The Market Has Yet To Reach Bottom

Jeffrey Day (pictured) is managing director and co-head of Deutsche Bank Berkshire Mortgage (DBBM). DBBM is a Fannie Mae, Freddie Mac and Federal Housing Administration (FHA) mortgage lender. It originates in excess of $6 billion per year in multifamily loans, and has a servicing portfolio of over $23 billion.As a part of the Deutsche Bank Global Commercial Real Estate Group (GCRE), DBBM also offers Commercial Mortgage Backed Securities (CMBS), conduit, mezzanine and bridge financing, as well as real estate investment banking services. Day is jointly responsible for the overall operation of the 200-person firm, including origination, underwriting, closing, servicing, asset management and investor relations. He talks to Online News Editor Anuradha Kher about the bailout of Fannie Mae and Freddie Mac, its impact on multifamily and why he believes the market has yet to reach its bottom.MHN: How is this conservatorship being received in the multifamily industry? What have you been hearing? Day: Many people in the industry believed this needed to happen. With this intervention, the questions surrounding Fannie’s and Freddie’s destiny have dissipated. In that sense, there is more clarity, at least in the short run. Of course, with a new Congress and administration set to come in, how this takeover will play out over the long term is still unclear. MHN: How will the takeover affect multifamily financing? Day: Over the recent past, Fannie and Freddie were really the only debt capital sources for the multifamily industry.  Without them, liquidity in the multifamily market is lost and the market freezes up.  The good news is that we have heard directly from both GSEs that it is business as usual. Hank Paulson has made it clear that he does not want the GSEs to be owned by the government and that he wants to minimize the cost to the taxpayer. As the multifamily businesses have excellent credit books and excellent profitability, it is in FHFA’s best interest to keep the multifamily side of the GSE businesses unaffected. MHN: Has the forecast for multifamily changed since this takeover? Day: It is too early to forecast right now. There were cyclical changes prior to the bailout and it is difficult to differentiate those changes from the changes that are taking place after the takeover. There are macroeconomic issues such as unemployment, low job creation, and the single-family market which could impact multifamily in the near future. This may cause a further tightening of underwriting criteria, but this is certainly not directly related the takeover. Cap rates in the tertiary and secondary markets are going up and through the end of this year, I see acquisition activity continuing to slow. MHN: Will this be enough to turn around the woes in the housing industry? Does the government need to do more? Day: I am generally a free market proponent.  I believe that the markets need to find their own levels. I don’t believe that we have reached the bottom yet. We are currently in a recession and the economy is suffering, domestically as well as globally, and this is definitely not the type of environment in which home prices will likely rally. MHN: How is the Lehman situation likely to affect the housing market and multifamily, if at all? Day: Whatever happens with Lehman Brothers, I don’t believe it will have any kind of resounding impact on the market. I think the market has become desensitized to these kinds of issues. The question is how much stamina and ammunition does the government have left to do anything about a Lehman-like situation? MHN: Do you have any advice for borrowers right now? Day: We believe it is business as usual and good deals are still being done. The GSEs and we continue to look for good opportunities.   MHN: How is this different from the advice you might have given borrowers last week—just before the bailout? Day: Before this happened, there was a feeling that a precipitous event was looming on the horizon, causing uncertainty among borrowers. Now with the government having stepped in, the GSEs’ credit quality has been restored and cost of capital is lower. Certainly the adjustable rate mortgages are very attractive now. Having said that, this plan is not cast in stone and its long-term implications are still unknown.