Erika Morphy is co-editor of Debt and Equity Journal, from which this article is excerpted.

Washington, DC—Representatives from the National Multi Housing Council had quite a sit down recently with James Lockhart, director of the Office of Federal Housing Enterprise Oversight, to find out what he thought about increasing Fannie Mae and Freddie Mac portfolio lending limits. The agency executives knew Lockhart’s official stance since he had outlined it in August in a public letter to Fannie Mae president and CEO Daniel H. Mudd when he asked for a “moderate” increase of about 10%.

However, NMHC, at the very least, wanted to give Lockhart its view on the issue. “If one or both of those companies are restricted in what they can purchase, it could have a chilling impact on borrowers, especially given the disruption in the conduit marketplace,” says David Cardwell, NMHC’s vice president of capital markets and technology. “So much of the volume Fannie and Freddie are doing now is a result of the problems in the conduit market.”

Lockhart, it turned out, did not reveal much more about his position. He indicated the agency is still considering a range of options and is willing to revisit the possibility of raising caps if necessary. The problem, Cardwell says, is that the government and regulatory agencies are focusing on consumers caught in the subprime crisis. “They haven’t been as focused on the indirect impact the debt crisis is having on the multifamily sector,” he adds.

For now, though, the greatest impact Freddie and Fannie are having on the market is their overstuffed pipelines. Deals formerly financed in the conduit market have shifted to the agencies. As a result, the time to close a deal has grown markedly longer in the past several weeks, according to several developers interviewed by DEJ.

“The agencies are becoming exceedingly competitive because the conduit business is basically gone,” says John Williams, vice president at Carmel Partners Inc. in San Francisco. Carmel has a long history with Freddie and Fannie, he adds, “but I think if you are a new borrower just introducing yourself to them it might be difficult to get their attention. One of the problems with Freddie and Fannie now is that they are so busy and they might not spend as much time with a one-off transaction.”

Carmel recently acquired six multifamily properties for its Fund II: Timberwood Apartments in Aurora, CO; Skyline Park Apartments in Kent, WA; Villa Pacific Apartments in Westminster, CA; One Belmar Place in Lakewood, CO; Tustin Park Apartments in Tustin, CA and Piedmont Apartments in Bellevue, WA. According to Chris Beda, chief investment officer at Carmel, these properties, as is typical for the firm, were initially financed on its $150-million line of credit with Wells Fargo. Later, the company will seek long term financing with one of the agencies.

“Fannie and Freddie are extremely busy right now. The time it takes them to get a deal done has definitely increased,” agrees Bruce Minchey, vice president/chief underwriter for KeyCorp Real Estate Capital Markets Inc. in Dallas. Minchey, who recently took over as national operations director of the firm’s FHA group, says borrowers should expect a 60-day to 80-day turnaround, compared to 30 days just several weeks ago.

The US Department of Housing and Urban Development‘s 223(F) refinance and acquisition program, which can be seen as a competitor to Fannie and Freddie financing, which Minchey says was always slower than the agencies, has grown even slower. “Still, though, money is available. It hasn’t dried up,” he says.

While that is good news for the moment, the slowdown at the agencies and the looming specter of agency portfolios that have reached their caps must be viewed through the prism of a commercial lending sector that has become decidedly skittish. Multifamily is the asset class in favor right now. However, lenders are clearly placing limits on the leverage, on how the deals are underwritten and, in some cases, vetting the borrowers themselves.

“There is definitely a pull back among multifamily lenders,” says Eric Brody, founder and principal of the Brody Group in New York City. “Banks are no longer willing to underwrite construction loans based on condo numbers. They will only do it if the rental numbers support the project.” He says a recent condo project he tried to finance was evaluated along those lines. “I received the money I wanted–but only because the rental figures worked for the bank,” he explains.

In addition, he says, lenders are looking at the builder’s own credit record, regardless of how the deal in question pencils in. “Before, banks would give money to first time developers,” Brody notes.

Jeff Friedman, principal with Los Angeles-based Mesa West Capital, a balance sheet lender that provides loans on transitional and value add projects in the Western United States, says borrowers can get the money they are looking for–even a commitment–but not necessarily at the leverage ratios they have come to expect. A few months ago, a multifamily might have received 80% to 85% LTV, financed at 90 to 100 basis points over 10-year Treasury on an IO basis. Today, that same deal would finance at 70% to 75% LTV at 190 to 210 over Treasury, with 30-year amortization. “And that is for lenders that are quoting. Many are now sitting on the sidelines,” he says.

Friedman tells of a loan application his firm just signed for a pension fund that teamed with an operating partner to acquire properties in California. “They requested 75% leverage. We told them to dial that down to 65% and, if they would, we would give them a commitment within the week.” They took the offer, he says. While they did not get the leverage they would have liked, they got something almost as valuable in this market: certainty that the financing would come through after they put down a nonrefundable deposit for the deal.

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