells Fargo for failing to secure a swimming pool at a foreclosed house in downtown Orlando. At the same house last month, Orlando cited Wells Fargo for overgrown landscaping and debris in the backyard. And just two weeks ago, Wells Fargo got a notice for broken front windows and black water in the pool.

Repeated safety violations at the same bank-owned houses have become such a recurrent theme for local governments that some of them, such as the city of Tampa, have considered establishing foreclosure registries, which require lenders pay $125 to register a property within 10 days of filing a foreclosure notice.

In registering a property, banks have to provide contact information for a property manager in case the house falls into disrepair and the local government — or the neighborhood’s community association — wants some action taken.

Rhodes said there has been some discussion about creating a registry in Orlando, but getting the properties “signed up” does not ensure the houses will be maintained. He said his staff already knows whom to call at most of the mortgage companies with foreclosures in the city, so he questions whether such a registration is necessary.

“You call a company in Texas that manages the assets of Wells Fargo, and they contact someone here,” Rhodes said. Calls, though, don’t always resolve the problems.

“We’ve got a situation in Parramore, the property is owned by Wells Fargo,” Rhodes said. “There are squatters, drugs being dealt and you name it.”

A spokeswoman for Wells Fargo said the company inspects foreclosures monthly, registers foreclosures as required, maintains abandoned houses and secures them.

“We occasionally receive code violations or concerns regarding the condition and maintenance of homes in our servicing portfolio that are not foreclosed,” the bank said in a written statement. “If the property in our servicing portfolio is delinquent and vacant, but has not yet gone to foreclosure sale, we will maintain and secure it.”

The time JP Morgan Chase takes to sell its foreclosed properties has held steady from last year to this year. Lisa Shepherd, vice president of Chase’s REO and Preservation unit, said the company has not changed its sales strategies in the past year but has been able to move more properties as it winnows its inventory.

“When there is less distress inventory in the market, we find there are more interested buyers,” Shepherd said. She added that Chase works with local real-estate agents and makes necessary repairs, taking into consideration the neighborhood overall.

Prospects for banks generally to work through their foreclosure inventory in Florida do not look promising. RealtyTrac projects that foreclosure filings in the state will continue to increase for the next six to 12 months, and that will likely increase the average time to sell for many of these lenders during the next year.

“However, because buyers and investors finally appear to be flocking to the market, pulled by low prices and interest rates, I don’t expect the influx in bank-owned inventory to cause a major dip in average prices,” said Blomquist, the RealtyTrac vice president.

Back in Altamonte Springs, Campanaro said it’s sad that he has grown accustomed to the shredded blue tarp that creates an eyesore at the entrance to his neighborhood.

What’s even sadder, he said, is what that does to the property values for residents trying to rebuild some equity in their homes. for 407-420-5538

Copyright © 2012, Orlando Sentinel

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

By Scott Baltic, Contributing Editor, Commercial Property Executive Magazine

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.

David Brickman Takes Over as Head of Multifamily at Freddie Mac

By Keat Foong, Executive Editor, Multi-Family News

Washington, D.C.—David Brickman was named senior vice president, multifamily, at Freddie Mac in June, succeeding Michael May. Brickman’s responsibilities include overseeing customer relations, product development, marketing, sales, loan purchase, asset management, capital markets and securitization for the company’s multifamily business.

Brickman, who has been at Freddie Mac since 1999, holds a Ph.D. in economics and real estate from the Massachusetts Institute of Technology and a master’s degree in public policy from Harvard University. Keat Foong, executive editor, MHN, interviews Brickman, who lends his thoughts on a number of topics, from where Freddie Mac’s multifamily division should be headed to the health of the apartment industry.

What are your plans for Freddie Mac’s multifamily division?

The first and most important plan is to keep the momentum going. We have a fantastic business. Things are going very well for us, and I want to keep the train on its tracks and not lose that momentum as we continue to grow, in terms of our volume and overall financing activity, as we return to a healthier level of market activity post-recession.

