Multi Housing News November 2011 : Page 7
trum. These assets may also tend to be located in stronger markets (eg., high income levels and cost of housing) that support demand for these proper-ties. They’re also the apartment types that Freddie Mac and Fannie Mae generally bid on aggressively. Class B properties are generally 10-25 years old and usually have a middle-class tenant base of both white-and blue-collar workers. Class C properties are generally 30-40 years old and generally have blue-collar and low-to-moderate income tenants. In legacy CMBS, conduit lenders typically sought to fi nance B and C Class apartments as they were able to offer borrowers more favorable terms. It’s our view that the performance of Class B and C properties will likely constrain any meaning-ful improvement in the multifamily delinquency rate. This is because potential homeowners have settled into Class A units while they wait for the single-family housing market to turn around. We anticipate that this trend will continue until signs of home price stability become evident. In general, it’s also our belief that Class B and C owners will continue to experience operating cash fl ow stress due to thin debt service coverage levels and rental concessions that are still available in these classes. This practice can put additional pressure on a borrower’s ability to make their loan payments. Increasing employment for the 20-34 year-old cohort should, however, provide some sup-port for these apartment classes. We believe that until the weak housing mar-kets that we identifi ed strengthen, rents stabilize among Class B and C apartments and troubled rental conversion projects get worked out, any meaningful decline in the multifamily delinquen-cy rate may take a while to materialize. Differ-ences will vary by market, however, particularly for those weaker areas where concentrations of foreclosure-displaced homeowners stimulate de-mand for rental units. S&P downgraded the debt credit ratings for the GSEs. What will it take for their credit ratings to be upgraded? First, it is important to note that Standard & Poor’s does not have an issuer credit rating on Fannie Mae and Freddie Mac, as they were placed into conser-vatorship in September 2008. However, Standard & Poor’s does have ratings on their senior debt, subordinated debt and preferred stock issues. We recently lowered our ratings on the senior debt is-sues from Fannie Mae and Freddie Mac to “AA+/ Negative” from “AAA/Watch Neg,” following a downgrade of the U.S., in accordance with our government-related entity criteria. Our “A” sub-ordinated debt rating and our “C” rating on the preferred stock of these entities remain unchanged. We don’t believe either entity has experienced a material deterioration in its ability to fund opera-tions in the market as a result of the downgrade or any of the subsequent market turmoil. However, we could further lower the senior debt ratings if the U.S. rating were downgraded again, which is why the outlook is negative, consistent with the outlook on the U.S. government. Given where the ratings are currently on the subordinated debt and the pre-ferred stock, we are unlikely to move them if the U.S. were to be downgraded again. Does S&P think it is desirable to eliminate the GSEs and reduce the role the govern-ment plays in housing finance? We do not make policy recommendations. How-ever, any reformation process would likely take several years because the government isn’t likely to pull out of the housing fi nance business until it’s confi dent the housing market has strengthened enough to withstand an overhaul. Did you see any signs of deteriorating underwriting standards of CRE loans being made today under CMBS 2.0? We published two commentaries on these issues in 2011, one in February and another in May. One topic that we highlighted in both articles was po-tentially aggressive valuations/appraisals, especially in hotel and offi ce loans in primary markets. The appraisals appear to be building in upside in rents and occupancy to arrive at a value for the proper-ties in question, instead of using in-place rents and tenancy at the time of closing. Using metrics such as Standard & Poor’s stressed loan-to-value (LTV) and debt service coverage (DSC) ratios, we also indicated our opinion that, on average, CMBS 2.0 underwriting most closely resembled pools issued between 2002-2004. While these metrics moved in a more aggressive direction in 2011 when compared with 2010 vintage deals, they had not yet reached levels seen in the boom years of 2006-2007. MHN To comment on this story, e-mail Keat Foong at kfoong@multi-housingnews.com. PAGES CITY Insight from MHN’s dedicated team of local news writers Visit MHN City Pages @ multihousingnews.com/city-pages Your One-Stop Shop for Multiple Real Estate Markets www.multi-housingnews.com | November 2011 7
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