Mortgage bankers leary of venturing into the sometimes precarious multifamily market got reason for some optimism Sept. 27 when Fannie Mae and Merrill Lynch & Co. introduced a Remic that each hopes will attract investors and draw more lenders into the multifamily arena.
Merrill launched the $258.8 million issue on Sept. 28 and by the next morning it was sold out, according to Jack Blackburn, vice president of mortgage financing. Fannie Mae hopes to have $2 billion to $3 billion in this multifamily market by 1994. Blackburn said Merrill is already looking for new issuers for a new deal and expects others, such as Freddie Mac, to sponsor similar deals soon.
All the multifamily lending legislation on Capitol Hill and special HUD programs aimed at spurring affordable housing do much to create avenues for banks to get into multifamilies.
But precious little has been done to help the bottom line--investor security. Consequently, multifamily lending has lagged.
This program, Fannie contends, will provide investors with welcomed liquidity and may do more to spur multifamily lending than a thousand legislative pronouncements, while also creating a partial solution to the low- and moderate-income housing shortage.
Portfolio lenders have expressed a desire for greater liquidity for the multifamily market, said Thomas W. White, Fannie Mae's senior vice president for multifamily activities. This interest was raised by greater capital requirements imposed by the 1989 thrift bailout law, he said.
Fannie Mae calls its new product ACES, for alternative credit enhancement structures. It involves a novel application of the Fannie Mae guaranty to apartment financing.
The recent Fannie-Merrill deal shows what's involved. Merrill will issue its private-label Remic backed by $258.8 million in multifamily whole loans with senior and subordinated tranches. Fannie Mae will buy all the senior class tranches, worth $230 million, and issue and guarantee its own multifamily Remic. That piece will be first in line for interest and principal payments.
Yet this tranche contains new twists. Fannie will guarantee the principal, but receipt of certain principal payments by the certificate holders may be delayed. Fannie said occasional delays occur with the multifamily Remic because of modifications extensions in the underlying mortgages that are more involved than single-family mortgages.
Since much more money is involved in a single mortgage, more effort and negotiation go into determining whether to work with a borrower or foreclose. It wouldn't make sense to throw in the cards if there is a temporary interest rate shock just when payments on a balloon mortgage come due, said White.
The remaining 11% of the value of the multifamily loans not taken by Fannie will be divided by Merrill into two senior and junior tranches. An advantage of this approach over previous multifamily mortgage experiments in the secondary market is it allows investors, not the government sponsored enterprise, to assess credit risk through the market.
In doomed past experiments, the GSEs have waded directly into multifamily underwriting. This was expensive and inefficient, said White. This time, rather than reunderwrite all the multifamily mortgages that come its way, Fannie is using a rapid due diligence system to "kick the tires' of the loans. White said care was taken to codify rules by which servicers will operate 'so Fannie Mae can feel comfortable if it isn't an active, intrusive partner in servicing."
Other advantages this time, said Blackburn, are the clean underlying collateral and thorough disclosure.
Fannie's added value to its piece of the Remic creates enough overall value to sell the package, White said. Referring to all the tranches in the deal, he said, "Our name brings a very good execution."
