All Forum Posts by: Ian Stuart

@James Free

I am the lender. 

  
Our shop - Berkadia Commercial Mortgage LLC is a direct Freddie Mac Seller/Servicer and Fannie Mae DUS Lender with nationwide reach for both conventional and small balance loans >$750K. We consistently rank among the Top 5 Fannie / Freddie lenders nationwide.

Feel free to shoot me an email - happy to provide further info, soft quotes, market reports, etc. I'm looking at a Fannie Mae Small Loan for ~$2.0M in Windsor, CO as we speak. 

Short Term: Buyers and sellers are currently in a stalemate. Sellers (who aren't facing a loan maturity) will settle for anything less than pre-COVID prices, convinced that the market will return to normalcy post-virus. Buyers - however - are patiently waiting for sellers to adjust their expectations, so that they can get a deal. 

Sellers will ultimately prevail in the short run. Reasons being: (a) employment will recover (b) investors will regain confidence in multifamily income streams as virus fears subside, and when they do (c) Freddie Mac / Fannie Mae rates will be lower than ever. Due to the Federal Reserve's absurd US Treasury and Agency MBS bond buying programs (which they plan to continue indefinitely), treasury rates, agency spreads and ultimately - interest rates - will be artificially low just as demand begins to pick up again. This cheap debt, combined with a resurgence of investor confidence - will lead to a short/intermediate term speculative bubble in multifamily that will benefit sellers. 

The buyer pool - consisting of debt addicted institutions and high net worth individuals - will chase deals harder than ever before. 

Long Term: Over the long haul, due to  stagnant wage growth, and ever growing supply of "value add" units, and the Federal Reserves insane debt monetization policies - investors will soon realize that they can only squeeze so much rent / RUBS / pet rent / misc. income out of their tenant, especially in areas with relatively low AMI levels. Yield will be difficult to come by, and landlords will likely begin cutting capex, replacement reserves, etc. to maximize whatever meat's left on the bone. Tenants' quality of life will decline en aggregate. 

Over the long haul - the world will begin to catch on the long con which is the Federal Reserves "QE Infinity" policy - which fundamentally de-values the dollar against fixed supply stores of value such as gold, and is basically an impossible situation for the Fed to get out of (especially since the Fed has proven they are no longer an "independent" institution). QE infinity, corporate bond buying, and (eventually) equity investments by the Fed will will result in dollar devaluation, and cause both (a) inflation and (b) the international community to lose faith in the dollar - and dump US Treasuries. 

Over time, inflation will erode tenants' purchasing power - and make it more difficult to raise rents. Also - due to Federal Reserve manipulation of the money supply, nations will be less incentivized to buy US Treasury Bonds - which pay a fixed coupon in dollars (which are losing their purchasing power). 

As a result, rents will stagnate and the treasury market will gradually sell off. Values will fall as tenant purchasing power declines and treasury yields climb - putting downward pressure on prices and upward pressure on cap rates. 

Many of the geniuses who bought deals with government backed, 80% leverage, cheap debt, with interest only terms (during which they are not amortizing their loan) and syndicated the majority of the equity will slowly sink underwater on their 10+ year term loans with balloon payments.

Today I put a Fannie Mae Small Loan in Oregon under application for $4.8M @ 3.50% - $600K cash out to borrower after fees, reports, title/escrow, legal, insurance, escrows, etc. Tertiary market - so pricing would likely improve the closer you get to downtown Portland. 

Both Freddie and Fannie are still active on cash out refinances - though they're likely to be a bit more conservative on full leverage deals - especially when it comes to interest only term and minimum DSCR sizing. They'll also want you to put up anywhere from 6-18 months of P&I at closing held for minimum 9 months to hedge against COVID-related rent delinquency risk.

Of the three markets you listed, I'm going to say Dallas/Ft Worth for all the conventional reasons. [Starts rattling off conventional stats like YOY rent growth, nonfarm payroll growth, steady vacancy contraction, strong diverse employment base, quality of life, relative affordability to other west coast markets. Maybe a "sweet article" from WSJ that tickles my confirmation bias...]. 

However, we live in unconventional times. Over 60% of employees nationwide are working remotely from home. Productivity has remained static, if not slightly improved. Twitter announced yesterday that employees can continue to work from home permanently. Companies are taking notice, and adapting. Habits and changing, and so too will long term behavior and norms related to working from home. 

After COVID passes, a significant number employees and companies will continue to work from home. Why wouldn't they? What's the point of waking up at 6:00AM every morning to catch a 35-minute bus and pay $15 a day for "omg so good" arugula salads with cherry tomatoes if you're getting pad the same salary to work from home? 

Now - if you're working for a truly innovative company such as Tesla, obviously you're going to want to collaborate in person a bit more and will value living near your workplace more than others. But if you're working at Deloitte or Northwestern Mutual... you get the picture. Also - if you have family nearby, in addition to employment - obviously your ties to the area will be stronger. 

Sure, young people (renters) will continue to live in core cities for the reason they always do - for the thrill of it. Bars, restaurants, partners, bougie overpriced e-Cycling gyms across from their cubes at Amazon... 

