Daily Archives: August 21, 2012

Bibby: Spin Out the GSE Multifamily Divisions

ByDoug Bibby, Multi-Family Executive Magazine

Ever since the federal government bailed out Fannie Mae and Freddie Mac in 2008, policymakers and stakeholders have struggled with the question of what to do with these challenged but fundamental components of the nation’s mortgage finance system. Most generally agree that the two government-sponsored enterprises (GSEs) can’t survive in their present form. Finding the right fix, however, is anything but simple, given the size of the GSEs’ footprint in housing finance. Fannie and Freddie’s multifamily lending may make up a smaller portion of their portfolios than their single-family businesses, but the GSEs’ multifamily programs have been quite successful. They have default rates of less than 1 percent—just a tenth of the default rates in the single-family sector—and have produced roughly $7 billion in profits for the federal government since being placed in conservatorship. But the gravity of the problems with Fannie and Freddie’s single-family mortgage financing programs is overshadowing this proven multifamily track record. And as GSE reform evolves, a single-family focus could cost the apartment industry a critical source of financing, undercutting its ability to provide quality housing for the nearly 100 million Americans who rent. Whither Alternative Financing? From the beginning of 2008 through the third quarter of 2011, the GSEs have provided $144 billion in financing to the multifamily industry. This represents roughly 55 percent of the debt accessed by the industry, with traditional financing sources such as banks and life companies providing the remaining capital. This means that since 2008, one in every two apartments would have been unable to secure construction financing or refinance existing loans without the GSEs. Some argue that alternative sources of capital could fill the financing gap if the GSEs were to exit the marketplace. However, this scenario is unlikely given various market constraints. Banks are limited by capital requirements and continue to work through troubled balance sheets resulting from the stagnant economy. Life insurance companies, which have historically provided less than 10 percent of the industry’s capital, lend primarily for newer, high-end properties and are somewhat inconsistent, entering and exiting the multifamily market based on changing investment needs and economic conditions. Moreover, the private-label CMBS market is unlikely to return to the volume and market share it reached a few years ago. And, finally, the Federal Housing Administration, which ramped up its multifamily financing activities through the housing downturn, has exceeded its lending capacity. Maintaining adequate liquidity in the debt markets will be more critical in the future as America increasingly relies on rental housing. The apartment industry needs to build an estimated 300,000 units a year to meet expected demand. Yet, we started just 167,400 in 2011, just barely enough to replace the units lost to demolition and obsolescence. Without some degree of government credit support, the apartment industry’s supply–demand imbalance will become more acute, driving up the cost of rental housing. A Stand-alone Proposal With private capital sources unable to fully meet the apartment industry’s financing needs, it’s important to find a solution to the GSE question that will ensure that the industry continues to have access to capital to meet increasing rental housing demand in markets nationwide. At the same time, the solution must be flexible enough to allow the private capital market to assume a larger financing role as the economy continues to recover. Given the GSE multifamily programs’ record of success, the National Multi Housing Council (NMHC) believes such a solution could involve spinning out Fannie and Freddie’s multifamily businesses into stand-alone and independently capitalized entities, creating a framework that would maintain liquidity in the market while fully compensating taxpayers for rescuing Fannie and Freddie. Key elements of such a proposal would include:

• Establishing new, stand-alone entities. Each company’s multifamily platform would need to transfer to new successor entities. Taxpayers would be compensated for the value of Fannie and Freddie’s holdings.

• Retaining a federal credit guarantee. A federal credit guarantee would be tied to the security, a necessary provision to attract global investors. However, unlike today, neither the GSE-successor entities nor their shareholders would be eligible for a guarantee, forcing them to absorb all losses. Furthermore, the credit guarantee would be priced to prevent the GSE-successor entities from receiving capital at preferential rates and crowding out private-debt providers.

• Setting up critical taxpayer protections. The GSE-successor entities would be obligated to pay a fee to the government covering the entire cost of the guarantee. The entities also would have to hold significant levels of risk-based capital. And last but not least, the entities would be required to retain risk in each mortgage to support prudent underwriting.