At the same time, I do think there are things that we can continue to improve. I view much of my focus to be on incremental improvements. It is not the most glamorous to talk about, but making ours a more effective organization involves taking a hard look at and improving our processes, our technology and our ability to be a state-of-the-art mortgage processing organization. I would like to see that when borrowers and mortgage bankers work with us, they think, “Freddie Mac has really got it down as far as their ability to process business, to be responsive and to be effective in terms of how they do their business.”

The third area of our focus is to continue the transformation that we began two to three years ago in converting from being a buy-and-hold portfolio lender to a securitization shop, and to really continue to reinvent not just who we are but also how securitization is done. We think we have brought significant innovation to the securitization space through our [K-Certificate] deals and CME mortgage products. We seek to continue to enhance that securitization execution so that we are able to blend the best of both worlds in terms of our ability to offer a greater degree of customization to be more customer- and borrower-oriented, and yet provide the execution and standardization that we are able to achieve through securitization.

How are you improving efficiencies at Freddie Mac?

A good example lies in our early-rate-lock process. Before the crisis, as much as 60 percent or so of our business was executed via early rate lock. That program provides significant value to borrowers who are looking to lock in their borrowing rate while continuing to work through the due diligence process. Certainly, in a very low-interest environment, that early-rate-lock has a lot of value. In more recent years, the percentage of our business that has been early-rate-locked has dropped precipitously for a number of reasons, some due to our process, some to broader economic issues. As far as our processes, we are taking a hard look at how we can increase the amount of early-rate-lock business in the future. We think there is a lot of demand for early-rate-lock that we’ll be better able to meet if we have a more efficient process.

What limits exist regarding how much financing Freddie Mac can advance in the multifamily market?

There is no limit placed upon us by any external body. We have no capital budget from which we need to work. The constraints that are on us are almost entirely economic as far as the demand for financing and our ability to execute efficiently at an economically sound level. We are not going to execute business if we cannot do it in a way that a prudent investor would. So there will be times when there are other investors in the marketplace who are more aggressive than we are. There are also times when our execution may work better. There is no limit on our volume other than that we, like any sound business, look to ensure we are able to generate appropriate returns and stay squarely within our credit parameters.

What has been happening to spreads for Freddie Mac on the multifamily side?

They are changing from minute to minute these days. We have seen significant volatility in the capital markets that is really reminiscent of the financial crisis. The widening in spreads was most precipitous in the days immediately following the S&P credit rating downgrade of the U.S. government. After having moved during that week after the downgrade, our spreads have been steady since then, though we are still in a relatively volatile market environment. Right now, there is a reasonable possibility they will contract if we see continued stability and some broader market rally, so stay tuned. We probably are more confident [than in previous crises] of our ability to stay relatively stable in terms of our spreads. They have moved up in concert with broader credit spreads, but less so than most other comparable mortgage or credit spreads or indices. We have been extremely pleased with the performance of our securities. This has really made a very strong statement about the value of the structure of our securities, and that in turn has enabled us to be more stable in terms of the mortgage spreads that we have been able to offer to our borrowers.

How about overall interest rates for Freddie Mac multi-housing loans?

Interest rates went down significantly, especially in the weeks immediately preceding the S&P downgrade and then immediately after the S&P downgrade. We saw 10-year Treasury rates dipping under 2 percent. You saw fairly significant reduction in interest rates, so even with our increase in spreads, the total mortgage rate available for borrowers declined. That helped fuel some surge in activity, though I think most of the business we’ve seen over the last couple of weeks had largely been in the pipeline for weeks prior to the downgrade. There was an opportunity to lock in a very attractive borrowing rate. We have a reasonable expectation that, in fact, while we are not slow right now—we are extremely busy—we did not get busier in terms of new quoting activity. That has probably more to do with its being the end of August rather than any lack of borrower demand. Barring any major changes, I think we will see a healthy uptick in quoting activity come September.

