Monthly Archives: March 2013 - Page 2

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.

Personal Income, Construction Spending Drop; Sequester Arrives

By Dees Stribling, Contributing Editor-

The Bureau of Economic Analysis reported on Friday that U.S. personal income took a hit in January. At $505.5 billion, income was down 3.6 percent for the month, the largest drop in about 20 years. But accounting maneuvers spurred the drop more than a wider decline in economic activity, since some income that would ordinarily have been taken in January was shifted in December, to avoid higher taxes.

At the same time, total spending — what the BEA called personal consumption expenditures — was up a little, by 0.2 percent for the month. Some of that, however, was because of rising prices, such as for gasoline, which has been volatile on the upward side lately. Take out price increases, and real personal consumption expenditures were only up 0.1 percent.

When income is down yet spending is up, people tend not be saving as much. Sure enough, the BEA also reported that personal saving — disposable personal income minus personal outlays — was $283.9 billion in January, compared with $797.4 billion in December. The personal saving rate, which is saving as a percentage of disposable personal income, was 2.4 percent in January, compared with 6.4 percent in December.

Construction Spending Also Down

Construction spending was down in January compared with December, according to the Census Bureau on Friday, which put it at an annualized rate of $883.3 billion. That’s 2.1 percent below the revised December rate of $902.6 billion, but 7.1 percent higher than the January 2012 rate.

Both private and public construction spending dropped month over month. Spending on private construction was down 2.6 percent, mostly because of a drop in power and electric projects. Private residential construction, on the other hand, came in at an annualized rate of $304.6 billion in January, nearly the same as the revised December rate of $304.7 billion.

In January the annualized rate of public construction spending was $269 billion, 1 percent below the December rate. Public spending is down 3 percent year over year, and in fact at its lowest level since 2006. Considering that federal stimulus spending has largely run its course, and that the sequester might drag on for a while, it’s unlikely that going forward public construction’s going to be anything but a drag on total construction spending.

The Sequester Has Arrived

Friday was Sequester Day. Not much happened, since most of Congress was out of town and negotiations between the president and the Congressional leaders who were in town were inconclusive. At some point during the day, however, the administration was obliged to notify various government agencies that their funding is being cut.

The cuts aren’t that large in terms of the vast $3.5 trillion federal budget, but there will be an immediate impact on most agencies (cutting distributions to the states, prompting furloughs for some employees, and the like). The wider effect will take weeks or months to be felt. While much guesswork has been aired about how the sequester will affect the economy, the sober-minded Congressional Budget Office has estimated that it would halve U.S. economic growth in 2013 to 1.4 percent.

Wall Street didn’t seem to mind the sequester much on Friday, with the Dow Jones Industrial Average up 35.17 points, or 0.25 percent. The S&P 500 gained 0.23 percent and the Nasdaq advanced 0.3 percent.

More Multifamily “Rookies” Mean Possible Oversupply in Some Markets

By Linsey Isaacs – Multi-Family Executive Magazine

The multifamily industry is an attractive, albeit tumultuous industry. With several years of rent growth and an improved financial environment, it seems like the perfect moment to plan future apartment deliveries and set up shop in up-and-coming-markets.
So much so that non-traditional industries are attempting to stake their claim in the multifamily world. But the increased interest will inevitably threaten to oversupply some top markets that are already seeing overproduction in the multifamily world.
“Traditional, multifamily developers might be underestimating the magnitude of the threat of new entrants, which are increasingly announcing their own multifamily development plans,” says Dave Bragg, director of research at Cleveland-based Zelman & Associates.
Particularly, some very large single family builders have muscled into the space, like Miami-based home builder Lennar, which plans to soon break ground on a multifamily community in Jacksonville, Fla.

Bragg adds that other REITs in the office and retail sub sectors are similarly slipping into the multifamily business, at a time “when the supply figures have already been escalating.”
“Nationally, the numbers are increasing at such a rate that it should become a greater concern,” he says.
Some smaller markets that might fare better against the influx of new developments are those that are just recovering and have seen little action since the housing bust. Bragg suggests markets in Atlanta, Phoenix, and Las Vegas should become a greater focus for new entrants.
“I think these are three markets where developers, whether they’re longstanding developing partners or new entrants, can feel more comfortable putting the shovel in the ground because there has been little new permitting activity thus far in this recovery,” he says.
On the other hand, Washington, D.C., Raleigh, N.C., Austin, Houston, and San Jose, Calif. will all be facing a larger supply threat in the next two years. And the oversupply is only the preliminary threat of new developments, as it will continue to lead to negative rent growth.
“It’s hard to predict, but it will contribute to a continued deceleration of rent growth, which has already begun for those markets,” Bragg says.

The Great Leadership Challenge

by Jim Rohn

If you want to be a leader who attracts quality people, the key is to become a person of quality yourself. Leadership is the ability to attract someone to the gifts, skills, and opportunities you offer as an owner, as a manager, as a parent. What’s important in leadership is refining your skills. All great leaders keep working on themselves until they become effective. Here are some specifics:

Learn to be strong but not impolite. It is an extra step you must take to become a powerful, capable leader with a wide range of reach. Some people mistake rudeness for strength. It’s not even a good substitute.

Next, learn to be kind but not weak. We must not mistake weakness for kindness. Kindness isn’t weak. Kindness is a certain type of strength. We must be kind enough to tell someone the truth. We must be kind enough and considerate enough to lay it on the line. We must be kind enough to tell it like it is and not deal in delusion.

Next, learn to be bold but not a bully. It takes boldness to win the day. To build your influence, you’ve got to walk in front of your group. You’ve got to be willing to take the first arrow, tackle the first problem, discover the first sign of trouble. Like the farmer, if you want any rewards at harvest time, you have got to be bold and face the weeds and the rain and the bugs straight on. You’ve got to seize the moment.

Here’s the next step. You’ve got to learn to be humble but not timid. You can’t get to the high life by being timid. Some people mistake timidity for humility. But humility is a virtue; timidity is a disease. It’s an affliction. It can be cured, but it is a problem. Humility is almost a God-like word. A sense of awe. A sense of wonder. An awareness of the human soul and spirit. An understanding that there is something unique about the human drama versus the rest of life. Humility is a grasp of the distance between us and the stars, yet having the feeling that we’re part of the stars.

Here’s a good tip: Learn to be proud but not arrogant. It takes pride to build your ambitions. It takes pride in your community. It takes pride in a cause, in accomplishment. But the key to becoming a good leader is to be proud without being arrogant. Do you know the worst kind of arrogance? Arrogance from ignorance. It’s intolerable. If someone is smart and arrogant, we can tolerate that. But if someone is ignorant and arrogant, that’s just too much to take.

The next step is learning to develop humor without folly. In leadership, we learn that it’s okay to be witty but not silly; fun but not foolish.

Next, deal in realities. Deal in truth. Save yourself the agony of delusion. Just accept life as it is. Life is unique. The whole drama of life is unique. It’s fascinating. Life is unique. Leadership is unique. The skills that work well for one leader may not work at all for another. However, the fundamental skills of leadership can be adopted to work well for just about everyone: at work, in the community, and at home.