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Apartment Finance TodayCapital MarketsLife Companies Jumping Back InAPARTMENT FINANCE TODAY • May/June 2010 Life insurance companies step off the sidelines to put Fannie and Freddie on notice. BY Jerry Ascierto 
Back in the Game: Large, nonstandard transactions—such as the $130 million, three-year floatingrate loan that MetLife provided for the 492-unit Ocean in Manhattan—are one area where life companies have an advantage over the GSEs. Photo: MetLife FANNIE MAE AND FREDDIE MAC are no longer the only games in town. Life insurance companies have stepped back into the multifamily arena in a real way, closing the pricing gap with the government-sponsored enterprises (GSEs). For much of 2009, life insurance companies were reduced to spectators, watching the GSEs win deal after deal. But by the first quarter of 2010, firms such as Prudential, MetLife, and Northwestern Mutual were back in stride. And apartment brokers say that other life insurance companies—including Cornerstone, Aetna, Guardian, and Cigna—are showing signs of activity as well. As 2010 progresses, the GSEs are expected to again dominate the multifamily market, though borrowers will likely see an increasing list of options. In fact, in early March, Freddie Mac lost a deal to a large life insurance company for the first time in 18 months, which was bittersweet news. “I was upset about losing it, but happy to see that we’ve got some players back in the market,” says Mike McRoberts, national head of multifamily underwriting and credit at McLean, Va.-based Freddie Mac. “It’s a really good sign for the marketplace today.” Rate Race The reason for the resurgence is all in the price tag. Life insurance companies now offer rates in the 5.75 percent to 6 percent range on 10-year loans, basically on par with the GSEs. That’s a big turnaround from October of 2009, when such deals were being quoted nearly 100 basis points above that level. And the lower the leverage, the better the rate: For deals with leverage levels below 60 percent, life companies are offering loans in the low-5 percent range. Ripe for RehabLife companies look to take advantage of rehab deals. BEFORE FANNIE MAE and Freddie Mac began their multifamily divisions, life insurance companies were one of, if not the largest debt source for the multifamily industry. While nobody expects them to regain that mantle in 2010, many life companies are hungry to make multifamily loans and see an opportunity through flexible underwriting. “The life companies have always wanted to do multifamily, and they’re ready at a moment’s notice to exploit a hole in the capital stack if they can,” says Amos Smith, a senior vice president at Irvine, Calif.-based Johnson Capital. “They are, by nature, very conservative, but they have much more flexibility in their underwriting.” One such area ripe for exploitation, and an example of the sector’s flexibility, is in rehab deals, which the government- sponsored enterprises (GSEs) have all but abandoned. The GSEs have grown more conservative regarding transitional deals, as the idea of raising rents in today’s market is a hard sell. “The market has certainly shifted away from rehab loans,” says Tom Eberhardt, Fannie Mae’s director of credit risk management for mezzanine debt. “You really have to prove out your assumptions in this market.” While life insurance companies overwhelmingly favor stabilized assets, rehab loans can still be had for the right customers. “For the highest quality borrowers, you’ll see the largest life companies carve out a bucket of money for deals that need some rehabilitation,” Smith says. “It’s all very structured, all very transaction-specific financing.” “Our ability to be more competitive with the agencies on pricing right now is better than it’s typically been,” says Mark Wilsmann, managing director of the commercial real estate operations of New York-based MetLife. “If it fits the agencies’ box cleanly, it’s still very hard for the life companies to compete. But as that box gets smaller, the life companies will be a better alternative.” MetLife sees some opportunity this year lending for assets that don’t fit the GSEs’ increasingly shrinking credit box, such as new properties still in lease-up or good properties in “pre-review” markets where the GSEs are less inclined to lend. For those life insurance companies that also offer GSE debt, the quotes from each side of the house are closer than they’ve been in years. For instance, Prudential has licenses with the GSEs and the Federal Housing Administration, and also offers portfolio loans through its general account. When a borrower comes calling, the firm runs the numbers through all of its platforms to come up with competitive quotes. “For a number of years, that was just a pro-forma exercise because our general account was not going to be the most competitive source,” says David Durning, senior managing director at Newark, N.J.-based Prudential Mortgage Capital Co. “The difference today is we are seeing and winning business, and the life company pricing is in the mix now.” And the longer the terms, the better the pricing that life insurance companies can offer. “When you get to 10 years and longer, the life companies are right on top of—or can sometimes even be inside of—where the agencies are today,” Durning says. Leverage Shortfall Pricing is one thing; proceeds are another. Life insurance companies are notoriously conservative in their underwriting, with the majority of deals at 65 percent as MetLife and Prudential, will stretch up to 75 percent for cream-of-the-crop assets, but those are exceptions that prove the rule. Life companies have other strengths to make up for this leverage shortfall, often competing more on flexibility. Since they take a case-by-case view of deals, as opposed to the GSEs’ more formulaic approach, life companies have more latitude in structuring deals. “If a transaction involves the need for a different kind of structure or flexibility, nonstandard terms or speed of execution, the life companies still have an edge over the agencies today,” Durning says. Another key feature of portfolio lenders is the fact that their debt is not securitized, which makes it much easier for a borrower to communicate with its lender. One of the biggest pitfalls of securitized debt is the inability of a borrower to renegotiate after closing—their debt is owned by various third-party investors with no interest in working with the borrower. Portfolio lenders, though, often feature one direct point of contact. “The person you do the loan with is the person you’re going to be talking to if anything comes up during the life of the loan,” Wilsmann says. “You always know where to find them.” |
