Rick Fitzgerald -The MultiFamily Expert

The multifamily lending industry is crossing their fingers while waiting for the market to stabilize. Multifamily investors across the nation are looking for any positive signs.

Yesterday's market performance along with the financial sectors reporting went down in the record books as one of the worst financial crisis in history.

Never before have we had the entire financial sector failing at the same time. Banks, stocks, insurance companies, investment banks all took it on the chin several times with Lehman Brothers unable to get up. Merrill Lynch staggered to its feet with new owners. AIG, the world's largest insurer, needs mouth to wallet resuscitation.

Federal Reserve Chairman Paulson issued a vote of confidence in our banking system. Your deposits are as safe as you want them to be. Panic and closing accounts helps no one.

Recognizing the circumstances of the economy is the first step towards recovery. The Feds, Treasury, SEC and world banking groups are working together for the first time in coordinating a plan to move forward.

Pointing fingers isn't going to solve our troubles. Working together towards a solution should be our primary focus.

Meanwhile our multifamily programs are still available which is a good sign. Fannie, Freddie and HUD all see this sector as performing better than almost any other. Refinancing has been very active.

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Lehman Brothers did in fact file Chapter 11 Bankruptcy. The rest of the investment banks who have not made arrangements have certainly been put on notice.

If you do some research, you will find the seed of this all lies from an back in 1999 and the Clinton Administration. Without being political about accusing them, the following link from Wikipedia helps explain what it was and what it allowed.

The rest is almost history. This will be a terrible week for the financial sectors and the economy. The link:

http://en.wikipedia.org/wiki/Glass-Steagall_Act

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A multifamily investor asked my opinion (for what it’s worth; about the same as Lehman Brothers stock) on the time table for this nightmare to end. He was the same investor who thought I was crazy in early 2007.

The quick meltdown of New Century certainly opened our eyes. There’s nothing like having a closing on a purchase and the lender’s money doesn’t show up. They were the sub prime market.

This investor and I get along great but he didn’t believe a credit crisis was looming since it hadn’t affected him. Now it has big time.

I follow the banking and investment banking industries closely having worked in it for so many years. Our US and for that matter the global economy has been driven by debt issued through our banking sectors. As the banks go, so goes the economy.

Most folks don’t recognize the term “fractional reserve banking” and how it works for us as consumers.

Fractional reserve banking is the Feds method and reasoning that the banks can hold only a “fraction” of the deposits in capital reserves since all depositors would rarely request a total withdrawal of their deposit accounts at the same time. (Ask Indy Mac if that’s true).

The bank sets aside 20% of the deposit which is the Feds "fractional reserve rate". Then the bank can lend out 10 times the net.

Keep an eye on this math closely:

Customer makes a $1,000 deposit. The bank now lends out $800 of that deposit. That $800 is re-deposited in another bank in some form (unless you bury it). That bank now lends out $640 of that deposit. That $640 is deposited in some form. Then that bank lends out $512 dollars. And so it goes on…….Each bank places 20% in the central bank (or so we thought!) for safe keeping. The Central Bank should have a $1,000 in reserves when all is said and done equal to the original deposit.

How much money was lent on just the original deposit of $1,000? This “fractional” lending has been the fuel for our economy for years and is the essence of modern banking.

So the banks hang on the original deposit and don’t lend to the next guy wiping out all those dollars that could be spent (or saved). And the economy tanks even more.

So back to the question of when will we turn the corner. The answer is whenever you see the banks begin to turn legitimate profits. Not the creative accounting kind of profit you often see but the plain old we made more money than we lost profit.

Plan ahead for any expected projects or funding to ensure a happy ending and call us if you need help.

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What was the real reason behind the Fed bailout?

The huge jump in home loans that started the housing bubble around 2003 was a result of foreign investors including governments or central banks moving into the higher paying Mortgage Backed Securities (MBS).

These same investors were previously buying Treasury Bonds with cash American consumers were sending overseas on oil and goods.

Foreign investors turned to the MBS because of higher yields and the promise of safety due to the ultimate backing of the US government. Our government’s lack of oversight may have been part of their strategy as the housing boom created a thriving economy ultimately built like a house of cards.

Either way, the foreign investment holdings grew from just over $650B of Government backed debt to over $1.5 trillion dollars in 2008. A Newsweek article details the growth and demise of this financial market. Foreign investors have lost billions of dollars in the US financial market and unfortunately we need them now more than ever to help the economy get back on its feet.

There is no evidence to suggest it was part of the strategy of course. It is only my opinion in watching the bond market grow so much with little regard for the risk. In hind sight, the bond rating agencies were either ignorant of subprime borrowers actual payment history or felt safe because of the Fed backing the bonds. As a lender with an Underwriting background, folks who don't pay a cell phone bill will most likely not make a house payment. The lending programs backed by bonds and purchased by investors were not the creation of mortgage brokers who ultimately have taken the brunt of the fallout.

It's been almost 3 business days since the takeover and the impact on multifamily investing remains unclear. Most of those in the know have not commented or provided any indication of a change in the increased multifamily funding.

The experts who keep track and rely on Fannie Mae and Freddie Mac for funding are looking for the same commitment from the new owners. Perhaps even more funding than its commitment.

The performance of the multi family investment portfolio has out paced most other real estate related sectors. Even Conduit programs were mentioned again which is good news. Conduits have virtually disappeared with margin spreads of 400 basis points and more. Not much business when your rates are no longer competitive with little upside on the terms.

The down side is Bank of America's analyst has down graded several multi-family REITS stating that some areas of the country are having problems.

The areas of concern are for the most part in the west where foreclosures have flooded the market and areas where job growth has been lost.

Analysts don't have a very good track record recently and it seems that each one wants to be the first to predict change. His statement indicated that REIT investors should take their profits now while the profits were healthy just in case. They have the potential to lose some of their profits.

Multi-family investing has done very well for savvy investors. No need to jump off the band wagon anytime soon in my opinion.

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