But eventually they will move out to the city. To the burbs and beyond. Except - this time - the burbs don't necessarily need to be located in the same city, county, state, or (hell with it) country. Why would they? We're working from home!

Home (and apartment) locations will no longer be geographically tied or limited to locations 60 minute or less from the office. 

As a result, people will move - and they will move far away. Secondary and tertiary markets that score high in livability and affordability measures will become more alluring, and will see large population inflows over time. Markets where people can truly maximize their personal utility, enjoy life, and (eventually) buy a newly constructed home for less than half a million bucks with HUD/Fannie/Freddie SFR financing. Why pay $3.5Kmo for an "open 1 bedroom" 400SF prison cell in San Francisco, when you can pay $3K to rent a decked out, 3x2, 1,500 SF unit near Lake Tahoe? And that assumes you're renting the Tahoe pad all by yourself! Why not buy a house in Boise, ID for $350K? You're working from home anyway - who cares?

The fact that we are looking at 20% unemployment - with more layoffs soon to come after unemployment benefits burn off - will only speed up this shift, assuming the people can afford to move or swipe a credit card to cover the costs. 

In my multifamily financing memorandums that I submit to Fannie Mae and Freddie Mac, one of the key sections has always been "Proximity to Major Employers". Due to work from home policies, proximity to employment is losing it's allure with renters. Over time, it will lose its allure with progressive employers who use it as a tool to capture top end talent. 

People thought is was crazy when the tech companies started putting in ping pong tables, bean bag chairs, gaming stations, etc. in their HQ's. This is the next step - permanent work from home. 

People who's social lives are completely and inexorably tied to their office lifes - of course - will disagree with me. To endorse it would go counter to their their identity as a person. But those who have established personal lives outside of their work sphere may feel differently. 

Hi Bigger Pockets: 

I have a client who is bidding on a portfolio of six multifamily properties totaling 98 units in Downtown Denver. They're seeking a portfolio mortgage (either crossed or uncrossed) of ~$12M (70% LTV; 1.20x DCR; 6.50% DY) - and was wondering if anyone had any portfolio lender recommendations?

Insitutional-ish client. Primarily IRR driven. Attracted to max leverage, partial term interest only loan executions similar to standard Freddie / Fannie mortgaes. Any portfolio lenders comfortable lending at 70% with half term IO, 25-30 amortization, and limited P&I/tax/insurance/replacement reserves would be right in their sweet spot.

Little background on me - I'm a mortgage banker at Berkadia in Seattle specializing in conventional and small balance Freddie Mac and Fannie Mae mortgages - typically >$20M. Agency guy through and through. As a Freddie Mac Seller/Servicer and Fannie Mae DUS Lender, my immediate inclination was to take the deal to Freddie SBL and Fannie Smalls. 

Unfortunately, Freddie doesn't like cross collateralized portfolio loans under $50M in aggregate - they're more inclined to do six individual one-off deals, which puts upward pressure on my client's closing costs and  origination fees. Fannie could do the portfolio, but their minimum 7.25% DY requirement is killing my loan proceeds. In addition - in order to hedge against COVID related unemployment and rent delinquency risk, Fannie now requires 18 months P&I, 12 months tax/insurance/replacement reserves due at closing. This is not attractive - especially at a high 3.00% (pushing 4.00%) rate with no IO.

95% of the time, this client goes for agency financing - but given the nature of this small loan portfolio - I don't think agencies are the right puzzle piece here. 

Any recommendations would be much appreciated!

@Erin Dorsey Robinson Yep, I see this as an opportunity for investors to firm up their personal balance sheets, build up a war chest of capital to deploy, and exercise patience in the short term (waiting for market fundamentals to erode in the intermediate term, and for deals to become more attractive) and exercise aggression in the long term (capitalizing on weakness in the market as sellers' expectations are forced to adjust). 

As Warren Buffet says, investing is a no strikes called game. You can sit back and wait for your pitch, you don't have to swing at any deal you don't like. FOMO will work against impatient, fee driven companies who need deal churn to generate fees and make a living. Play stupid games, pay stupid prizes. But individual investors have the luxury of being able to sit back and wait for their pitch. 

In addition - as the wealte gap widens in the coming years - calls for UBI (Universal Basic Income) among the poor will be overwhelming. UBI will be a boon for single family and multifamily owners - because landlords will begin increasing rents to "get their share" of this unearned helicopter money. I anticipate that this will make SFR and multifamily very profitable in years to come, assuming local government don't start raising property taxes to offset the rent inflation.

Only other recommendation I have is to short Tesla stock. 

@Chris Mason Yep, strictly Fannie / Freddie / HUD commercial multifamily. On the commercial side, we like to see that the borrower has skin the game and is re-investing back into the deal in the form of unit upgrades, exterior capex, etc. and keeping the property up to date. Agencies don't like cashing out slumlords, or cashing out borrowers out solely on the basis of cap rate compression.

Teach yourself to fish. Build your own model in excel. 

Some of these pay-to-play models are oversimplistic garbage. Watch Brandon's videos and also check out some other ivestors on YouTube. 

