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Will Uncle Sam’s Guarantee Revitalize New York City’s Apartment Building Market?
January 16, 2010 by Neil · Leave a Comment
Freddie Mac, the mortgage-finance company with U.S. government support, plans to sell about $1.1 billion of securities backed by loans on multifamily properties.
Why might conservative investors purchase these securities on the secondary market? According to Freddie Mac, investors will be shielded against default on the underlying mortgages by both a Freddie Mac guarantee and credit protection. In other words, Uncle Sam will guarantee the notes in the event that the borrowers default.
Freddie Mac and competitor Fannie Mae have gained larger roles in the apartment-financing market amid a collapse in demand for private commercial-mortgage-backed securities after property prices started to plunge. Freddie Mac last year began securitizing more of such debt it purchases, instead of holding the loans on its balance sheet, following the lead of Washington-based Fannie Mae.
Fannie Mae issued $11.7 billion of its standard multifamily-mortgage securities in the first nine months of last year, up from $4.17 billion during all of 2008. Federal agency Ginnie Mae guaranteed $6.85 billion of new multifamily bonds last year, up from $3.56 billion the previous year.
Since the collapse of Lehman Brothers, Freddie and Fannie have stepped into the abyss that is banks’ failure to underwrite multifamily purchases on their own balance sheets. The relatively few purchases in the multifamily arena underwritten with outside financing are largely attributable to Fannie and Freddie.
If these loans can be sold on the secondary market, then more government financing will continue.
The two key dangers are as follows:
1. If Uncle Sam continues to bankroll these multifamily loans, it will obviate big banks’ role. Big banks will continue squirreling away money from the discount window. They will then invest this money, and cover their eventual need to write down their bad loans, instead of making loans — their ostensible reason for existing. Or as the clever French might say, their raison debt. This is a textbook example of moral hazard.
2. If the economy hits the dreaded Big W, even these conservatively underwritten loans risk tanking. If these borrowers tank because we still haven’t hit bottom, then Uncle Sam is on the hook for all these loans on the secondary market.
