BIG Competition.(Fannie Mae and Freddie Mac)

Both Fannie Mae and Freddie Mac have boosted their activity in the apartment lending markets. Pushed by affordable-housing goals set by HUD, the two secondary market giants are approaching a 40 percent market share.

In the multifamily lending industry, it's hard to find someone who takes a neutral position on the growing role the two dominant government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, are playing in the market.

Those companies that have become frequent originators through the GSEs' automated underwriting networks say Fannie and Freddie bring real benefits by their consistent presence in the apartment lending markets. These lenders salute the active role the two are playing.

Then, there are other players that grudgingly give the two GSEs their respect, but keep a wary eye on the competition, which they feel has become extremely aggressive in the marketplace.

Fannie Mae's Delegated Underwriting and Servicing (DUS) program and Freddie Mac,s Program Plus(r) have grown so important to the multifamily lending industry that some of the biggest lenders now must consider the "Prudential Mortgage Paradigm." That is, do they maintain an independent course of action or go out and acquire an existing DUS or Program Plus lender?

The paradigm was defined by Newark, New Jersey-based Prudential Mortgage Capital Co. LLC which, last year, in a $138 million deal, bought The WMF Group Ltd., Vienna, Virginia, a top-five Fannie Mae DUS lender--thus instantly becoming a DUS lender. Another similar transaction occurred in 1999, when Lend Lease Real Estate Investments Inc., New York, bought Dallas-based AMRESCO Capital Ltd., an originator of loans for Fannie Mae and Freddie Mac.

"Last year, 50 percent of the Freddie Mac Program Plus lenders changed hands, many through consolidation," says Shekar Narasimhan, a managing director of agency and funds management at Prudential Mortgage. "Also, 25 percent of Fannie Mae DUS lenders changed hands, and they were to some of the largest lenders in the country--Prudential, Lend Lease, KeyCorp and Washington Mutual."

Those lenders that haven't become part of the GSE distribution system are left but one primary option: choose their financing areas carefully so as not to compete directly against the GSEs.

"The competition we are seeing from the agencies, both on price and proceeds, has really forced us to try and pick our spots where we want to be competitive. We have decided to just be very high-quality and really compete on that price level," says Joseph Franzetti, a director with Salomon Smith Barney, New York, which has a conduit program that lends on multifamily properties.

There is a third option that sometimes comes as a response to this narrowing of strategic business opportunities. Not many have chosen this route. The option is to become one of Fannie Mae's and Freddie Mac's more committed industry critics--a group that is becoming more organized and more strident all the time.

It's easier to find those people who are not entirely happy with the direction of the GSEs or what is perceived to be their anticompetitive zeal, because the most strident among them now have joined a group called FM Watch. FM Watch has its own Web site (www.fmwatch.org), and has taken to calling for stronger regulatory containment of the GSEs, however, they are focused primarily on the single-family lending market.

Washington, D.C.-based FM Watch represents a coalition of financial services- and housing-related trade associations working with affordable-housing and consumer advocates, taxpayers and financial institutions. The objective of the organization is solely to monitor the activities of Fannie Mae and Freddie Mac with an eye out for mission creep--or going beyond the activities authorized in the GSE's charters.

Lending credibility to the group's work is the involvement of some widely respected financial services companies including GE Capital Services, Chase Manhattan Corporation and Wells Fargo & Co.

One of the tenets of FM Watch's mission is to not allow the GSEs to move beyond their unique charters into markets and services already served by the private sector. While FM Watch does not focus on multifamily lending per se, according to statements posted on its Web site it is critical of the automated underwriting networks, which are as important to the GSEs' growth in multifamily as they are in single-family.

FM Watch views the underwriting networks as anticompetitive, or as FM Watch Chairman Gerald Friedman stated in an ABA Banking Journal article, "Fannie's Desktop Underwriter[R] and Freddie Mac's Loan Prospector[R] are monsters in disguise."

Basically, FM Watch charges in a pronouncement on its Web site that Fannie Mae and Freddie Mac are "squeezing out competitors and creating a monopoly."

