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Two Decades of Multifamily Financing

Working paper #457
Donald S. Bradley, Frank E. Nothaft and Michael A. Schoenbeck

Multifamily property finance has evolved dramatically over the past decade. The role of the traditional actors—thrifts, commercial banks and life insurance companies—has been overshadowed by the emergence of those with lower-cost access to the national and inter-national capital markets: Freddie Mac, Fannie Mae, and Commercial Mortgage-Backed Securities (CMBS). For example, since 1990, financing through Freddie Mac, Fannie Mae, and CMBS represented 69 percent of the net increase in conventional multifamily debt in the United States. The many changes accompanying this transformation include lower-cost access to capital; the decoupling of the underwriting, servicing, and investment decisions; and an injection of new capital from investors who had previously shied away from the complexities of apartment finance. Changes in capital holding requirements as well as the reduced risk of securities investments have encouraged banks, thrifts, and insur-ance companies to trade in their multifamily whole-loan holdings for Freddie Mac, Fannie Mae, or CMBS. Consequently, multifamily mortgage rates relative to benchmark yields have become less volatile and regional disparities in multifamily loan pricing have nar-rowed. The multifamily mortgage market has become bifurcated into small property financing (50 or fewer units) dominated by depositories’ portfolio lending, and large property financing largely funded through Freddie Mac, Fannie Mae, and CMBS. Large apartment financing has been for the last decade the stabilizing core of commercial real estate finance. Moreover, it appears that the secondary mortgage market’s underwriting standards and due diligence procedures have introduced sufficient market discipline to mitigate the past cycles in apartment financing.

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