2008-07-11, 08:54

The Ripple Effect From the Mortgage Housing Crisis

By: Multifamily Real Estate Industry Team
As the ripple effect (or should I say tidal wave?) from the mortgage housing crisis continues to reveal its true depth, we all wake this morning to find that the Bush Administration is now considering a takeover of Fannie Mae and Freddie Mac, the nation’s two largest mortgage finance companies. If implemented, this plan conceives that the two mortgage giants would be placed in a conservatorship, where the shares of the companies would be reduced to zero and losses on the mortgages they own or guarantee would be borne by taxpayers. The hope is that such a rescue step would prevent the financial system from collapsing, since the distress of the two companies has long-ranging impact on the global economy, given the number of oversees companies that hold shares in Fannie Mae and Freddie Mac.

The press about this subject (http://www.nytimes.com/2008/07/11/business/11fannie.html?pagewanted=1&_r=1&th&emc=th) largely focuses on the need to keep the housing mortgage market alive. If Fannie Mae and Freddie Mac are unable to borrow due to their declining creditworthiness, they will be unable to purchase residential mortgages from commercial lenders. As a result, home buyers will likely be unable to obtain loans for the purchase of homes and the nation’s housing market will be frozen, since banks will not likely make capital available to home buyers without the comfort that they can “exit” from those mortgages through a purchase of the same by Fannie Mae or Freddie Mac.

Clearly the dismal state of affairs for Fannie Mae and Freddie Mac will materially impact the availability of debt for the multifamily industry, which to date, has been one of the few asset classes within the real estate marketplace that still believed it had a reliable source of mortgage financing from those companies for acquisitions, dispositions and mandatory refinancings (i.e., for mortgages coming due).

Query whether the multifamily market may also come to a standstill (similar to the risks now presented to the housing market) and whether there are any steps that owners and managers should proactively be taking to best position themselves to address the challenges that continue to unfold as a result of the unprecedented meltdown in the capital markets. As one real estate industry player recently remarked, we are nowhere near the bottom of this yet. We are just touching the soft mushy stuff in the pond that deceives us into feeling like it may be the floor, but it’s really just only about halfway down.

(This entry posted by Pamela V. Rothenberg, a member of the Real Estate Development group)


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