The biggest news for the multifamily industry in 2013 came not at the beginning of the year, when Federal Housing Finance Agency acting director Edward J. DeMarco released the agency's 2013 Conservatorship Scorecard for Fannie Mae and Freddie Mac, revealing that there would be a 10% reduction target in business volume from 2012 levels.

Nor could it be said that the GSEs' big moment came in the fourth quarter, when they suddenly ramped up their aggressiveness because, even with the 10% haircut, they found themselves with excess capacity. And while Fairholme Capital Management's proposal to acquire Fannie Mae and Freddie Mac's operations in November was exciting and innovative, it was also quite short-lived. So it, too, gets eliminated from consideration for the short list of the GSEs' pivotal moment of the year.

So what would make the cut for “Most Important Day in 2013 for Multifamily Finance?” One would argue it is Nov. 21—when the Senate voted to eliminate the use of the filibuster against the majority of presidential nominees. Leaving politics aside—and yes, this can be an uphill climb—that move undoubtedly paved the way for the confirmation of Rep. Mel Watt (D-North Carolina) as director of FHFA by a 57-41 largely partisan vote.

Watt is included in Real Estate Forum's Names to Watch for 2014. While he brings serious creds to the position—Watt has a long history of overseeing the GSEs—his confirmation isn't pivotal because of him, his record or his party affiliation.

Rather, it's the mere fact that the GSEs have a permanent head at the helm of their regulatory body, which instills certainty and continuity as they move into uncharted waters.

To be blunt, the way the industry is structured right now, private sector multifamily—for all its growth of the past year—is still secondary to the GSEs.

“Multifamily is dominated by Fannie and Freddie,” says Clay Sublett, senior vice president at KeyBank Real Estate Capital. There are other sources—CMBS and life and banking lending—but they cannot hold their own against the GSEs. “It is not a level playing field,” Sublett says. “When Fannie and Freddie decide to step on the gas they can clearly dominate the market.”

The Private Sector Pushes Back

Not that the private sector is a nonentity in this space, or that it would not be able to step up if the GSEs were to be disbanded (a highly doubtful scenario in the run-up to an election year). In recent months a number of developments have suggested that the private sector is itching to take a greater run at the multifamily finance space.

In November, Walker & Dunlop and Fortress Investment Group announced the launch of a CMBS lending platform from which the company hopes to originate $1 billion a year, starting at the beginning of 2014. Also part of the mix will be high-yield whole loans, mezzanine debt and preferred equity. Tim Koltermann, who was tapped to head the group, says that one reason for the launch is that the agencies have started to pull back from their multifamily finance operations and W&D saw the need to step in.

“As we look at the marketplace, because of Dodd-Frank and Basel, there is a lot of activity that money banks can no longer finance—they can't offer an all-end solution under one roof anymore,” he says. “So that is what we are trying to do.”

In August, Capital One announced it was acquiring multifamily originator Beech Street Capital in the fourth quarter, which it duly did—creating, with the stroke of a pen, a combined entity that is the fifth largest national multifamily loan originator. The two companies saw the acquisition as a way to balance out each other's strengths and weaknesses. “There are clearly other markets we are not that strong in and would like to be and thoroughly expect to make inroads,” Rick Lyon, head of commercial real estate banking, Capital One, said at the time of the deal's announcement.

Existing providers, as well, happily step up to the plate for deals, when they can. In April, for instance, TIAA-CREF provided $86.8 million in acquisition financing for Monument Park, a 460-unit, class A multi-housing community in Fairfax, VA. HFF helped secure the financing on behalf of a private real estate fund advised by Crow Holdings Capital Partners. It is a 10-year fixed rate loan.

On the smaller scale, there is the example of the $28.6-million senior construction loan MAC Realty Advisers placed with a national bank for the development of Kalorama West, a 117-unit apartment building in Washington, DC.

A number of lenders competed for the infill project and the loan required virtually no new cash equity, according to MAC executives. Life insurance companies as well have a strong appetite for multifamily loans—when they can win them from Fannie Mae and Freddie Mac, that is. About 12% of their total commercial real estate loan originations go to this category, Sublett says.

But in truth, these private-sector originations are more the exception than the rule. More typical of deals in the industry are those like the $28.2-million acquisition financing NorthMarq's Los Angeles regional office arranged for Pinnacle Canyon View Apartments, a 288-unit multifamily property in Orem, UT. NorthMarq secured the financing through a Fannie Mae DUS Lender.

