Let's ask the experts:

What's up for multi-family lending?

MBG:  In what key ways has our financial system changed during the past year?

Juran:  With higher cap rates and more conservative underwriting, investors are facing much more scrutiny and less loan dollars from lenders.  Fannie Mae, in particular, has in some cases, imposed minimum interest rate and exit tests as well as put floors on their deals.  A lot of Fannie Mae loans are 10-year term.  When the debt matures, it’s difficult to find the loan dollars to refinance even what they have into them.   

Larkin:  Because there’s no competition right now, agencies can be more selective.  Fannie Mae, Freddie Mac and FHA/HUD are the only non-recourse lenders in the apartment business with a few insurance companies who will make loans, but not under very good terms.  Banks and conduits are not doing much, if any, lending, and insurance companies that are lending are at rates at or above 7 percent rates with maximum loan to value in the 60 to 70 percent range.  Investors and owners of real estate are in a tough spot—they need to worry about refinancing risk as well as managing the revenue and expense side of their projects. 

MBG:  From a borrower’s perspective, what are the main differences between the lenders?

Juran:  The major differences are loan terms, and who makes the decisions and assumes the risk.  Fannie Mae is the only delegated program with its core group of lenders making the loan decisions and taking the risk.  The borrower deals directly with the decision maker in the lender’s shop who originates, underwrites, closes and services loans.  Freddie Mac and FHA/HUD programs require an extra step—the lender submits the numbers to its underwriters at the agency who then review it and decide whether or not they agree with the lender’s numbers.  Greater scrutiny takes longer to get the deal done. 

Larkin:  Another difference is that FHA/HUD provides mortgage insurance as opposed to making direct loans.  They insure the lender against loss in the event of default.  FHA is the only place you can get a long-term (30 to 40 year), non-recourse, fixed-rate mortgage.  They also have programs that insure loans for new construction and substantial rehabilitation of existing properties.

MBG:  Does it look like the environment is going to ease up in the future?

Juran:  Short term, we don’t expect to see a lot of change.  Conduits are dead for quite a while because people lost a lot of money on those deals.  They took more risk than they thought on 10-year, interest only apartment loans.  Those were done when cap rates were 5 ½ or 6 percent, and valuations were big.  We do expect that experienced borrowers with track records will find it easier to get loans. 

Larkin:  It’s a good environment right now for refinancing.  Fannie Mae and Freddie Mac won’t do new construction, but they are actively refinancing.  HUD’s program terms are designed for the long-term investor, and its basic underwriting parameters are extremely attractive given the low rates, longer term and amortization period.  Also, if an investor has an existing HUD mortgage, the agency has an expedited program that allows borrowers to quickly take advantage of current rates.  Right now, it’s a sub 5 percent for a refinance.  New construction is in the high fives.  Our advice:  Restructure, refinance everything you can today in this low interest environment. 

MBG:  What’s ahead for commercial lenders?

Juran:  We anticipate slow changes—nothing happening fast until banks decide they want to finance new construction.  Longer-term rates aren’t going anywhere.  The jobs part of the equation is also not happening—when jobs get better we’ll see some positive changes in the lending market.

Larkin:  Community banks have opportunities now to take advantage of the liquidity pressures larger banks are facing.  Although they are not aggressively lending, community banks are better positioned to do the deals—execution is faster—usually about 90 days.  But, in return, when they make a loan, they want it all—your deposits and your checking accounts, in addition to your personal guarantees. 

MBG:  Will we see another bubble of foreclosures as some experts are saying, or will the Fed urge banks to rework troubled loans to avoid another federal bailout?

Juran:  Feds are not pushing banks like they were to foreclose on loans or to sell loans.  There are few foreclosed loans for sale.  A lot of people started groups to buy distressed loans from banks, but it didn’t really happen as anticipated.

Larkin:  Mostly lenders are doing everything they can not to foreclose, and focusing more on refinancing and restructuring.  This should stay steady for a while.

MBG:  What Fannie Mae financing options are available through small multifamily lenders and how are they competitive?

Juran:    As a privately-owned DUS shop, we offer the same Fannie Mae programs as the “big guys”, but we keep deals—large or small—on our books for a long time.

A borrower can get small loans done efficiently through Fannie May under their small loan program.  Small lenders like Dougherty remain competitive by underwriting and servicing loans in-house, not by selling the servicing rights or shipping servicing to another location where no relationship exists.  This goes a long way with clients.  

It’s more important now than ever to have solid relationships with your lender.  If you request a $1.5 million loan from a big lender and you don’t have a prior relationship, most are so busy the deal may not be their top priority.  In a smaller shop, we look at your deal and try to make it work.

Larkin:  From a competitive point of view, it’s best to deal with just a few lenders.  We market ourselves to borrowers we’ve done business with for many years.  As we have found over time, word of mouth remains the superior marketing tool.  It’s in our best interest to keep your business, and we look for longer-term business opportunities—it’s a two-way street.

MBG:  For the average multi-family investor, What are the up- and downsides of tax-exempt bond financing?

Juran:  Historically, there has always been a rate advantage to doing tax-exempt financing especially— if you can get them—through the low floater programs with variable interest rates.  The non-rated, fixed rate bond market has not come back today to where it was two years ago at 5 ½ percent.  In today’s market it’s about 7 ½ percent, which isn’t bad for a 30 year loan.  You also get the four percent credits with the bonds.  

Larkin:  Smaller investors are not usually interested in bond deals because of the considerable costs and less liquidity.  They also don’t want to deal with the complexity of the transaction, which includes affordability requirements related to the bonds, and/or tax credits.  It’s mostly designed for the more sophisticated borrower who understands and is able to deal with the process. 

Juran:  If you’re looking for a fixed-rate deal, we’re actually converting bond deals right now into conventional loans.  Bonds have higher interest rates and have not come down as much as market rate.  The conversion advantages are getting rid of bond restrictions and getting a nice mortgage at a great rate with increased cash flow.  There’s always a place for bonds in affordable or senior housing projects, if you are able to get a letter of credit from a bank or from Freddie Mac. 

MBG:  How would you advise a client with about $250,000 to invest in the real estate market?

Juran:  That investment won’t get you much unless you are willing to be a passive investor in a group.  Many of the larger owners don’t need partners.  It’s best to find someone who owns and operates between 500 and 1,000 units; has experience and management expertise; and is looking for investors in a deal.  These opportunities are frequently affordable housing projects.

Larkin:  For example, on a $7.5 million deal, you can expect to get upside of between 6 to 8 percent cash on cash returns, plus the tax benefits.  You could sell ten years from now and get a nice return on your investment.  But, lenders are also scrutinizing project sponsors financial capabilities very closely these days.  Investors need to prove they are financially able to invest even smaller amounts into a deal.