From a balance sheet perspective, the situation could not begrimmer for Fannie Mae and Freddie Mac. The two governmentsponsored entities posted yet another quarter of eye-popping lossesfor Q1: Fannie Mae's $13.1 billion loss necessitated a request for$8.4 billion in additional federal funds. Freddie Mac, for itspart, posted $8 billion in red ink-and had to ask for a$10.6-billion government infusion of capital.

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For multifamily players that rely on Fannie and Freddie, thereis some good news-and some more bad. The vast majority of the GSElosses are driven by their single-family portfolios. At FreddieMac, for example, the 60-day delinquency rate on its multifamilyportfolio is just 0.24%, according to Sam Chandan, chief economistat Real Capital Analytics.

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Furthermore, as LaFonte Nesbitt, a partner in Holland &Knight's Real Estate practice points out, Fannie's loss for thefirst quarter of 2010 was less than half its loss in the firstquarter of 2009.

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"I don't foresee any immediate impact on Fannie Mae'smultifamily lending activities, ' he says. "Throughout theirfinancial troubles, Fannie and Freddie have continued to be thelargest sources of multifamily financing and I expect that tocontinue."

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That conclusion is a relief to many in the industry. Multifamilymay be performing better than most other asset classes-due partlyto the GSE support-but its fundamentals are still struggling inmany markets.

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"Concessions are starting to decrease slightly in some marketsand occupancy is increasing, but overall rents are not seeing anysubstantial increases, ' says Angela Smith, partner and co-founderof Strategic Management Partners, a Marietta, GA-based manager ofmultifamily properties nationwide. "Inflated unemployment and prioroverdevelopment continues to weaken certain markets." Right now,the weakest cities are Jacksonville, FL, Phoenix, Las Vegas, andAtlanta, while the strongest are New York City, Washington, DC, SanDiego, and San Francisco.

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Not surprisingly, these fundamentals appear to be taking a tollon the GSEs' multifamily lines. In the Mortgage BankersAssociation's Quarterly Survey of commercial/Multifamily MortgageBankers Originations, the organization reported that the dollarvolume of loans for Fannie Mae and Freddie Mac had decreased by49%.

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The political environment, as well, is becoming more hostiletoward Fannie and Freddie. The GSEs dodged a call for the end oftheir conservatorship within two years, when an amendmentintroduced by Republican Sen. John McCain and two other Republicanswas defeated, 43-56, in a May 11 vote. Instead, a weaker amendmentcalling for further study was passed.

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Some in the industry, such as Chandan, breathed a sigh of reliefthat the original measure was defeated. There was merit in much ofthat first proposal's conceptual underpinnings, he makes clear: forinstance, guarantees are less efficient than a clearly defined andpriced insurance mechanism, and they also facilitate moral hazardsand the potential for excessive risk-taking.

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On a more fundamental level, he says, it is entirely unclear ifthere is a long-term role for government, either directly orindirectly, in broadly subsidizing the cost of mortgage credit inthe modern US economy, distorting private market outcomes. Thatsaid,

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a restructuring of the GSEs is too important and complex to becrammed into a larger bill on financial reform, Chandan concludes.Neither storyline-its political and economic fortunes-though, hascome to an end for Fannie and Freddie. As long as the GSEs bleedtheir red ink, calls for their reform and privatization will onlygrow louder.


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