$/Unit, $/RSF, Cap Rate (Going In), Cap Rate (Exit), Cash On Cash, IRR - and comp it out with rent and sales comps so that you can identify whether or not you're overpaying, and whether there is additional rent upside supported by strong tenant demographic and market growth trends. This is just a starting point.

Depends on the market man. If your deal is the middle of BF nowhere Montana, you're gonna be capped to 70% Max on a cash out refi with Fannie or Freddie. That said - if you're in a core coastal market you're looking at 80% LTV.

Keep in mind though, lending isn't all about LTV. More importantly, it's about your asset's ability to cover it's annual debt service. No one's going to loan you money at 75%-80% LTV leverage if your asset's NOI can't even cover the Annual Debt Service at (at least) a 1.0x ratio, you feel me?

Rates are also market driven, because they are risk-sensitive. If your deal is in the middle of nowhere (say - Appalachia), you're going to see a higher rate on than you would on the same exact deal in Seattle, WA or Jersey.  

On cash out refis, lenders are also going to want to know your basis. Basis is equal to the price you originally paid for the asset, plus closing costs, plus all your capital improvements paid for to date (eg: new roof, parking lot repave, unit interior value add renovations, new signage, etc). Many lender get timid when it comes to cashing you out at a level in excess of your basis - but if you've owned the deal for 5-10 years this should be a non issue. Lenders don't just want to cash you out because cap rates have compressed in the short term (less than 5 years) - they like to see increasing NRI, increasing other income, and expense compression driving cash flows up organically over time. If your cash flows are growing over time, you'll get less pushback on the cash out request. 

When it comes to financing fees, both Fannie Mae and Freddie Mac have minimum fees due to your banker at close, non negotiable. Bankers don't work for free. However - if you can figure out what those minimum fees are (google it), you can judge exactly how much these other mortgage brokers are screwing you on (A) origination fees (B) rates - in the form of premium buy ups, and other costs.

With this COVID situation, Fannie and Freddie are also upping their reserve requirements for P&I, taxes, insruace, and replacements at close - so just be aware of that.

Most bankers are greedy. If they know you're not shopping the deal around, they'll go for the jugular and bake in 4 points if they can get away with it. Hold them accountable. The free market is your friend in the short term. Once you find someone trustworthy, then start building a relationship - but on the first deal most bankers are trying to make as much money as possible. 

I think the housing market will remain steady in the intermediate term. The Federal Reserve is backstopping the Fannie/Freddie MBS capital markets - so interest rates on loans are still relatively low, and the capital markets are still liquid in that area - so credit is not drying up anytime soon. That said - heard that Chase recently raised up their minimum SFR financing requirements, requiring a 20% down payment, stronger credit scores, and are also no longer doing HELOCs - which will squeeze single family further. Apparently things were getting a little crazy and Chase was getting accustomed to lending at 5-10% down levels to FICOs below 650... does this story sound familiar?

Would be a different story if the Fed wasn't buying GSE MBS bonds - because rates would be through the roof and acquisitions activity would grind to a halt. 

Here on the multifamily side we're still seeing Fannie quote fully levered, 10-year term / 5 IO, 30 year am, yield maintenance prepay, in the mid - high 3%'s depending on market, asset, and sponsor. 

On the single family side - we're seeing AirBNB hosts getting wiped out. And to be honest - if you're levering yourself up and not putting aside money for reserves / capex / savings - you deserve to get wiped out due to the fundamental lack of risk management in your business plan. I know this one idiot who owns (probably "owned" in the next 12 months) 10 coastal rentals, portfolio leverage of around 76% LTV; 1.10x DCR and now all of a sudden he's not able to cover his annual debt service. Some of them he's even renovating so he can try to realize some "sick upside". Borderline brain dead move.

Well capitalized owners will come in and scoop these properties up for pennies. As it should be. 

That said, the crisis is going to result in many individuals and mom & pops losing their homes in the intermediate term. The wealth gap will widen significantly once this crisis is all said and done due to the massive corporate bailouts, stock market pump, and resulting inflation that will result from the Fed's massive money printing (Giving a whole new definition to the term "BRRR"). Individual mom and pops are losing their income streams and defaulting on their mortgages, autos, credit cards - etc, and they need capital. All the while, wages will likely remain stagnant (save for UBI - which I think is likely) and inflation will be an indirect tax on those that don't own assets - which will further stifle the idea of the American Dream.

The market for single family may not crash in the intermediate term, but the assets and wealth will be transferred from mom and pops to corporations and single family syndicators. Over time single family will be consolidated more and more into the hands of operators as opposed to families, which is a shame. 

That being said - if rates spike, we're in a whole different world. If rates rise, count on acquisitions activity to tank and for discretionary refis to slow down significantly unless they have a hard stop maturity date that they have to deal with. Furtunately the Fed is bailing out us mortgage bankers by propping up demand for GSE MBS paper. (Fannie/Freddie mortgages). 

As a free market capitalist, it's embarassing to be in a industry that is getting propped up by the government. If it was a truly free market I'd be looking for a job because spreads would be sky high, and honestly I think I should be. Unfortunately I don't make the rules.