Fannie, Freddie Voice Concerns on Multifamily Problems

Freddie Mac and Fannie Mae say the declining condition of commercial properties is one of the biggest challenges facing multifamily servicers today. Both agree the so-called watch lists on problem loans are growing in size.

"Our top-shared concern is really all about physical risk," said Karyn Sandelman, portfolio services director for Freddie Mac, at the MBA's Commercial/Multifamily Servicing and Technology Conference in New York last week. "We have declining cash flows and overextended borrowers and an unwillingness to take care of the real estate."

In order to deal with this, Freddie Mac is working on an inspection quality control protocol it is putting in place next year. The primary goal is to review the inspections and to do quick "drive-bys" of watch list loans while in specific markets.

Freddie Mac is requiring quarterly reporting on a portion of its multifamily portfolio. For loans deemed to be in the highest exposure of emerging risk, Freddie has asked for more analytical risk assessment from its servicers.

"The first quarter that we got the deeper review was in the third quarter of 2009. From that data, we changed the risk profile rating from our group on almost 20% of the loans that were submitted to us. Out of that, 80% were actually elevated on our watch list and 20% were reduced to a lower level or removed from the watch list," said Sandelman.

As loans move up and down the watch list levels it changes the amount of effort servicers put into those loans as well as the amount of monitoring by the Freddie Mac staff. The higher risk the loan is, the smaller the analyst portfolio will be, and that means they will have more interaction with the servicer and the borrower to understand what is happening on that loan.

Like Freddie, Fannie Mae has started quarterlies on its entire multifamily mortgage credit book of business of $185 billion. This includes watch list loans and performing loans.

The GSE is conducting onsite inspections to deal with the problem. For three quarters, Fannie has chosen "quick sites" in five cities every quarter from all of its services where it conducts drive-bys and talks to property managers.

"We have learned a lot about the quality of inspections and perception of the risk," added Caroline Blakely, vice president, Fannie Mae. "This quarter we are trying something new. In one market we are seeing every one of Fannie Mae's properties on a deeper dive."

Robert Shean, chief operating officer of M&T Realty Corp., listed loan maturity management as a third hot topic for servicers.

He says it causes him "a lot of sleepless nights," adding that "balloons [mortgages] are facing their maturity dates. While the flow of maturing loans isn't particularly overwhelming [presently], when you look out over the next few years, we all know we are in for a rough ride."

In an internal credit review, while mapping out maturities from 2010-2020 for M&T, Mr. Shean said it doubled well as a retirement planning tool.

"It became very clear to me when my retirement papers are going in."

It's been a modest year for M&T. The company had 14 multifamily total loans in 2010. Going forward, the volume is expected to pick up next year at four times the level, he said, followed by six times the level in 2012.

"In 2013, the roof really falls in for us. By the way, that's my retirement year. That is when we will be messing with 10 times as many loans as we are dealing with this year. That is mind-boggling when I think how much effort is going in to dealing with the very few we have in today's environment."

In the next three or four years, most of the emphasis is going to be on the Fannie Mae maturing portfolio.

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