Has S&P’s recent downgrade of the GSEs’ debt credit ratings had any effect on Freddie Mac’s multi-housing financing?

It has had remarkably little effect on Freddie Mac multifamily. We had in the marketplace our latest securitization K703, and it has been extremely well-received by the market. The underlying senior bonds we issued were rated triple-A. This speaks again to the strength of our security structure. What investors are increasingly coming to realize is that this K-Deal structure that we have developed really provides them with a belt and suspenders: They have the benefit of a genuine triple-A rating based on the collateral independent of the Freddie Mac guarantee, and on top of that they have the benefit of a Freddie Mac guarantee. To the extent that the downgrade only speaks to an issue about the Freddie Mac guarantee, it doesn’t affect the fact that we are achieving a triple-A level independent of that guarantee just based on the collateral. So investors have largely realized [S&P’s downgrade of the GSEs’ credit ratings] does not have a significant effect on the credit quality of the Freddie Mac K-Certificates, and that has been reflected again in this very strong demand that we have seen in the marketplace. That strong demand is what in turn gives us the confidence in the mortgage marketplace to be stable in terms of our pricing of mortgages, knowing that we are not being significantly affected by that downgrade and the implications of it.

There is a lot of talk about how much money Freddie Mac overall is losing or costing taxpayers. Can you comment?

Freddie Mac Multifamily is consistently profitable. Last year we earned the taxpayer indirectly $964 million in the multifamily business. Through the first two quarters of this year, we [made] $559 million [in segment earnings]. So Freddie Mac Multifamily is consistently generating strong profits for Freddie Mac, and ultimately for the U.S. taxpayers, and we have done so throughout the financial crisis and in the post-crisis period. We are a healthy business. We think the returns we generate are appropriate for the business and would be appropriate levels for a private capital investor.

Can borrowers expect any changes in underwriting standards or new products from Freddie Mac in the near future?

We have no intention of changing our underwriting standards. We think we are in a good spot in terms of our underwriting and credit posture. We will not reach in terms of credit to increase business. So if other investors were to choose to become more aggressive in terms of credit, that would not affect our position in the market. We do not see a need to tighten; we do not see a need to loosen. It is an issue of whether if mortgage demand increases, business is going to fall within our credit parameters. In terms of new products, we don’t think we will be introducing any significant new products in the near future, so much as we will be making modest improvements and innovations to existing products to make them more borrower-friendly and accessible. We do work under a directive from our regulator that we not engage in new activities.

Many economists are now saying that the chances for a double-dip recession are higher. What is your view?

I cannot offer you an economic forecast. I would agree with you that the consensus view is that we are looking at slower rates of economic growth in the near term. And certainly there are a number of economists who are suggesting that we are likely to see a double dip. Whatever happens in the macro economy, I think multifamily will fare better than most other asset classes, both in the commercial mortgage space and the broader economy. The reason is that you do see significant positives in the outlook for multifamily, including the broader shift from owned housing to rental housing that has probably not fully run its course. You also had very limited construction of new apartments in most major markets in the past few years, so the increase in demand has not been met by increased supply.

And even though the economy is weak now and obviously can get weaker, we are seeing some positive household formation. This is tied most directly to the economy and will be higher or lower depending on what the economic growth looks like. Anecdotally, a number of our larger borrowers are seeing some reversal of the household contraction that occurred during the recession. The proverbial kids are beginning to move out of the house and find an apartment, and some roommates are deciding they can go and rent an apartment on their own. Household formation is not as robust as you would expect if the economy were creating a large number of jobs, but it is a notable difference from what we were experiencing in 2008-10 when we were actually seeing contraction.

And then superimposed on all of those trends, apartment investors can finance apartments at such attractive low rates. That has a very positive effect in terms of values. So the income side looks good, and the value side looks good. And compared to other asset classes, multifamily comes pretty close to the top. If the economy gets much weaker, that will, all else being equal, take a little of the growth from multifamily as it will from everything else, but I will not change that relative ranking of multifamily.