Mike May's Speech to the MBA Commercial Real Estate Conference on February 2, 2010
Prepared Remarks for Mike May
Senior Vice President of Multifamily Business
MBA Commercial Real Estate Conference
Las Vegas, Nevada
February 2, 2010
Let me spend the next 20 minutes or so updating you on the Multifamily business at Freddie Mac. As I review 2009 and describe the year ahead, I want to leave you with one key takeaway. And that is: even as the economy continues to be weak, Freddie Mac enters 2010 in a strong position to support the multifamily market. Our public purpose is much more clear. We have plenty of liquidity to make the right deals with you. And we have a leadership position in the market that we plan to build on. Combined, all these advantages give us greater ability to help lenders, borrowers and renters survive the economic crisis.
2009: A Hugely Important Year
It was not easy getting to this point. In fact, a few weeks ago I sat down to write my year-end message to customers. All I could think was, “Thank God the year is over.” It seemed like a meteor had landed on us all. The worst economic recession in a generation. Unemployment at 10 percent. Apartment markets that melted down faster than the casino can take your money. Capital markets that remained closed. And financial pressures that threatened the very existence of some customers.
At Freddie Mac, we were on federal life support, with an uncertain diagnosis. For us, 2009 was our first full year in conservatorship. We had key vacancies at the top of our company. We didn’t know if we could be as effective in supporting mortgage markets as we had before. And, with the government so heavily focused on the single-family market, many wondered whether multifamily was even in the picture. In many ways, we in the Multifamily business were fighting to remain relevant.
How did we respond? Well, we did not worry about what we could not control. That would have been wasted energy. Instead, we focused on the things we could control. That meant business initiatives that met market needs, responded to customer concerns, and fulfilled our public mission. Accordingly, we invested resources in keeping mortgage markets open, customers originating quality loans, and the Multifamily business here at Freddie Mac on solid financial ground.
The result: A hugely important year. During 2009, rental housing became more relevant than ever. Our market share hit an all-time high. And we did so while keeping our delinquency rates an at industry low. What’s more, we delivered on our securitization promise. We financed one of the biggest affordable housing developments in the United States. And we solved for tough customer issues, such as making sure that warehouse lines of credit were available to you. Considering all that was happening around us – both in the company and in the market – 2009 was one heckuva year for us.
Let me touch on the highlights a bit more. During the economic crisis, multifamily became more central to our company and to public policy. People finally figured it out: one-third of this nation pays rent, and that’s okay. With single-family foreclosures at all-time highs, it became clear to everyone that apartment living must be a viable housing option. That’s why our regulator issued several statements of support for apartment markets, Congress revamped our charter with a greater emphasis on multifamily, and the Obama Administration looked to us to help housing finance agencies support more renters. At Freddie Mac, we were thrilled by multifamily business results that were high on affordable housing, economic returns and credit quality.
The bottom line of all these developments? When it comes to housing, multifamily is now a priority, not an afterthought.
Big Wins in Liquidity, Credit Management, Affordable Housing & Customer Support
The credit goes to our staff in the Multifamily business and key support areas at the company. Together, they racked up one big win after another. For example, we have completed a three-year run in which our multifamily loan portfolio has grown by 80 percent. We stayed flat during the credit boom years, when we disagreed with the market’s view. Then, when the credit bubble burst wide open and other providers left the market, we had the economic strength to come in and grow our loan portfolio.
During 2009, our market share set a new record at roughly 37 percent. We financed $16.6 billion worth of multifamily loans. We funded 1,000 loans that provided rental housing for 250,000 families. Our big win here? We solidified securitization in our business model. One out of every five loans was funded through our Capital Market Execution (CME). We issued two large deals, both way over-subscribed, in an otherwise dormant CMBS market, providing solid credit in a credit storm. We are about to close on our third deal. And our pipeline is filling up fast. All this is to say that, during a deep credit crunch that continued in 2009, Freddie Mac remained a reliable source of liquidity and continued to expand our capabilities.