• Empowering a strong regulator. This entity would be charged with establishing and enforcing effective capital standards and reserves, as well as monitoring and assessing performance to ensure a competitive private-debt market. With the strength of this framework, the NMHC is working to further develop its proposal with input from key stakeholder groups. The end goal is to provide lawmakers and regulators with a road map for addressing the multifamily sector’s capital concerns and ensuring that adequate liquidity remains available in all markets at all times as more wholesale GSE reform is enacted. A complete outline of the proposal is available at www.nmhc.org/goto/60819.

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.

Motivating ourselves to sell more is only half the battle

Ron Stein, Florida Trend Magazine

Selling has its ups and downs. Yet, every day we need to pick ourselves up and get motivated to sell more of our offering. But, driving ourselves forward is only half the battle. You must move others too, no matter if you’re a solo entrepreneur or the executive of a large enterprise.

Yet, can you really motivate another person on your sales team, or a strategic partner, even a prospect? There are CEOs and sales managers out there who think they can, and that only leads to trouble.

I’m sure you’ve seen it or may even have been on the receiving end of this. It ranges from cheerleading that comes across as empty to intimidation. They try to do something to another person to motivate them. More often than not the result is demotivation.

Instead, figure out what’s important to people and tap into that so the motivation comes from within them. Knowing what a salesperson or a prospect considers important is the key. Also consider factors such as trust, respect, and candor.

Hey, I’m not getting metaphysical on you here! It’s just a fact. These qualities greatly influence the level of confidence people who work for you or with you — including customers — have in moving forward with your business.

For instance, studies have shown that companies with high levels of trust enjoy improved profits and better retention of employees. People inside and outside of these companies are motivated by the positive things these businesses do — and it’s much more than the CEO’s upbeat speech and the showing a video clip of Slyvester Stallone pumping his fist in the movie Rocky.

Here’s what you and your company can do to inspire more sales.

  • Business leaders listen, connect, and align. You’ll get people to trust and respect you with real dialog. Ask questions and do it in person as much as possible instead by of email. But just don’t talk back and forth. Involve staff and customers in decisions that affect them. Do you know the personal goals of your salespeople, partners, and prospects? Demonstrate that you have common objectives — and let them know how you’ll help them achieve those goals. When you listen to people, they’ll listen to you. Communicate, communicate, communicate.
  • Anticipate questions and needs. It’s easier for people to get motivated and reach their goals when they have tangible help. Give it to them in the form of marketing material, technology, training, and support that will make their jobs easier — whether it’s a sales rep or a prospect that’s making a decision to take the next step with you. They’ll do their best work when they have the needed tools, which will in turn make them feel motivated to move forward. Show people that you have their best interests at heart. Answer questions before they are asked, provide tools and support before they’re needed.
  • Set challenging goals, give meaningful feedback. It’s normal to expect the best from yourself and your sales team. It’s also OK to share your expectations with your partners and prospects. But don’t just say it — demonstrate it! Spell out why your company strives to be the best and challenges — and helps — others to achieve more too. Before a project or relationship gets off course, be prepared to offer feedback. Not criticism, but a conversation that shows you value the relationship and want to make it work for both of you. Ask questions — “What could I or we do to be even more effective?” or “I value your opinion. What might work even better?”

Discover the best way to get people enthusiastic about your goals by getting them committed to theirs. Why? Because other people really don’t care about your goals!

Create an environment that motivates and allow the individual to see what they can gain from it. Make your sales team’s aspirations and prospect’s goals work for you. Communicate that you understand what matters to them and help them get there. People will then trust that you’ll do the right things to align with their interests. They’ll respect you and be more confident about the relationship. And confidence sells!

When working with relatives, plan for the unexpected

Family members can be great assets in a business, but to make it work, you need to face some harsh realities.

By James Cassel


            Family owned businesses, when run correctly by the right family members, can be wildly successful. But when they’re dysfunctional, family businesses can be a real nightmare for everyone involved – and even destroy families and their financial well being.

There’s no question that our own flesh and blood can offer a level of loyalty, trust, commitment and vested interest in the business’ long-term success that’s not usually given by those who aren’t our family. On the flip side, things can quickly get ugly with family members who feel jealousy, resentment, entitlement, greed and other emotions that can get in the way of sound business judgment. When problems occur, the more family members involved, the worse things can get. Moreover, family businesses can also chase away great non-family talent if they are not sensitive to their needs.

