Mike May's Speech to the MBA Commercial Real Estate Conference on February 9, 2009
Prepared Remarks for Mike May
Senior Vice President of Multifamily Business
MBA Commercial Real Estate Conference
San Diego, CA
February 9, 2009
Let me welcome everyone to the Freddie Mac session. It's good to see all the faces that have become familiar to me now. We're glad you could join us today. And when it comes to being glad to be here, that includes all of us at Freddie Mac. At a recent concert by the Rolling Stones, Keith Richards said, "It's great to be here. Heck, with everything that's happened to me, it's great to be anywhere!" Well, now I know what's he talking about. At Freddie Mac, we are fortunate that we can be right here, right now, with each one of you.
Apartment Conditions Weakening
To say that 2008 was a turbulent year does a disservice to the word "turbulent." Catastrophic. A living nightmare. Hell on Earth. Any of them might better describe the business environment. Together, we have been dragged down by a housing depression, an economic recession, and a near total collapse in the financial markets. A shadow supply of vacant, single-family houses has flooded the rental market with a surplus approaching one million homes. Unemployment is rising fast, with 3.6 million jobs already lost during the recession. And as we all painfully know, the financial markets have lost trillions of dollars in economic wealth and extended the credit crunch beyond expectations.
In other words, the business environment has been about as bad as it gets. As a result, all the key indicators of the multifamily market have been going in the wrong direction. Indeed, apartment conditions have weakened considerably. Property values? Going down. Vacancy rates? Going up. Rental growth? Slowing down. Equity financing? Zilch. Private-market liquidity? Very little to be found.
For a while, the multifamily market had been somewhat immune from the havoc occurring in residential housing. But with the steep declines in the economy and financial markets, that is no longer the case. And there is widespread fear that things in our industry might get worse.
Well, this is a pretty sobering picture. There must be some good news, right? And there is. Before I left Washington, I received this e-mail:
Mike, I am asking that you relay this message to your correspondent lenders. As Director of the Federal Housing Finance Agency, I am monitoring developments in the multifamily mortgage market. I have met with the management teams of both GSEs. And I have received productive briefings from you and your team at Freddie Mac.
Like many of your lenders, I am deeply concerned about the economic dislocation taking place in this vital industry sector. Capital to support multifamily lending has become scarce as corporate balance sheets have come under enormous stress and the secondary market has contracted.
So, at this critical time in the economy, I want to underscore that we need Freddie Mac and your multifamily business to be active and engaged in the mortgage market. Without GSEs fulfilling their mission of providing liquidity, many lenders would have no other viable outlets for their loans and, as a consequence, would cease much of their lending activity. That is an unacceptable outcome to me and, more importantly, to the millions of Americans who rely on this market for affordable housing.
Under conservatorship, we have worked closely with you to ensure that Freddie Mac has been open for business in the multifamily sector. Indeed, as I said at the time the conservatorships were created, conservatorship provides the time and opportunity to restore confidence in the Enterprises, enhance their capacity to fulfill their mission, and mitigate the systemic risk that has contributed directly to the instability in the current environment.
In that context, and with the support of the Treasury facilities provided, I fully expect Freddie Mac to continue supporting the multifamily market. And after our recent meeting, I am encouraged by your plans to do just that.
Sincerely,
James Lockhart
Director, Federal Housing Finance Agency
So what does this message mean to you? It means that, amid all the destruction in the financial marketplace, Freddie Mac remains a source of liquidity. At this critical moment for the mortgage markets, Freddie Mac is still here. Now, I won't sugarcoat our situation. There are significant problems and challenges. We have experienced major losses. We are operating under a Conservatorship. And we have needed capital infusions from the federal government.
So why are we still here? The answer is that the policymakers who oversee the company have given us a specific charge: Keep the mortgage markets alive. And that is precisely what we are doing. In the single-family market, the GSEs are supporting 60-to-70 percent of all new home loans. In the multifamily market, it's even higher: 80-to-90 percent.
At Freddie Mac, we have been able to support the market because we have spent the past few years building a better multifamily business. One that makes the right credit decisions. One that takes customer needs seriously. And one that supports the market in good times and bad.
Stabilizing An Unstable Market
Our business volumes have grown considerably in recent years. But most of our growth has occurred since mid-2007, when the credit crunch began to grip the market. We have used our liquidity to stabilize an unstable market. In the past two years, we have purchased $46 billion in non-CMBS multifamily loans. In 2008, we set a new annual record: $24.3 billion. That was up 10 percent from the year before. And it sent our loan portfolio up 30 percent to $88 billion.
Last year, almost everything was up. Our total conventional business was up three percent. Seniors housing, nine percent. Student housing, 20 percent. Structured transactions, 23 percent. Targeted Affordable, up a whopping 50 percent. What's more, our new Capital Markets Execution funded more than $415 million, with an additional $455 million in the pipe. And that's not all we did.
When the company began to experience financial difficulties, the multifamily business stayed focused on the task at hand: supporting customers and markets. As you can see on this slide, our mortgage purchases remained consistent throughout the year. In the months following conservatorship, we funded more than $6 billion in loans. We executed some of our largest and most complex deals. We expanded our Capital Markets Execution to all conventional customers. And to ease your warehouse lending needs, we enhanced our expedited funding process. The bottom line: Under conservatorship, we haven't missed a beat.
And because you stood there with us, even more good things happened. When your other opportunities in commercial real estate dried up, we created value for you in the multifamily space. For us, Multifamily became the most successful business line at Freddie Mac. We delivered on our mission by supporting your needs for liquidity, and by making home possible for 418,000 families, almost of all of them just getting by on modest incomes.
Thus, in 2008, a time when liquidity was needed most by the multifamily market, Freddie Mac fulfilled the mission that Congress created for us.
Looking Ahead
Now, I will be the first to say that we didn't satisfy you all of the time. No customer wants to see prices go up or credit tightened. And we did both of them. The reason is straightforward: As we look ahead, our industry will come under continued pressure. The economy will weigh heavily on us. Property values will go down. Delinquencies and foreclosures will go up, including our own. And liquidity will remain a precious commodity.
In this environment, what can you expect from Freddie Mac? Well, a few things:
- We will remain a reliable source of liquidity. I am mindful that we will be operating against an economic headwind. So our job is to thread the needle and fund loans based on sound credit.
- To do so, we will be clear and transparent in our credit principles. We will paint the credit bulls-eye for you as best we can.
- We also will pro-actively manage distressed properties. We will implement loss-mitigation solutions that make economic sense. And we will do so while minimizing any impact on renters.
- And lastly, we will continue to invest in our customers, in both the technology you use and the staff support you receive from us.
In the following panel, our management team will tell you more about these and other priorities.
In the current environment, our collective goal is pretty clear: To keep our heads above water until the current business cycle moves out and a better one comes in. In the near-total absence of other funding sources, our liquidity can serve as a lifeboat for you to get to the other side. And emerge on the other side, you will, to a market that rewards those with a long-term commitment to multifamily, a more sustainable view of credit, more transparent securities structures, and quite simply, more value placed on business relationships.
These are principles that not only will shape a new marketplace, these are principles that will guide how we at Freddie Mac operate. And for that reason, we plan to be with you not only today, but tomorrow as well. It might be in our current structure. It might be in a new one. Either way, we plan to work together with you. And together, we play to win.