While our portfolio expanded, our loan delinquencies led the industry, not for the highest levels but for the lowest. CMBS delinquencies, 403 basis points. Banks, 343. Fannie Mae, 62. Life companies, 23. Freddie Mac? Just 19 basis points for 60-day delinquencies and 15 basis points for 90-day ones. How did we stay so low? It’s pretty simple. We stayed true to our credit principles. We relied on our lender network to identify quality deals. And we worked with owners who have been committed to their properties. In other words, our business growth has come from high-quality loans and business partners.
Even better, pretty much all of this growth supported families of modest financial means. Indeed, Multifamily very much remains an affordable housing business. At Freddie Mac, multifamily loans typically comprise a very small part of our total business volumes – about six percent in this chart -- but these same loans represent almost one-third of Freddie’s affordable housing units. Now, that’s the kind of high-leverage business all of us can embrace.
During the year, more than four in five loans supported families earning the local area median income and, in many cases, a whole lot less. We delivered a big win by refinancing the largest apartment development in the United States that relies on federal assistance. In the process, we spared 6,000 families from having their rents jacked up during a recession. Even as the housing depression continued in 2009, Freddie Mac remained one of the few institutions that financed affordable housing on a broad scale. That’s something to be proud of.
To review, we grew our loan portfolio, kept our delinquencies low, and supported affordable housing. And we did one more thing: we made it easier for customers to do business with us. We heard you say that our CME process is too centralized, so we will be delegating more authority to the regions. We heard you say that you are inundated with paper, so we launched a pilot that enables electronic submission of more key documents. But our biggest win was facilitating a solution that made warehouse lines of credit more available to you. To some, these warehouse lines literally meant the difference between having a business and shutting it down. All this proves a powerful point: when it comes to customer needs, we show up, pay attention and take action.
To sum up 2009, it was an absolutely horrible year in terms of the market environment. But it also was a year where Freddie Mac made a real difference. We kept mortgage markets open, helped the economy move towards recovery, and supported customers, borrowers and renters alike. All of us are Survivors of 2009. But – and there’s always a but, isn’t there? – we are not out of the woods just yet.
What Can You Expect in 2010?
As Ed (Haldeman, Freddie Mac CEO) mentioned, Freddie Mac’s plan for 2010 is to stay focused on helping mortgage markets survive the broader economic crisis. You will see us implement the President’s mortgage-relief programs and provide liquidity that stabilizes unstable markets. And we will do so with no shortage of available capital, with the ability to use our investment portfolio, and supported by an “effective” government guarantee. That’s what you can expect from Freddie Mac at the corporate level.
What can you expect from the Multifamily business? With apartment markets still in crisis, we will not deviate from our business plan. We will continue to be one of the few institutions that provides mortgage liquidity, supports affordable housing, and does so while creating a better customer experience. While our direction remains the same, there will be differences in how we implement our plan, either in substance or emphasis, or both. Let me spend the rest of my time hitting the highlights.
We have prepared our business for an apartment market that will trail the broader economic recovery. The economists at Freddie Mac tell us that the economy is likely to grow by around 3.3 percent this year and that job losses probably have stopped. But they also say it will be a while before the unemployment rate comes down by a substantial amount. In our market, the jobless rate is the best leading indicator for the year ahead. As long as the unemployment remains high, apartment markets will remain under stress. Household formation and rental growth will be lower. Vacancy rates, loan delinquencies and foreclosures will be higher.
In this environment, our top priority is to manage our credit exposure. Even the highest-quality book of business, like ours, will be affected by high unemployment and deteriorating market conditions. For us, 2009 was a year of preparation. We built up a large loss reserve, beefed up our Asset Management area, and developed initiatives to modify and otherwise resolve problem loans.
In 2010, our preparation will be put to the test. We will implement loss-mitigation programs on a broader scale. We will look to you to provide us with more detailed information on our loans and properties. And we want you to stick with your deals. One thing is clear: We will need to work together to get through this economic trough.