While family owned businesses are the backbone of the U.S. economy, many family businesses fail or are sold before the next generation has taken the reins. I watched firsthand the third generation of two families kill a business. It could have been avoided if they had been more rational or had proper legal documents in place.

Having spent decades counseling owners of family businesses in all sorts of industries, not to mention having worked very successfully in several businesses with my own family members, including at Cassel Salpeter, I’ve pretty much seen it all. Here are a few important things I’ve learned that are critical for those who want to sustain healthy family owned businesses and healthy family relationships:

1. Plan ahead. Simply put, you have to put in place the equivalent of a “business pre-nup.” Work with qualified legal and financial advisors to develop appropriate written agreements such as shareholder or partnership agreements that include succession plans and buy-sell provisions. We all know couples that have built fabulous businesses together – only to see those businesses fall apart at tremendous financial and emotional expense when they divorce. Same goes for siblings who fight turf wars after the parent who owned the family business passes away or retires, and one sibling wants to run the business while the others want to sell or take out money. Too often, these matters end up in court because people failed to plan in advance. It’s important to have plans in place when dealing with family so everyone knows where they stand and agrees in advance to what can and cannot be done.

2. Communicate. In fact, over-communicate. Most families don’t do this very well or often enough. It becomes difficult to handle issues because the family members don’t know how to discuss their opinions, reach consensus and make decisions efficiently. So talk it out. Lack of communication is one of the main causes of litigation and failure in family businesses.

Need help? There are plenty of business psychologists and coaches who specialize in helping family businesses. Don’t wait until things go wrong to consult professionals.

Years ago, a couple contacted me for advice regarding their plans to sell their business. Although they had spent years grooming their very capable son to eventually take over the business and he was doing a great job, they decided to begin entertaining buyout offers without consulting him.

I reminded them that if they sold the business without their son’s involvement or consent, they might burn their relationship with him and his wife and never get to see their grandchildren. I recommended they discuss their plans upfront with their son, bring him into the process and, if they still wanted to sell the business, offer to sell it to him first rather than anyone else. A few weeks later, they sent me a bottle of champagne and a note that read: “Thank you. You saved our family and our business.”

3. Be picky. Recognize that not everyone is good for the business or should be in the business. Yes, even family members must understand that the “there’s always a place for you here” school of thought may not be in everyone’s best interest. Some companies are populated by next-generation members who failed in other businesses or spent the early part of their careers as aspiring athletes, artists, or  musicians before ascending to leadership positions as unprepared 40-somethings – clearly not a good business model. Finding the right positions for the right people is crucial. Not everyone is CEO material.

4. Implement safety measures. Require training and implement a screening process for new family hires and promotions. When possible, ensure that new family hires have obtained solid industry experience before they join the business. This will help ensure that only dedicated, qualified relatives join and lead the firm. I know families who “traded” their children to get experience at other businesses before the children joined their own families’ businesses.

Additionally, some family run businesses appoint independent members to the board of directors along with family members and/or a family council, which functions like a board of directors and handles the important, potentially divisive decisions. Some have lawyers develop proper succession plans for use after retirement, death or disability. Measures like these can help prevent many of the common headaches that occur when it comes time for the second or third generations to take the reins.

5. Think creatively. Many family businesses are run for decades by the same leaders, often making it difficult to implement creative solutions or necessary changes like new technologies, business models and schools of thought. Don’t let this be the case for you. Young family members may have great ideas.

Years ago, I watched a business owner successfully devise a clever escape route from a touchy family situation. One sibling had taken over the family business and grown it to unprecedented levels. Thinking they needed extra support after sales skyrocketed, they invited another sibling to assume a leadership role. They soon learned this was a big mistake, as everything this new sibling touched turned to ashes. Rather than cause more turmoil by booting out the problem child, they offered to double his salary in exchange for staying home. He wisely accepted, and the business got back on track.

Most important, don’t be afraid to say “no” or terminate problematic or unhappy family members. No matter how tricky or delicate the situation might seem, it can be in everyone’s best interest. Having done this personally, I can tell you firsthand how hard it can be. Many family businesses suffer unnecessarily because they over-extend their resources to accommodate every family member who wants a piece of the pie. By putting the right systems in place, you can minimize the potential for trouble and maximize the potential for success while retaining everyone’s priceless peace of mind.

James Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment-banking firm with headquarters in Miami that works with middle-market companies.  www.casselsalpeter.com

Exclusive Interview With Bernards’ Steve Pellegren

Natalie Dolce Natalie Dolce, editor of the West Coast region for GlobeSt.com

LOS ANGELES-In terms of student housing trends, two major things emerging are educational institutions both partnering and competing with private student housing developers for residents, and secondly, most educational institutions now require sustainable/green building features. That is according to Steve Pellegren, VP of preconstruction services for Bernards, who recently chatted with GlobeSt.com on the subject of student housing trends and what’s driving them.

GlobeSt.com: What are some of the newest trends in student housing?

Steve Pellegren: There are two major trends emerging in the student housing arena. First, most educational institutions now require sustainable/green building features. Over the last few years, there have been new student housing projects on a few California campuses including the University of California Merced, Claremont-McKenna College and CAL State Northridge, two of which are LEED Silver Certified projects.

Secondly, educational institutions are both partnering and competing with private student housing developers for residents. Additionally, the top ranked schools are competing for the top students and top professors. Therefore, the current generation of both student and faculty housing looks and feels more like well-appointed apartment projects than traditional campus housing facilities, providing top quality finishes, a rich array of amenities and ample community spaces to promote social interaction.

For example, Bernards is currently providing preconstruction services for a top-ranked university on a $400-million student/faculty residential village. This project is on par with our latest mixed-use project, Americana at Brand, which is a high-end, $267-million residential-retail development in Glendale, CA, by Caruso Affiliated.

All of these new student housing projects are designed to appeal to GenY students, with spaces that promote greater social interaction, including comfortable student lounges and group study areas; meeting, music and recreation rooms; and open spaces for events and recreational uses, such a courtyards, BBQ areas, and exercise facilities, as well as a full array of technology services [internet, WiFi, cable TV and telephone]. The UC Merced project even has its own TV channel, which provides blockbuster movies, information about campus events and educational content.

GlobeSt.com: Are colleges and universities upgrading older student housing facilities, and if so, what’s driving renovations?

Pellegren: Yes, in fact, the Cal State Northridge student housing project was precisely that: an upgrade to replace aging student housing. Existing student housing facilities are being upgraded for two major reasons. In California, older campus facilities of all types are being retrofitted to meet seismic guidelines of both the Federal Emergency Management Agency and California Emergency Management Agency guidelines, as well as upgraded to sustainability standards.

Additionally, student housing is becoming a marketing issue, because the attendees are making decisions about which schools to attend based on quality of campus life, including living accommodations. Therefore, educational institutions are modernizing student housing and adding amenities and technologies that students now expect. For instance, aesthetic upgrades that were completed on two student residence halls at Claremont McKenna College were aimed at supporting competitive student recruitment efforts, with new community living areas, toilet/shower facilities, and new doors throughout.

GlobeSt.com: Could you further explain what you mean by institutions partnering and competing with private student housing developers for student residents? 

Pellegren: This is a relatively new market niche that offers opportunities for private developers and investors on and off college and university campuses. The trend developed out of the need for colleges and universities to continue to invest in academic programs  during the economic downturn, which left little to no funding for student housing at many higher education institutions, while the need for additional housing increased as the huge GenY population reached college age. Consequently, publicly traded housing REITS have emerged, such as Education Realty Trust, American Campus Communities and Campus Crest Communities. Additionally, market operators are attracting private equity capital for student housing projects. Greystar, Campus Apartments, Capstone Cos. and Opus Development all have broken ground on thousands of new student housing units over the last two years. Some of these projects are being developed in partnership with academic institutions, which are experiencing an uptick in enrollment due to the large GenY student population, but, as I mentioned, lack funding for new housing projects.

GlobeSt.com: What makes student housing of interest to private investors?

Pellegren: It’s profitable. While capitalization rates are compressed for conventional multifamily properties, cap rates on apartment deals close to campuses have remained typically 50 to 100 basis points higher, averaging in the upper 7% range. Depending on the quality and distance to campus, the spread can be 150 to 200 basis points higher for apartment properties that serve as student housing.

GlobeSt.com: What other changes do you foresee for student housing projects in the future?

