Multi-family mortgage financing opens up.

Mortgage financing is available today for multi-family housing from a variety of sources. But the mortgage terms are relatively conservative.

Nevertheless, mortgage financing for multi-family properties no longer is a lender's market, as it was for several years. Institutional investors are turning away somewhat from a strategy of focusing on buying Treasuries. Returns on government paper are at post-war historic lows - as of this writing, three-month T-bills are trading at 2.92 percent and rates on 10-year Treasuries are at 5.9 percent. Given this scenario, banks are looking for better yields from quality investment product in the mortgage market based on strong underlying real estate and strong ownership in each property-niche in which they lend.

Active in this market right now are U.S. and foreign banks, insurance companies, Wall Street underwriters selling securitized mortgage paper, and Real Estate Investment Trusts. They are offering private, conventional loans as well as government and quasi-government insured financing. Incidentally, Wall Street seems to have an almost insatiable demand for mortgage investment opportunities. And this is not surprising with savings accounts and money funds offering only 2 and 3 percent rates, while consumers clamor for higher returns.

Among the various types of real estate for which owners seek refinancing or acquisition mortgages today, investors recognize that apartment property loans are the safest. Shelter is a necessity and rent and mortgage carrying charges are among the first bills to be paid by most consumers. Moreover, lenders will not soon repeat the mistakes they made in the 1970s and 1980s in lending on apartment properties by basing loans on projected instead of current values.

Generally, they are funding only multi-family properties,where there is experienced, financially sound ownership. They want an actual cash investment of 25 percent and/or annual contributions to a reserve fund. Loan-to-value ratios generally are conservative.

As well, in addition to a strong cash flow - actual, not projected - that will pay operating costs and debt coverage, they sometimes require a reserve fund.

To assure the assure the reality of a stated cash flow, lenders want to see a three-year cash-flow history, and also are plugging in a 3 to 5 percent vacancy allowance, whether there are vacancies or not. And they are including up to a 5 percent management fee in the event they must take back a property. And co-op properties are being appraised as if they are rentals.

Fannie Mae has been a popular government mortgage program for the multi-family housing market, providing 75 percent loan-to-value mortgages amortized over 25 years at 8 percent interest. Freddie Mac is coming back into this market with a pilot program aimed at lending on older properties, and with significant reserve requirements built into its underwriting requirements. We are correspondents for both Fanny Mae and Freddie Mac.

Meanwhile, one of the most popular of the government loan programs being used by apartment house owners is the HUD 223 (f) fixed rate program. Its popularity derives from the fact that it deals with a problem caused by the loan excesses of the 1970s and 1980s when most real estate values were highly inflated and the loans highly leveraged. Naturally, these values declined steeply during the recession, and they still have not rebounded significantly.

But the HUD 223 (f) fixed-rate program provides for 85 percent loan--to-value mortgages depending on the reserves. The loans are amortized over 35 years. My company is a correspondent for a number of banks on 223 (f) mortgages and recently arranged several loans under the program at a 7 percent interest plus one-half a point for insurance.

One of the properties was a high-rise luxury apartment building in Queens, N.Y., with doorman service, an on-site playground, a work-out center and other amenities, but also with a number of unsold apartments. We were able to arrange an underlying mortgage for the property, despite the fact that presently most, banks won't consider lending on co-op apartment buildings that have a fairly large number of unsold apartments. For one institutional lender with which we work, key issues include not only unsold units but cash flow plus reserves on rental units - as much as $500 to $1,000 a

We also have used the 232 (f) program to finance an acquisition loan for a 500-unit rental garden apartment property and a rental six-story apartment building, both in New Jersey.

As we noted earlier, 232 (f) is a very popular refinancing mechanism today because of the high loan-to-value ratio allowed under it. However an initial reserve is required. In addition, owners who contemplate obtaining financing under this program should be aware that a great deal of documentation is required for it and that errors and omissions in providing the necessary information can result in substantial delays. Borrowers should be aware that there are significant variables in costs, including servicing charges, prepayment penalties and interest rates. Experienced underwriting is essential.