Multifamily lending has been the darling of banks and investors for the past few years due partly to easy financing from Fannie Mae and Freddie Mac and the housing bust that has forced more families to rent rather than own.
But bankers and investors are raising renewed concerns that fierce competition for deals, a run-up in apartment prices, and an expected jump in interest rates in the years ahead could spell bad news for banks that hold multifamily loans on their balance sheets. Others are questioning the role of the government in providing cheap financing to large investors while financing for small affordable rental housing has declined.
At a multifamily conference in San Diego this week, debate raged over whether a jump in new construction and increased demand for apartments are laying the groundwork for a multifamily housing bubble. Some of the comments sounded astonishingly like those made by bankers before the housing bust.
"It does require everybody being reasonable and not pushing things too much because that's when the party ends," said Steven Holmes, Morgan Stanley's executive director of commercial real estate lending. "Eventually the punch bowl will move again. When I go home at night, I worry about things changing."
Jeffery Hayward, a senior vice president of the multifamily mortgage business at Fannie Mae, said that as private capital comes back into the market, lenders need to be mindful of maintaining strong underwriting standards.
"I hope we learned our lesson because we can ruin a very good thing," said Hayward. "I think a lot of people are on higher alert than they've ever been."
Banks held 29.5% of the $847 billion in outstanding multifamily mortgage debt at Sept. 30, down from 30.5% a year earlier, according to the latest data from the Federal Reserve Board and Trepp LLC.
But Fannie Mae and Freddie Mac remain the largest sources of multifamily financing. Fannie provided $33.8 billion in multifamily financing last year, up 38.5% from a year earlier, while Freddie provided $28.8 billion in financing, up 42% in the same period.
To be sure, multifamily lending represents a mere 6% of the government-sponsored enterprises overall volume, which is dominated by residential lending. The GSEs tend to have low delinquency rates, in part because of credit standards and loss-sharing agreements that typically require lenders share one-third of losses on delinquent multifamily loans.
Still, Jamie Woodwell, vice president of commercial real estate research at the Mortgage Bankers Association, says that since the housing downturn investors have flocked to the least-risky investments and that after U.S. Treasuries, having a government guarantee "comes second."
"The government pie has brought a lot of investors into the market," he says.
A big concern among multifamily lenders is the impact much-anticipated GSE reform could have on the marketplace. Though it is hard to know when lawmakers will take up the issue, market watchers speculate that GSE reform could force Fannie and Freddie to shrink their presence and that there are no guarantees that banks and other players such as life insurers would step to pick up the slack.
Hugh Frater, the chief executive at Berkadia, a large commercial lender, said at the San Diego conference that that GSE reform could potentially hit the industry hard.
"We've enjoyed the profitability of the GSE business, and there is the expectation that there will be a change two to three years from now," Frater said. "Mortgage banking will be less profitable without the agencies."
Housing advocates, though, believe that the GSEs are distorting the marketplace.