A multifamily primer. (Executive Suite).

I AM A SINGLE-FAMILY LENDER. I HAVE always been a single-family lender. When I was given the assignment of authoring the annual multifamily column, I did what most people do when given a responsibility they are unfamiliar with: I procrastinated. Then I finally figured out what I could do--research everything there is available about multifamily and write about my learning experience. While experienced multifamily lenders may want to turn their heads, my objective is to help single-family lenders understand a bit more about the extremely interesting and dynamic world of multifamily lending.

What is multifamily?

Amazingly, this simple question does not have a simple technical answer. In reviewing various sets of data on the U.S. Census Bureau's Web site, certain graphs were broken out into "single family" and "two or more unit" categories. Other government releases such as the U.S. Department of Commerce/Department of Housing and Urban Development (HUD) monthly joint release on housing starts uses a one-to-four-family category for "single family" and five or more units as multifamily. This is also the Mortgage Bankers Association of America (MBA) definition, and as such carries the day. Freddie Mac and Fannie Mae set their definition of multifamily with loan amount minimums as well as unit specifications--but more on that later.

According to MBA statistics, multifamily mortgage bankers originated approximately $35 billion in 2001 and $26.5 billion in 2000. Over the last two years, multifamily has made up approximately 45 percent of the overall commercial mortgage banking origination market. As one might expect, the multifamily market is much smaller than the single-family market. According to the Brookings Institute, Washington, D.C., multifamily properties make up approximately 16 percent of the nation's housing stock. In 2001, approximately 281,000 multifamily units were completed; in 2000 that number was about 304,000 units. Current run rates are somewhere in between 2000 and 2001, as one might expect considering the current state of economic affairs. As of 2000, the total amount of multifamily debt outstanding was approximately s378 billion. While it may be smaller than single-family, multifamily is still a very substantial market.

Who is multifamily?

Much like single-family lending, the face of multifamily lending has changed significantly in the past 20 years. The traditional leaders in the multifamily business were commercial banks, thrifts and life insurance companies. As with single-family, the thrift crisis in the 1980s] resulted in a vacuum in the marketplace. While the other two traditionally strong participant segments filled some of the void, especially commercial banks, along came mortgage bankers and the agencies to fill the void.

In a review of the top servicers and top holders of multifamily debt, it is apparent that specialization is having a significant impact on the multifamily market. I could not find any information on top originators. I would assume this has to do with the fragmented nature of the multifamily origination marketplace. However, MBA does publish lists of top mortgage servicers for Freddie Mac, Fannie Mae and Ginnie Mae servicers. The top servicer to Freddie Mac and Fannie Mae as of year-end 2001 was Berkshire Mortgage Finance, with $12.3 billion serviced (1,500 loans) for the government-sponsored enterprises (GSEs), followed by ARCS and Prudential Asset Resources. The top servicer to Ginnie Mae at the end of 2001 was Reilly Mortgage Group, with $7.3 billion serviced.

There were several other items of note on the lists, especially for a single-family lender. Only 27 companies service 100 or more loans for Freddie Mac and Fannie Mae. Only 24 companies service more than $1 billion for Freddie Mac and Fannie Mae. Also, with very limited exception, notably absent from the lists are any large single-family lenders whatsoever, Wells Fargo being one exception. It should be noted that GMAC does not participate in the surveys.

As to investors, while there is still a great deal of direct lending taking place by thrifts, banks and insurance companies, there is no question that Fannie Mae and Freddie Mac are large and important players in the multifamily world. As the thrift crisis unfolded, both Freddie Mac and Fannie Mae accelerated the pace of their multifamily acquisitions. This pace proved to be a bit faster than may have been prudent, as both agencies suffered large losses in the late 1980s and early 1990s.

However, after some retooling the GSEs have come back stronger than ever. According to the Brookings Institute, Freddie Mac and Fannie Mae accounted for 30 percent of the growth of the multifamily market between 1995 and 2000. They are accelerating from even that rapid growth. In 2001 Fannie Mae announced that it had either invested or participated in S22.8 billion in multifamily business. This compares with $13.4 billion in 2000 and $12.4 billion in 1999. Similarly, Freddie Mac numbers for 2001 were $12.3 billion as compared with $6.9 billion in 2000 and $7.6 billion in 1999. Fannie Mae currently holds $82 billion in multifamily debt, with Freddie Mac holding strong at $23 billion.

Finally, if there are mortgage bankers in a market there are certain to be securitizations following closely behind. While there are very few multifamily-only, private-label commercial mortgage-backed securities (CMBS) formed, multifamily loans are an important component of many CMBS issuances and, due to their superior performance, are typically priced at among the tightest spreads of any commercial real estate loan type.

Where is multifamily?

Naturally, multifamily loans are everywhere. However, as with other real estate, some markets are more robust for multifamily development than others. According to Integra Realty Resources, the top five apartment markets in 2002 are Washington, D.C.; Sacramento, California; Houston; Orlando, Florida; and San Antonio, Texas. To compare, among the top single-family markets forecasted for 2001 as reported by Case Shiller Weiss Inc., Cambridge, Massachusetts, were Palm Beach, Florida; Riverside, California; Atlanta; San Bernardino, California; and Austin, Texas. It should be noted that several of the top five multifamily markets were also mentioned as top single-family markets.

As might be expected, all five multifamily market leaders are high-growth, highly transient areas with significant service components to the local economies. They are also all areas with significant immigration. Looking at this from a single-family perspective, it may make sense to track these markets to see if multifamily demand is a leading indicator for future single-family growth.

Another way to answer the "where" question might be to look for where opportunities may be present in multifamily lending. One area that the ABN AMRO Mortgage Group has experience in is the "low-balance" multifamily segment, Both Fannie Mae and Freddie Mac have minimum balance requirements of $1 million, at least in their standard programs. Most commercial real estate conduits look for loans of at least $3 million. The ABN AMRO Apartment Lending unit has been extremely successful in finding loans on both a direct and indirect basis in the segment between single-family and agency or conduit lending, with more than $1.4 billion funded in 2001. There is a secondary market in this product as well, as several packages of lower balance loans have traded at favorable execution in the secondary market. Although the multifamily market is well-developed, just as with single-family there are always niche market opportunities.

Overall, it was quite a learning experience taking my first steps into the multifamily world. There is no question that it is an extremely well-developed market; however, as with any market, there are opportunities. One observation is that although it is a well-developed market, there still is a great deal of fragmentation as far as market participants. Certainly the lack of standards for serviced loans has made it a challenge to scale an organization. Although there is no question that multifamily is more specialized and more localized than single-family, it will be interesting to see if the same game of consolidation to scale starts to play out. Based on some recently announced acquisitions, this may already be happening.

Another area that will definitely be of interest is technology. While one can argue cause and effect, there is no question that the single-family landscape changed dramatically as the ability of lenders to implement effective technology tools resulted in greater efficiency and, for some, a competitive advantage. From that perspective it looks as if multifamily is nearing the point where technology will make a difference.

Although some of these observations may be a bit presumptuous based on lack of experience, there is no question about one observation: The next few years will no doubt be as interesting in multifamily as it will be and has been for its single-family brethren.

William Newman is executive vice president of ABN AMRO Mortgage Group Inc. (AAMG) and president of InterFirst Wholesale Mortgage Lending, a unit of AAMG, headquartered in Ann Arbor, Michigan.