Of course, we will not only be managing loans we already have. We will be adding new ones, too. And we will be doing so by securitizing more. In 2010, we will enhance CME to make more products eligible and create a wider range of flexibility options. To this end, I am announcing that CME flexibility is now available for all fixed-rate mortgages. During the year, you will see us expand CME to Targeted Affordable loans, seniors housing and structured transactions. CME expansion plus an already full pipeline should result in roughly half a dozen issuances this year. With securitization and portfolio financing both on solid ground, the Multifamily business will be a more effective competitor in the market and a more efficient steward of corporate capital.
When it comes to our credit standards, we will remain clear and consistent. Our credit box will hold firm. Our overriding principle: Cash is King. We will continue to look for deals with real borrower equity, positive and sustainable cash flows, a clear exit at loan maturity, and sponsorship with local market knowledge. For non-Freddie loans that are maturing, we will support loans that fit within credit box. For underwater loans, we will require that debt be paid down to support the deal. The best way to describe our approach: In a turbulent market, we will hold onto credit principles that have served us well.
All throughout, we want our customer experience to get better and better. Accordingly, we have firmed up our technology roadmap and integrated key elements into a corporate-wide effort that Bruce (Witherell, Freddie Mac COO) is leading. You will next see a document management system, then an origination and underwriting system, and then a servicing system. Some of these features will be internal only within Freddie Mac. Others will be more visible to you. But throughout, we are looking to create the ability to securitize more loans, process more documents electronically, and improve data integrity. To build scale in the Multifamily business, to build for the future, we need to really advance the ball on technology.
Now, I have talked for about 15 minutes and I have yet to mention the Targeted Affordable business. Is it because they are in my doghouse? No. It’s because Targeted Affordable is going through the most change. And I wanted to save this for last. In 2010, Targeted Affordable will have a somewhat different focus than in years past.
We will support new provisions in GSE legislation called Duty to Serve. Here, we will expand our work in the preservation of affordable housing. So you will see us more active in areas such as expiring HUD programs, rural housing and manufacturing housing communities. That’s one set of changes. Another is implementing Treasury initiatives that support state and local housing finance agencies. We began this work late last year by providing liquidity facilities. In the year ahead, we will continue that work plus issue Freddie Mac securities that Treasury will invest in as well as purchase new loans that you originate directly with us.
Now, a different focus requires different execution. To that end, we will end our delegated underwriting pilot and return to our prior-approval model. We will gradually open up the Targeted Affordable business to more customers. And, to really open up funding sources for these critical policy priorities, we will securitize more of the loans flowing through this business line. As you can see, Targeted Affordable will experience the most change in the year ahead. But it also will have the best opportunity to expand affordable housing.
Conclusion
And making a positive impact in housing is what drives all of Freddie Mac today. No one is disputing importance of rental housing now. Everyone gets it. Because they do, we are likely to see more policy and market support for multifamily initiatives. Combined with favorable long-term trends, this makes multifamily a terrific growth opportunity for your business and mine. More broadly, it represents a chance to define the future of urban renewal, green living and housing preservation. All are essential to next generation of affordable housing. And all are possible through everyone here.
That’s why we have spent the past year making Freddie Mac more effective in terms of our purpose, direction and execution. That’s true for our company and it’s true for the Multifamily business. In the year ahead, you can rely on us to help you ride out the economic storm, position your business for better times, and deliver some wins for the American renter.
As we press ahead, there will be events unfolding that are beyond our control. And here I am talking about the long-term future of Freddie Mac. Congress has begun public debate on this matter. I am no policy expert, but I imagine that it will take a while for all the interested parties to coalesce around a solution. Here, there are two facts to keep in mind. One, housing finance has always enjoyed some level of federal support. And that is not likely to change anytime soon. Two, Freddie Mac and Fannie Mae have gone through many organizational structures over the years, from a government corporation to a cooperative to shareholder companies. If our structure changes again, like before we will adapt. But until that happens, we have a business to run and customers to support. And that, ladies and gentlemen, is what consumes all of our attention today.