Commercial Loans & Mortgage News - March 12, 2002
Q & A with American Property Financing
We're fortunate to have with us once again Mr. Louis Weisman of American Property Financing (APF) based in Seattle, WA. APF ranks among the five largest Fannie Mae DUS lenders in the country with approximately $1.1 billion in multifamily financing for 2001. In light of the ever-changing economic landscape, we decided to look outward for greater perspective on what's shaping the capital market trends for 2002.
Peter Slaugh (PS): Give me an indication of how active the debt market is for multi's, both nationally and regionally...
Louis Weisman (LS): Our best indication is that overall volume of multifamily mortgages for the first quarter of 2002 is down 30% from what were the historic highs of 2000 -2001. Virtually all major markets have slowed. It has been particularly noticeable on the tenant demand side as unemployment has risen and job growth has slowed. Some markets have seen rent levels decline as much as 20% from the highs of last summer. These events have occurred in an extremely short period of time, so the impact is being clearly felt and seen in individual property performances.
The result is slower sales volume with tighter credit policy and underwriting standards from debt and equity providers. We are seeing some stabilization at the end of the first quarter and are anticipating an increasing volume of business through the balance of this year.
PS: How are Fannie and Freddie reacting/underwriting in markets with declining rents?
LW: Particular attention is being paid to actual rent collections. Specifically, how much money is the project putting into the bank each month. The agency lenders are looking closely at the last three months average collections compared to the previous 6-month and 12-month averages. If the 3-month average is lower than the 6 and/or 12-month average, this indicates potential instability in the project, the marketplace, or both. In these cases higher underwriting standards, such as adding to existing vacancy rate, shorter amortization, higher debt service coverage or a combination of all of these controls, are being used. The effect is more conservative loan amounts. Additionally, both agencies continue to stress strong borrower liquidity and financial strength. Close attention is being paid to rising costs of property insurance, utility and tax costs. This said, both agencies are making loans on a wide variety of project types and geographic areas.
PS: For a while we were hearing of specific areas that were on a so-called "Credit Watch" in various markets - what's the latest on perceived trouble spots?
LW: All lenders would like to do their loans in strong markets with high barriers to entry where the relationship between demand and supply is in balance. That being said, there is no specific prohibition on DUS lenders to pursue new loans anywhere in the United States. Several specific markets have shown greater vulnerability to the slowdown than others. These are the places where caution is warranted and good credit decisions are essential. We continue to lend in markets such as these, just with more caution.
PS: Do you feel that new development is in check with demand, or are you seeing some areas that have projects coming on line that will further soften their sub-market?
LW: Particular concern lies with high end product or the "renter by choice" segment. Many markets saw large additions to inventory in this product type immediately before the slowdown. Some of these projects are just being delivered now in the first quarter of 2002. Other developers have stopped similar projects; they are waiting for a turnaround, which is a prudent course given the circumstances and data. We anticipate softness in that "high-end" sector and can see it in the projects we're looking at and the ones in our servicing portfolio. Renters in this segment have the most mobility and those below 30 years old will have the highest propensity to enter the first time home buyer market. Concessions on existing rents in these projects have reached as high as 3 months' rent. This equates to a 25% discount from asking rents and will obviously put a lot of pressure on construction lenders and equity investors in these types of situations.
There continues to be a significant shortage of moderately priced and affordable rental housing in many places throughout the country. These types of projects are still in demand from the construction and permanent and rehabilitation lending perspective
PS: What does the crystal ball say about interest rates? Most agree we've enjoyed historic lows, and that rate increases are a matter of "when" not "if".
LW: We anticipate rising rates in 2002, particularly on the short end of the yield curve. There has been an unprecedented level of stimulus targeted at short-term rates that eventually will be taken back through the actions of the Federal Reserve. Since Alan Greenspan's bullish comments made during the week of March 5-8, longer term rates for ten year fixed rate mortgages have risen nearly 40 bps. Stabilizing property markets across the country will awaken to a higher interest rate environment by the time they are ready for permanent loans. Keep in mind that what we have seen the last six months have been some of the lowest rates on record for the past 30 years. A 7.00% to 7.25 % 10-year fixed rate deal is not all that bad.
PS: Lastly, how would you describe the differences in appetite and competitiveness between Fannie and Freddie?
LW: Both Fannie and Freddie are in the market everyday doing their primary function, which is that of providing liquidity to the housing and multifamily markets. Credit is available to all levels of multifamily housing albeit not as aggressively as the late 90's through 2001. In the long run, tighter credit policies can be a good thing as credit discipline is one of the factors that will make the downturn shorter. This time around we should return to equilibrium faster and have a good foundation on which to start growing the market. In my view there all already signs that this is underway.
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Chief Executive Officer Peter Slaugh founded Steelhead in 1999. In the relatively short period since its inception, Slaugh has built Steelhead into a leading resource for debt and equity placement nationwide. Slaugh is primarily engaged in growing the company and its lender relationships, as well as working on financings.
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