Pellegren: Adding even more amenities to aggressively market properties to GenY as well as the next generation of students.  In fact, it’s already happening. Greystar Student Living recently built a 477-bed student housing project within walking distance of the University of Texas at Austin campus that features upscale amenities, including resort-style pool, tanning beds, a community study café and lounge, recreation rooms with TVs, poker table and gaming systems. Loft-Right, a posh new student housing project on the DePaul University campus in Chicago that costs students $1,000 per month, has all new amenities, expansive city views, granite countertops in kitchens and bathrooms, modern designer furniture and satellite TV hookups. That lobby lounge area is similar to what you might find in a hip, boutique hotel, with a pool table and fireplace, and there is are tanning and hair salons and Starbucks next door.

Behringer Harvard Starts Construction on Delray Beach Luxury Development

By Jeffrey Steele, Contributing Writer, Multi-Housing News

Delray Beach, Fla.—Construction has begun on a 180-unit luxury apartment community in Delray Beach, Fla., Behringer Harvard announced recently. The Franklin Delray is being built on eight acres, and will include seven three-story residential buildings, as well as a free-standing clubhouse and amenities building.

Apartments at The Franklin Delray will average 1,035 square feet, offer up to three bedrooms and two bathrooms, and be constructed to condominium-quality specifications. Luxury features will include granite countertops, nine-foot ceilings, brushed nickel hardware, tile backsplashes, stainless steel appliances, private balconies and full-size washers and dryers.

Residents will be able to mingle in a number of common-area settings. They will include a rotunda community room, state-of-the-art fitness center, library and business center, cyber café and children’s activity center. Outdoors, neighbors will meet neighbors at the resort-style pool with cabanas, barbecue and lounge area with fire pit, water features and a children’s playground. In addition, the community will make bicycles available to residents.

A very appealing location between West Palm Beach and Boca Raton promises to be one of the big selling points of The Franklin Delray.

“This was a compelling opportunity to build a multifamily community in an exceptionally desirable location with strong demographics and proximity to employment centers in West Palm Beach and Boca Raton,” notes Behringer Harvard Multifamily REIT I Inc. chief operating officer Mark T. Alfieri.

It’s not just nearness to job centers, but also adjacency to shopping and recreation that is certain to be a big part of the lure for renters. The community is to be situated one mile south of downtown Delray Beach’s Atlantic Avenue, a hub of culinary, retail and nightlife attractions. And it’s less than one mile west of a stunning public beach featuring two miles of oceanfront beckoning to sun-and-surf aficionados fond of kayaking, swimming, wind-surfing, jet-skiing and simply soaking up some rays.

The general contractor on The Franklin Delray is Jacksonville-based LandSouth Construction, while the architects are Dallas-based STB Architects & Planners, and Richard Jones Architecture of Delray Beach.

The portfolio of Behringer Harvard Multifamily REIT I, Inc., includes investments in almost four dozen multifamily communities in 14 states, comprising more than 12,500 apartment homes.

Obama’s Proposed Carried Interest Tax Potentially ‘Devastating’ for Multifamily

By Jessica Fiur, News Editor, Multi-Housing News

Washington, D.C.—Could job creation come at the expense of multifamily owners? On Monday, the Obama administration proposed a $447 billion package for increased employment. This package suggests a tax increase on carried interest in order to raise revenue.

Though carried interest on private equity is considered by some to essentially be wages, which therefore could be taxed, others, especially those in the multifamily industry are strongly opposed to the carried interest tax.

“The apartment industry supports sound economic policy that helps restore job growth, but a tax increase on carried interest is bad for our economy and bad for our housing supply,” Cindy Vosper Chetti, National Multi Housing Council/National Apartment Association (NAA) senior vice president for government affairs said in a statement.

The carried interest tax, according to the NMHC and the NAA, will increase the cost of producing new housing as well as decreasing the supply by rendering deals financially unworkable. Additionally, the industry fears it could affect whether a new development is financially viable, and could affect proposed new affordable housing from being built. In 2010, the U.S. Conference of Mayors and the National Association of Counties opposed carried interest tax on the real estate industry for those reasons.

And, ironically, the tax, which plays a large part in real estate partnerships, could end up eliminating employment opportunities.

“It would be devastating to the production of multifamily,” Matthew Berger, vice president of tax, NMHC, tells MHN. “And, by extension, job creation.”

Note from the editor: Read more about the proposed carried interest tax here.

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.