Mortgage outlook for multi-family property improves.

One of the best pieces of news for the multi-family property market, as we noted in a recent column, is that mortgage lenders in the past year have come back into this market in a meaningful way. For several years, institutional lenders responded to their accumulations of non-performing loans in the 1980s and to the concerns of government auditors by confining their mortgage activity essentially to refinancing only their own loans, and, even then, only for short terms. As far as new mortgage loans were concerned, most institutions were out of the mortgage market.

But with interest rates plummeting to historic lows, and with consumers turning to the stock market for higher yields, banks need higher returns than are provided today by government paper, and they are competing for customers by turning to the apartment house mortgage market for its higher and relatively safe returns.

As a result, indications are that owners of quality multifamily property seeking financing no longer face a strictly lenders' market.

Government programs, as we reported in the prior column, are popular both with owners seeking refinancing or acquisition mortgage loans, and with lenders providing these loans. Fannie Mac is active in this market, and Freddie Mac is coming back into it. And one of the most active of the government mortgage financing programs is the HUD 232 (f) program under which an owner can obtain an 85 percent loan-to-value mortgage.

But there also are a half dozen or so private-market institutions and vehicles offering financing to the multi-family real estate market, and these include American and foreign banks, insurance companies, property securitization, real estate investment trusts (REITS), and mortgage conduits.

Thrift and commercial banks have recently become more active in the apartment house lending field. Conventional loans from these institutions, on average, are at 70-75 percent loan-to-value ratios, with 7-1/4 percent being the best interest rate available from them as we moved into the fall of '93.

So far, have been looking primarily for loans on quality and well-maintained properties. We believe this will be the pattern for years to come, reflecting lessons learned from experience in the prior decade. Bank multi-family mortgage product today includes loans on rent regulated high-rise and garden apartment buildings - the so called affordable rental apartment properties - as well, of course, as luxury apartment building loans and underlying mortgages on cooperative apartment complexes.

A typical mortgage loan by the thrift and commercial banks on multi-family property would have a term of five years and carry a fixed rate. The payback schedule would be amortized over 25 years, and the mortgagee would have an option to renew for another five years. In addition, though, some banks with which we deal are offering 10-year loan terms and still others offer a floating rate mortgage on multi-family property loans. Off-shore banks also are in the U.S. multi-family loan market, but, at the present time, they appear to be more risk-conscious and less rate-sensitive than American banks: The foreign banks usually will only make loans having a relatively low loan-to-value ratio - say 66 percent or less, - well below the 75 percent available from most American banks. In return for the smaller ratio, the offshore institutions will provide the mortgagee with a lower interest rate.

However, off-shore bank terms, of course, are negotiable, and the foreign banks are not monolithic in their mortgage loan requirements. For example, among the foreign bank we represent, one has taken a different tack than some of its peers and will provide higher loan-to-values at a higher coupon for American mortgage loans.

Insurance companies are beginning to take on their traditional mortgage lending roles in the multi-family field, and, reflecting their new investment goals, have even eased one of their property requirements. Formerly, many insurance companies loaned only on apartment buildings that were 10 years old or less. Today, many are willing to finance apartment buildings that are over 15 years old, but their focus still is on top-of-the line rental and cooperative apartment buildings, in both the city and suburbs.

The insurance companies are offering 70 percent loan-to-value ratios, though they will go to 75 percent, and interest rates that range from 7-8 percent.

Wall Street vehicles provide several alternative ways of financing real estate. One of them involves the securitization of a real estate portfolio involving a major property or several significant properties. This technique works best for private investors who have large property portfolios, because the minimum cost-efficient package for a securitization program is about $25 million worth of property. However, I prefer using this method for a portfolio of income properties valued at $50 million and up. The paper created by securitization would be valued by Duff & Phelps or Standard and Poor's, and the process can be an efficient way of liquifying a portfolio at an attractive price.

Real estate investment trusts are today among the real estate favorites of Wall Street, but because it costs a great deal to put a REIT together - about $100,000, whether it's successful or not - these vehicles generally are created to solve specific problems: by owners having a large and diversified realty portfolio and who are looking to shed mortgage debt by replacing it with (usually) lower costing stock sold to the public; and by a partnership where, for one reason or another, there is a need to sell the properties and the most profitable way to split up and get money out is to "go public."

Mortgage conduits still are a relatively new mortgage market device. Several were started a few years ago as an experiment, but they and the technique have become major mortgage market factors. One of the reasons for this is that their supply of money is potentially unlimited because Wall Street can access all the major capital markets. Another reason is that they will finance properties that insurance companies and other established money sources often will not look at.

In part, the mortgage conduits, like other Wall Street offerings, reflect the Street's need for higher yielding product to offer customers. Of course, over time, the countervailing effect of their competition for properties will be to bring yields down. Mortgage conduits have been created recently by such underwriters as Bear Stearns, Kidder Peabody, Daiwa and DLJ.

Generally, the mortgage conduits today are charging a 9 percent interest rate, but I believe this will decline to below 8 percent and begin to average out at some 275 basis points over corresponding Treasuries. Loan-to-value ratios are in the area of 75 percent, and while terms may range from five to 20 years, they usually are about 10 years or less. Again, Duff & Phelps or Standard and Poor's provide the ratings.