The apartment market is recovering nicely and Fannie Mae and Freddie Mac are enjoying the ride.

Multifamily loan production at both GSEs grew by at least 30% in 2011 from the previous year with Fannie reporting a $583 million profit on its multifamily guarantee business – more than double what it earned the year prior. 

In other words, while Fannie and Freddie's single-family businesses continue to lose money overall, the GSEs still have a profit center that has been contributing to their bottom line. And this profit center has not gone unnoticed by their regulator, the Federal Housing Finance Agency (FHFA), which recently issued a strategic plan for operating the GSEs in conservatorships over the next few years. As part of that plan, FHFA advanced the idea of possibly spinning off and privatizing their multifamily businesses.

“Unlike the single-family credit guarantee business, each Enterprise's multifamily business has weathered the financial crisis and generated positive cash flow,” the strategic plan said. 

Fannie Mae, of course, is quite aware that its MF business is thriving. In an interview with ASR sister publication National Mortgage News, GSE vice president for MF loan production Manny Menendez noted that the GSEs and Federal Housing Administration dominated the MF market immediately after the financial crisis.  

However, last year life insurance companies and certain commercial banks and thrifts increased apartment lending. "We believe the life insurance companies originated $11 billion last year," the Fannie VP said, which would be one of their biggest year's since 2007. 

Fannie-approved lenders (known as Delegated Underwriting Servicers) originated $24.2 billion of MF loans last year, up from $17.1 billion in 2010.

The GSEs also issued $10 billion in new MF MBS in 2011, compared to $8.7 billion in 2010.

The only pre-crisis player that has not staged a comeback is the commercial mortgage-backed securities market.  The 30-day delinquency rate on CMBS multifamily loans is 14.6%, according to the latest Trepp report.

The 60-day delinquency rate on Fannie-guaranteed MF loans is 0.59%.

Menendez attributes this performance to the DU lender/servicers and risk-sharing arrangement Fannie has with its 25 DU lenders. Under this arrangement, the lender assumes one-third of the credit risk on a loan and Fannie assumes the remaining risk.  When losses occur, the lender and Fannie share the loss proportionately.

"We think we have a unique business model because we share risk with our lenders," Menendez said.  "We have gotten through the cycle very well from a delinquency prospective," he added.

FHFA's strategic plan also notes that this risk-share feature makes the multifamily business an attractive candidate for privatization. 

The GSEs are "much further along in terms of risk sharing with multifamily lenders and investors than on the single-family side," the plan says.

FHFA acting director Edward DeMarco has directed Fannie and Freddie conduct an analysis of how much capital would be required for the multifamily units to survive as stand alone entities  – and how such a move might impact loan pricing.

“This is really meant to be an assessment process. We don't have a predetermined outcome,” DeMarco told NMN last month when the strategic plan was issued.

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