Q&A With Fannie Mae’s Heidi McKibben: Fannie Mae Looks at Ways to Mitigate Risks from Weaker Apt. Markets

Fannie Mae is providing much-needed capital on the permanent debt side for multifamily housing today. Presently under conservatorship and government control, the agency is acting to manage risks in the changed economic environment. Keat Foong, executive editor at MHN, catches up with Fannie Mae Vice President of Multifamily Production Heidi McKibben (pictured) to get an update on this important source of multifamily financing from the point of view of capital availability and underwriting standards. McKibben indicates how seriously she thinks the economic downturn is affecting apartments, and she tells MHN that Fannie Mae is considering additional ways to “mitigate risks associated with weak rental demand.” Fannie Mae is also looking at increasing its sale of Mortgage Backed Securities as a source of liquidity, and some of the welcome news is that investors are starting to come back to the market.   MHN: How much of a concern to Fannie Mae are delinquency and default trends for multifamily loans at present? Have they worsened significantly?McKibben: Fannie Mae’s multifamily serious delinquency rate was 0.32 percent as of March 31, 2009 as compared to 0.09 percent at the same time last year. Not unexpectedly, the increase reflects stress on our multifamily guaranty book of business due to the severe economic downturn, which has adversely affected multifamily property values and refinancing options. As a result, we increased our multifamily combined loss reserves by $520 million during the first quarter of 2009 to $624 million as of March 31, 2009. We are also looking at ways to mitigate risks associated with weak rental demand. This could include strengthening our risk management infrastructure; limiting risk on new business; and protecting and growing our existing book, among other possibilities.MHN: Fannie Mae tightened its underwriting standards late last year. Will there be further adjustments to underwriting standards coming down the road?McKibben: With respect to underwriting standards, we will continue to make adjustments to appropriately reflect changes in fundamentals at the property and overall market levels for multifamily assets. MHN: What does it mean for a market to be on your watch list, and which markets are these? McKibben: You may be referring to markets that we may designate as pre-review markets from time to time.  Fannie Mae reviews and approves all transactions originated by our multifamily lenders in pre-review markets.   These markets are typically characterized by higher vacancies and concessions and suffer from greater impact due to economic factors such as job loss or single family home foreclosures, among others, which may impact performance of multifamily assets.MHN: What is the update on Fannie Mae’s initiative to sell more Mortgage Backed Securities (MBS)? Has the market demand for MBS normalized in the last few months?   McKibben: Our effort to revitalize the multifamily MBS market is going very well. We have seen strong and growing demand over the course of this year for Fannie Mae’s multifamily MBS by various investor types. We issued approximately $2.4 billion in MBS securities in the first quarter of 2009. We have been working to re-introduce our MBS product to the market with our flagship MBS/DUS product. We have updated our marketing materials and have worked with our lender partners to increase the flow of MBS product that is made available to the market.  This increase in activity has been well received and a majority of our business is now being delivered as an MBS execution. We have also seen significant improvement in trading levels for our MBS/DUS and have seen spreads tighten by approximately 40 to 50 basis points since March of this year. We have seen strong and growing demand over the course of this year by various investor types.  MHN: Are the interest rates and terms to multifamily borrowers for loans made for an MBS execution any different than for portfolio executions? McKibben: No, because we have seen a return to fundamentals in the market both in terms of credit underwriting and deal structuring.  The MBS market is looking for traditional loan structures:  terms of 10/9.5 years with 30-year amortization, no interest-only periods and 1.25x DCSR and 80 percent LTV.  That’s the majority of the business that’s getting done today.