Followers of Commercial Mortgage Loan Blog knew long ago that the housing tax credit was a dumb idea. We posted as much months and months ago. Now a study, by some academic types at Northwestern, have studied it and came to the same conclusion:
The housing tax credit:
Great, another $22B down the rat hole. Read Tax Prof’s post about the study here.
From the stand-point of the commercial real estate industry, QE2 was a $600 billion dollar bust. Rates stayed low but lending stayed anemic. Trophy assets changed hands and big players with cash on their balance sheets got loans while bread and butter assets floundered because banks aren’t lending to the small operators or the mom and pops.
To further exasperate and prolong the problem, banks did not unload nearly enough of their problem loans or problem real estate. Why should they when they can stay solvent by borrowing money for free?
QE1 and QE2, while adding substantially to our national debt, did not solve our problems, it only allowed us to tread water and search the horizon for a rescue boat that we now must realize is not coming.
So what now? Do we print more money and buy the US Bonds that no one else will, or do we let the markets price our debt and go bankrupt?
Globe Street expresses the frustration that CRE execs feel in this recent post.
Freddie Mac recently announced that adjustable rate mortgage (ARM) loans are now eligible for securitization into Freddie Mac Multi Family Mortgage Backed Securities (K Certificates).
ARMs will now be purchased by Freddie through its CME multi family mortgage loan execution path. The loans will be bought from approved lenders in Freddie’s network, pooled with other eligible loans, securitized by Wall Street investment bankers and sold to the public.
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Liquidity is, of-course, welcome as we continue to work out of our credit malaise, but as we have said before, it is somewhat disconcerting that such a large percentage of all multi family lending must come from the Government.
Click Here to Learn More about Freddie Mac Multi Family ARM Loans.
There is not much liquidity for commercial mortgages in the retail, office or hospitality sectors of the commercial real estate industry, but there’s plenty of capital available for multi-family (apartment) buildings. The good news is that the Government is lending massive amounts of money against apartment properties; the bad news is that no one else is.
Virtually all the institutional loans being made today to purchase, refinance or build apartments are being funded or otherwise supported by Fannie Mae, Freddie Mac, The Federal Housing Administration (FHA) or The Department of Housing and Urban Development (HUD).
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For almost 2 years now, these Government Agencies have been the primary lenders to the rental housing industry. They stepped in to counteract the liquidity crisis that was caused by the collapse in the commercial mortgage backed securities markets (CMBS) and, almost by default, have become the only game in town. Even the banks who claim to be lending right now are, in reality, just originating loans and selling them to Fannie or Freddie.
As the economy improves traditional multi-family lenders, such-as insurance companies, smaller regional banks and Wall Street investment houses, would like to re-enter the market place with their own commercial mortgage offerings. Unfortunately for them, they are finding that they can’t compete with Uncle Sam who, of course, can simply print the money that it uses to lend.
Fannie and Freddie could maintain their dominance in multi-family finance indefinitely, but they won’t. They are lending at such levels because no one else can. As the economy improves and real, traditional banking becomes profitable once again, Government Agencies will retreat and allow the markets to provide the necessary capital. When that happens rates will be higher but the increased competition will mean more people will be able to qualify for loans.
Those lucky enough to meet the requirements of a Government Agency loan ought to apply now. When the time comes to lure lenders back into the market the Government will make itself less attractive by further tightening their underwriting criteria and lowering their loan-to-value ratios.
To secure the most favorable rates, terms and conditions that Government sponsored lending has to offer, a borrower must have decent credit (640 or better FICO) and a sound balance sheet that includes some liquidity (cash in the bank). Fannie and Freddie will lend up to 80% LTV but most loans that they are accepting now are in the 70%-75% LTV range. The property must be able to pay its own mortgage with a debt-service-coverage ratio (DSCR) of 1.2% or better and the building has to be stabilized (history of profitability). It goes without saying that the property must also be in good condition with little deferred maintenance necessary. The Government is sponsoring loans in all 50 states in-order to benefit the rental markets nationwide.
Loans typically come with 3, 5, 7 or 10 year terms and are amortized over 25 years. Currently rates are at historic lows due to the weak economy.
Apartment owners can get Agency backed loans through their local banks, larger national banks and through many other commercial mortgage lenders who enjoy direct and indirect relationships with Fannie, Freddie, FHA and HUD. You can’t apply directly to the Government.
Property owners who don’t qualify for agency loans will have to pay more to a private lender or work to meet Government requirements.
It’s good to know that there is liquidity for multi-family investing, but it is disconcerting to realize that the only willing and able lender is the US Government. As things improve this should change.
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It is anticipated that, for the second month in a row, the Feds program to restart the commercial mortgage bond market will fail to produce any sales.
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In a sign of just how bad the commercial real estate market is, South Florida property owners and investors are all but ignoring new federal rescue programs that they say are confusing and beyond their reach. Some are calling instead for the government to scrap the programs and let the marketplace hit bottom. That way, they say, the recovery can really begin.
Even though some industry groups have touted the federal programs as a boon to commercial real estate, local and regional developers and investors figure they will get little help from the Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF) and Public-Private Investment Program (PPIP). Instead, they’re forming their own funds to acquire properties or distressed loans, seeking refinancing on mortgages and loan extensions.
READ THE REST AT GLOBESTREET.COM
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We here at MasterPlan Capital generally love tax cuts, tax breaks and tax credits of all sorts, but we are Leary of the government’s proposal to offer a $15,000.00 tax credit to all home buyers.
First of all it’s a big break to homebuyers at the expense of everyone else. Why should renters and other tax paying citizens who happen to be out of the residential real estate market subsidize other people’s American dream? Why should you or I be forced to help a stranger pay for his house?
Redistribution schemes don’t work because although Paul gets paid, Peter gets robbed. The result is, at best, a wash to the overall economy.
Secondly, it’s artificial manipulation of the market. The housing market needs to find its true bottom; meaningful recovery can not happen until it does. Paying people $15k to buy houses will certainly increase demand, but the market will respond to that demand with price increases until it equalizes. The equilibrium, however, will be false and the market will be subject to devaluation when the tax credit is taken away.
It is not the mandate of the US Government to favor one class of people (homebuyers) over another class (renters, single people, retired people, students) and government intervention always has unintended consequences; bad ones.
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CB Richard Ellis Realty Trust just bought two office buildings outside of Washington, D.C. for $41.4MM. The offices are across from Dulles International and are both 100% leased, each by a single tenant, one building is occupied by a government agency the other by a government contractor. Both buildings are SCIF facilities. SCIF stands for “sensitive compartmented information facilities” That just means that access to the buildings and each section of the buildings is highly controlled because they may house classified information.
It’s good to see deals getting done but it’s a little disconcerting when you realize that CBRE is betting $41MM on the growth of government.
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