Whether the GSEs are viewed as too aggressive or simply responding to a marketplace that needs their programs, the two companies have attracted adherents as well as critics.

Government birthrights

Originally called the Federal National Mortgage Association, Fannie Mae was created by Congress in 1938 to bolster the housing industry in the wake of the Great Depression. Fannie Mae started out as part of the Federal Housing Administration (FHA), but in 1968 it became a private company. Today, the Washington, D.C.-based company ranks as the country's 26th largest corporation, with $37 billion in sales, according to Fannie Mae. It still operates under a congressional charter, and Congress has exerted pressure on Fannie Mae to increase its affordable-housing efforts.

Fannie Mae maintains it is the nation's largest source of financing for home mortgages and the largest investor in multifamily mortgages. Last year, Fannie Mae's DUS product line financed $8.7 billion in multifamily business, according to the company.

Begun as the Federal Home Loan Mortgage Corporation, now officially known as Freddie Mac, this second housing GSE is much younger than Fannie Mae. It was launched in 1970 and today remains a congressionally chartered company that buys conventional residential mortgages from lenders, and then issues securities backed by the pools of loans. Today, McLean, Virginia-based Freddie Mac is also a shareholder-owned company, ranking as the country's 62nd largest with sales of $33 billion, according to Hoover's Online.

Since the introduction of the Freddie Mac Program Plus network of multifamily loan originators and servicers in 1993, Freddie Mac has provided financing for more than 7,200 multifamily properties totaling more than $29 billion. That volume represents more than 900,000 rental units across the country, a large portion of which is affordable to people whose income levels are at or below area median income--including newly established households, single-parent households, large family households at lower salaries and older Americans.

"Our business is purchasing multifamily mortgages that fit our credit and pricing parameters, and to the extent there are mortgages out there, we go after them," says Mitchell Kiffe, vice president of multifamily loan production with Freddie Mac. "If you look at Freddie Mac's multifamily assets owned as a percentage of mortgage debt outstanding, we have grown incrementally over the last few years.

After being out of the multifamily market in the early 1990S because of portfolio problems, Freddie Mac has been active in the sector since 1993. Going back six years ago to 1995, annual multifamily investment volume was less than $2 billion, and that rose to a record in 1999 of $7.8 billion. Last year, volume slipped to $7.1 billion, according to Kiffe.

More than 90 percent of the units that Freddie Mac financed in 2000 were affordable to low-income to moderate-income renters, says Kiffe.

In 2000, Fannie Mae's overall multifamily loan production reached $13.5 billion, and that included a new production high of $7.8 billion from its DUS network, says Wendell Johns, Fannie Mae's vice president for multifamily affordable housing. "Over 49 percent of the units we financed were of low-to moderate-income and, in addition, 31 percent were in underserved areas."

The heat is on

Fannie Mae's overall production was quite substantial, but Johns says 92 percent of the financing it did was well within that low- to moderate-income definition that counts toward the mandated affordable-housing goals for the GSEs. "I don't understand the criticism," he says. "May be on a particular transaction, the people who are voicing the criticism of Fannie Mae lost on the deal."

All the talk of affordable housing and financing for low income projects is just a smoke screen, says one FM Watch member who doesn't want to be identified since the person represents large companies on single-family issues. "You really have to ask yourself as you look at their activities in the multifamily area: What does their participation mean to actual renters? And the answer is, nothing--developers get a little bit more money [and] the deals help the GSEs meet affordable-housing goals, but it does not accomplish any affordable housing. What does the GSEs' participation mean to somebody who is low-income and needs rent subsidized? It doesn't mean anything. There is zero cost savings to renters."

Both Kiffe and Johns can point to clearly defined Department of Housing and Urban Development (HUD) definitions as to what should be "affordable" housing, but since both GSEs can bridge into moderate-income housing, some questions have also been raised as to what they finance.

"A high-end apartment community in a very expensive area like Silicon Valley would qualify as affordable, because the mean income of that apartment community [in contrast to the surrounding wealthy neighborhood] would qualify it as affordable as defined by the GSE guidelines, even though it is high-end," says Brian Stoffers, an executive managing director and chief operating officer for Houston-based L.J. Melody & Co.