Or they are like the $40.5-million refinancing NorthMarq arranged for two multifamily properties in California—$17.7 million for Austin Commons Apartments in Hayward and $22.8 million for Gateway Apartments of San Leandro—in which the broker got Freddie Mac comfortable with the combination of cash out, month-to-month leases at the properties and the TIC borrower structure. Despite the huge prepayment penalties on the existing loans coming due in 2015, the sponsor wanted to lock in on the low interest rates available from Freddie Mac.

In short, by their strength and aggressiveness, Fannie Mae and Freddie Mac get the cream of the crop—and private sector sources of multifamily finance suffer as a result.

CMBS shops continue to struggle with “adverse selection”—that is, the acceptance of second-rate loans because that is all there is, Sublett says. “B piece buyers are always asking securitizers, 'why this particular deal? Why didn't the GSEs want it?'“ he says.

For that reason, Sublett says, the highest default rate in CMBS has been multifamily. “Over the last cycle most of the class A and B properties were financed by Fannie Mae and Freddie Mac because, simply, they are more competitive on interest rate and leverage.”

A Very Good Year

And indeed, despite their conservatorship status and the 10% scale-back in multifamily lending they were directed to take, the GSEs are flourishing. Freddie Mac, for example, reported that it issued a record $28 billion in multifamily securities via 19 K-Deals this year, up from $21.2 billion and 17 K-Deals in 2012. It also grew its private investor base to more than 140 domestic and international investors.

“2013 has been a great year—obviously it was our largest as far as securitizations were concerned,” says Mitchell Resnick, Freddie Mac Multifamily vice president of loan pricing and securitization. “We were in the market every two weeks to move that amount of risk.” 2014 will be a little smaller, he adds, noting: “we have less of a warehouse to work with.”

This is not necessarily great news for the private sector. While the GSEs may gobble up the best deals, the private sector clearly loves investing in GSE-backed securities for its own portfolios. Life insurance companies may be archenemies with the GSEs when competing for deals but they are also a top investor in, for example, Freddie Mac's K-Deals. And who was it that scooped up Freddie Mac's first multifamily bulk loan transaction in 2013—a portfolio of seasoned assets that had been residing on its balance sheet since before it entered conservatorship? An affiliate of Colony Capital.

For these reasons and others, the private sector is just as interested in the FHFA Scorecard for 2014.

Waiting for the Scorecard

It is not good then, to hear Resnick say that Freddie Mac can't discuss 2014 plans in too much detail because it is awaiting its marching orders from the FHFA.

Simply put, in the near term the most important decision coming out of the FHFA is the release of the 2014 Conservatorship Scorecard for Fannie Mae and Freddie Mac. A spokeswoman for that agency says that work on it is well under way, although she declined to say when the Scorecard would be made public.

Whether Watt will weigh in on the Scorecard is another key question, and there is no shortage to the guessing in the industry. This could play out in a number of ways, according to Willy Walker, CEO of the Bethesda, MD-based Walker & Dunlop.

“There is a lot of speculation about that,” he says. “There is talk that DeMarco might try to push the Scorecard out ASAP because he wants to leave his mark on the FHFA and the agencies as his send off. The flipside argument is that he won't do that because it would be subject to the sign off of the new director anyway.”

One factor to consider is the criticism heaped on the FHFA last year when it put out its 2013 Scorecard in March, Walker added. Namely, people pointedly noted that it is impossible to plan for a year when direction comes out three months into the year. But even if 2014's Scorecard is delayed for a bit, it might not be as much of a problem, as Walker has a theory that the next guidance will be for the longer term anyway.

“Some of the feedback the FHFA got was that one-year, short-term change is difficult,” he said. “On the multifamily side, at least, I think it will set up three-year objectives that will allow the GSEs many ways of meeting them. They may give them targets that are further out or allow them to focus on the origination side or how much risk they are retaining,” Walker says. “That is what I believe the regulator is focusing on and not a 10% cut.”

If that is the case, the GSEs are ahead of the curve. In 2013, Fannie Mae priced its first C-Deal offering—a new series in which the GSE farms out some of the risk in its portfolio to private investors—in a $675-million transaction. About 75 investors participated in the offering, including asset managers, mutual funds, pension funds, hedge funds, insurance companies, banks and REITs.

There was a lot of high interest in the offering, according to Laurel Davis, vice president at Fannie Mae.

“There haven't been a lot of new issuances of mortgage credit related securities in the residential space,” she said when the deal launched. “The Sequoia deals have been relatively small and there have been few other prime jumbo deals. So investors with a mandate to invest in the US residential market have had to trade in the secondary market for the most part.”

Fannie Mae is working on another C-Deal for early 2014.

For all the interest in the series, though, Davis had to hedge about next year's schedule. “We hope to be in the market with regular transaction in 2014 [but] a lot will depend on the FHFA's Scorecard for 2014.”