Academic journal article ABA Banking Journal

A Good Time to Look at Multifamily Lending: A Sweeping Demographic Shift Is Opening Up a Growth Market in Multifamily Lending, Which Can Help Balance Your Mortgage Portfolio. (Mortgage Lending)

Academic journal article ABA Banking Journal

A Good Time to Look at Multifamily Lending: A Sweeping Demographic Shift Is Opening Up a Growth Market in Multifamily Lending, Which Can Help Balance Your Mortgage Portfolio. (Mortgage Lending)

Article excerpt

Once considered a niche market confined to a few areas, multifamily lending is spreading, thanks to the process of urbanization now in full swing nationwide. Where people congregate in large numbers, construction of apartment dwellings is sure to follow.

Importantly, multifamily lending--defined as buildings with five or more rental units--can balance a bank's mortgage portfolio, helping to keep it healthy when the economic climate is poor for single family home financings. Home sales climb when interest rates are low, but apartment rentals increase when interest rates are high. That's because rental units open up as people leave multifamily housing for single home occupancy but they stay occupied when single home sales decline.

"Every bank wants a balanced portfolio, and multifamily loans balance a lot of differences," says Saverio Giarrusso, a senior vice-president at Buffalo-based M&T Bank Corp. "They represent a performing asset in a stable market. Even when the market dips, it's going to come back and, when it does, you're riding the crest of a wave again."

Giarrusso says there's more than a little truth in the maxim: "People who own office buildings eat well but people who own apartment buildings sleep well."

Interest rates for adjustable rate mortgages as well as 15-year and 30-year fixed rate mortgages continue at record lows. Although low interest rates usually draw people out of the rental market into home ownership, net absorption in the multifamily sector was positive in fourth quarter of 2002 with 28,600 of 39,200 new units absorbed in 54 metropolitan areas, according to a National Association of Realtors (NAR) survey.

Furthermore, this generally positive trend is likely to continue. The NAR predicts completions of new apartments will total 124,500 units in 2003, a nearly threefold increase from 2002. The average vacancy rate is expected to be an acceptable 6.8% this year, with average rents stable.

One thing is clear: Whether you're lust getting into multifamily or just want to expand your loan portfolio, there is more than one way to do it. A lengthy list of major investment houses like Credit Suisse First Boston, J.P. Morgan and Goldman Sachs are in strong competition with the government sponsored enterprises (GSEs) to bundle multifamily loans for the secondary markets. Then there's a growing list of specialist lenders who will partner with you or purchase your loans at favorable prices. Finally, there's plenty of room for you to go it alone.

Fannie's smorgasbord

The growth potential in multifamily housing is being given a leg up by a massive infusion of cash emanating mostly from Fannie Mae, but also from Freddie Mac and the Federal Home Loan Bank System. Fannie spent $20 billion dollars on multifamily mortgage debt and equity last year, an equal amount in 2001 and expects to spend $175 billion more by 2010. Freddie spent $14.5 billion in 2002 and $12.3 billion in 2001.

The initiative pursued by Fannie is part of its ten-year pledge to provide $2 trillion in home financing for 18 million historically underserved families. Just three years into its agenda it has already provided more than $1.3 trillion for 12 million targeted families.

Fannie provides financing for multifamily housing through a nationwide network of 26 "delegated underwriting and servicing" (DUS) lenders. They range in size from major regional and national multifamily players like GMAC Commercial Holdings to small, basically local ones like AmeriSphere Multifamily Finance in Omaha, Neb.

These lenders are mandated by Fannie to provide multifamily developers and investors the best products, prices and service when financing multifamily properties. So far most of the lenders are concentrated in New York, Chicago and California. But Fannie continues to look for new partners in such markets as Minneapolis, Detroit, Boston, Atlanta, San Francisco, Washington, D. …

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