Commercial borrowing shifts to Fannie, Freddie

By Jonathan Keehner and Al Yoon

NEW YORK (Reuters) - Big apartment and condo investors, who are having trouble financing purchases in the bond markets, are increasingly turning to government-chartered mortgage funders Fannie Mae (FNM.N) and Freddie Mac (FRE.N).

As the credit crunch deepens, large apartment property finance deals that six months ago may have been underwritten by banks like Morgan Stanley (MS.N) and JPMorgan Chase & Co (JPM.N) are now being funded by the "agencies."

The trend is the latest indication that both bond markets and banks are reluctant to provide credit, which could cut into U.S. economic growth. Fannie Mae and Freddie Mac, the largest sources of funding for U.S. residential mortgages, can still tap credit markets given their implicit government backing.

But to some critics of Fannie and Freddie, ramping up in apartment building financing is just a symptom of their taking on more risk as the housing market tanks -- which could make it hard for them to provide much more of a boost to the business.

"Right now the agencies are the only game in town," said Yuri Kletsman, a vice president in the commercial real estate group at Centerline Holding Co CHC.N. "Expect to see a lot of people doing whatever it takes to close with them."

Ken Bowen, chief underwriter at Red Mortgage Capital Inc, a unit of National City Corp NCC.N that helps fund multifamily housing, said his company recently arranged financing for the acquisition of a portfolio of apartment buildings from a real estate investment trust using Fannie Mae.

"We sold $1.35 billion in loans to Fannie Mae last year," Bowen said. "On Monday, we sold $1.35 billion in loans to Fannie Mae in one transaction."

Also this week, Centerline arranged its largest-ever Fannie Mae loan -- an $80 million mortgage to refinance a New York multifamily property, after arranging funding for an Arizona property acquisition last week using Freddie Mac.

NOW THEY'LL SUFFER THE PAPERWORK

Borrowers once eschewed agency financing because it could take more paperwork or garner less money than borrowing from the bond market. Wall Street banks tripled financing of commercial properties from 2003 to 2007 as they found hordes of willing investors less wary of risk and hungry for yield.

That trend has now reversed. Agency business, which represented 53 percent of Centerline's commercial real estate lending last year, is now 90 percent of its pipeline.

"I don't see any practical limitations on the amount of multifamily business they could do this year," said William Hyman, a managing director of Centerline's commercial real estate group. "I think it's really open-ended."

Freddie Mac boosted purchases of multifamily loans by 55 percent to a record $44.7 billion in 2007, with a "significant increase" at mid-year as other funding sources dried up, it said last month. Fannie Mae expects "another great year in 2008" after financing a record $60 billion in multifamily loans in 2007, an executive said in a statement last month.

Mike May, a senior vice president at Freddie Mac, said in an e-mail that he expects the multifamily market to shrink, but the agency share of it to grow as groups like Centerline expand their capabilities.

A DICEY TIME

The agencies hold charters from Congress to boost home ownership, and multifamily purchases help them meet affordable housing quotas set by the Department of Housing and Urban Development. Because of the charters, which many deem implicit government guarantees, investors shunning other securities still buy the agency debt that funds their massive portfolios.

But analysts said a more aggressive expansion would be difficult given regulatory and capital constraints. Executives at both agencies last week said they would conserve capital while managing pressures to bolster the ailing housing market.

Credit losses have taken a bite out of their capital. Last week the two reported a combined $6.1 billion of quarterly losses due to greater credit expenses and interest-rate swings, eating away at the $13.8 billion they raised late last year.

"They don't have the capital" to grow much, said Paul Miller, an analyst at Friedman Billings Ramsey in Arlington, Virginia.

That may be a good thing, a critic of the agencies said.

Freddie Mac took major credit losses in the downturn of the late 1980s and early 1990s, said Bert Ely, a banking consultant in Alexandria, Virginia, as its credit-related expenses rose to $524 million in 1994 from $175 million in 1987.

"This is a dicey time," said Ely of expanding lending. "I would be particularly concerned about the agencies dealing with people or projects that they haven't dealt with before."

(Additional reporting by Dan Wilchins; Editing by Braden Reddall)