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Lending
The lending of assets such as money, property, or other valuable personal belongings is a time-honored tradition. In the old days of lending, when local banks ran out of money to lend for mortgages, community growth was halted and so was the opportunity for business expansion. The federal government recognized this problem and initiated a plan to restock bank capital by substituting as a mortgage broker.
They set up the department of Housing and Urban Development, or HUD, as it is commonly known. Many specialized agencies of HUD developed, and you can probably recognize them by their acronyms such as VA, FHA, Fannie Mae, etc.
The federal government ran detailed studies and statistical analyses to determine why loans succeeded or failed. Their studies resulted in a set of guidelines and conditions that loans would need to conform to in order for HUD to purchase them from the banks.
These specialized agencies of HUD then offered to buy loans from the banks, allowing the banks to make a profit. This process has opened doors for investors to pool their capital and form national lending institutions, selling their pools of loans to the federal government.
The government would in turn securitize large groups of these loans and sell them to Wall Street as mortgage-backed securities. Wall Street sells these loans to national and international investors, which helps explain the daily precariousness of interest rates.
Over the years, more Americans began falling out of perfect credit, which created the necessity for lenders who were not as strict as the federal governments agencies. These lenders had the financial strength to purchase large pools of loans, securitize them and sell them directly to Wall Street for even larger profits! They translated higher-risk loans into higher interest rates and therefore higher earnings. Thus began another cycle of lending and mortgaging.
Are Banks funding Apartment Loans, ReFinancing and Commercial MultiFamily Construction Projects?
A common question being asked in todays financial climate, “Are apartment financing, MultiFamily property refinancing or apartment construction loans still available?” The answer to this question is a resounding YES. I continue see loans funded for apartment purchases, apartment refinances and construction lending. This is awfully good news in a time of a protracted credit crunch; a credit squeeze which has now gone global in its scope.
A source close to my company, one with ties to the top counsels of Fannie Mae and Freddie Mac, recently confided that Fannie and Freddie have been making money ONLY in the Apartment and Mobile Home Lending sectors. The upshot is this: These two venerable institutions of probity are determined to increase liquidity and strengthen apartment lending programs. The Fed needs to hang its hat on something, so why not strengthen an already existing stable lending platform to promote future growth in an industry already doing well: Apartments.
This protracted credit squeeze began as a virus. This virus started with the housing industry and contaminated the commercial real estate market along with just about every stock, financial instrument, business man, woman or line of credit in the country. Apartments have been the least impacted the credit crunch, but sales volume has still registered sizeable decline.
What a mess it has become. The chill in the credit markets began in October 2006. By October of 2007, this chill had become a deep freeze.
To understand the steep decline in the commercial real estate industry, one need only look at the numbers: Total commercial sales volume for October 2008 was barely one-quarter of its October 2007 level and just over 20% of the levels it achieved in 2006. Now that is a drop!
The aggregate deal volume and sales volumes for commercial real estate as a whole is down 75%, October 2007 to 2008.
For apartments, the fall off in deal volume has been sharp and steady: The number of properties trading hands has fallen 60% from October 2006 to October 2007 and has fallen another 75% this past 12 months.
There are several explanations for this but perhaps the number one reason is price risk, as measured between the spread of cap rates and the 10-Year Treasuries. In the apartment sector, this spread has more than tripled, (not Good) to a spread of 263 bps from their narrowest point in July of 2006, when it was 81 bps.
Between 2000 and 2004, the total renter households declined by 1.9 million as home ownership increase from 66.9 percent to 69 percent.
In 2005 this house-hold, rental-living trend began to reverse itself. Since the beginning of 2007,the home ownership rate has fallen by 110 basis points, resulting in 1.5 million additional renter households. This reversal is most pronounced in the younger age segment but it cuts across all age lines. The trend is up for rental-living-units.
In the end, Apartments are holding up well. Financing IS available and more people than ever are in need of rental housing.