The Stench Of Freddie Mac Is Back——$18 Billion In Crony Capitalist Thievery

Washington’s capacity to foster crony capitalist larceny and corruption never ceases to amaze. But according to the Bloomberg story below, Wall Street’s shameless thievery from US taxpayers is about to get a whole new definition.

To wit, Freddie Mac is handing three private equity billionaires deeply subsidized debt financing in order to undertake $18 billion in rental apartment deals. According to no less an authority than Morgan Stanley, the subsidy embedded in this cheap financing amounts to 150 basis points or roughly $150 million per year on the loan amounts in play.

Yet this largesse will serve no discernible public purpose whatsoever. Indeed, over the 10-year term of these loans the bonanza will amount to billions, but it will not generate a single new unit of housing. Nor will it provide a single dollar of incremental rent relief to any low or moderate income tenant.

That’s because the purpose of these giant loans is not to fund new construction of rental housing—– for which there is currently an arguable shortage. And it’s not even to incentivize owners to convert existing apartment buildings to affordable housing.

Instead, its sole effect will be to put the taxpayers in the business of  highly leveraged Wall Street deal making. That is, it will fund what amounts to apartment company LBOs being undertaken by the largest players in the private equity world including Barry Sternlicht’s Starwood Capital Group, Steve Schwarzman’s Blackstone Group and John Grayken’s Lone Star Fund.

Each of these cats are billionaires many times over and their remit most definitely does not include bolstering the social safety net. What they are doing is buying giant apartment companies in high priced takeover deals. These LBOs will shower sellers and speculators with windfall gains, and Wall Street dealers and themselves with prodigious fees now and the prospect of pocketing double, triple or quadruple their modest cash equity investments not too far down the road.

Freddie Mac, of course, is the one and same crony capitalist monstrosity that helped take the US financial system to the brink in 2008. If Washington had any common sense and gumption at all, it would have taken it out back and shot it years ago.

But the K-Street lobbies kept it alive during the dark days after the crash and have now invented a new mission to purportedly facilitate affordable rental housing. But that’s a crock, and the true purpose could not be more blatantly obvious than in the three deals described in the Bloomberg article.

Thus, Freddie Mac will loan the Lone Star Fund $5 billion to finance an LBO of Home Properties. Folks, the latter is a rental housing REIT that is publicly traded, more than adequately financed and in no need of help from the nation’s taxpayers whatsoever. In fact, it already has about $2.4 billion of plain old market debt.

But it can be well and truly said that the punters and hedge funds which own the stock have made out like bandits. Its share price has tripled since the March 2009 bottom, but more importantly, was up by 35% just in the 18-months prior to the June 2015 LBO announcement.
HME Chart

HME data by YCharts

Did Home Properties earnings take-off in the last year or so, thereby warranting the stock price surge shown above?

No they didn’t. During the 12-months ended in June 2015, Home Properties earned $177 million or 4% less than the $185 million of net income it posted two years earlier for the June 2013 LTM.

So here’s what putting the US taxpayer back into harms’ way in this instance will accomplish. A rental housing REIT with 121 communities and 41,917 apartment units, and which currently is comprised of about 30% “affordable” units under Freddie Mac’s elastic definitions, will be shuffled from public to private ownership.

That’s it!

Its proud new billionaire owner won’t be required to add a single additional unit of so-called “affordable” housing, and that term doesn’t mean much anyway. Freddie Mac’s definition includes about 60% of US households!

Well, there is one thing different. What was a public REIT with $4.4 billion of equity market cap and $2.4 billion of debt has become a private LBO with $5 billion of debt and a deal fee tab in the order of $400 million.

(to be continued)

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From Bloomberg

Who do billionaires turn to when they want to buy apartment complexes? The U.S. taxpayer.

Barry Sternlicht’s Starwood Capital Group and Stephen Schwarzman’s Blackstone Group LP are in talks with Freddie Mac to finance two transactions totaling more than $10 billion, according to people with knowledge of the negotiations. Those discussions come after the government-owned mortgage giant already agreed to back Lone Star Funds’ $7.6 billion deal to buy Home Properties Inc. and Brookfield Asset Management Inc.’s $2.5 billion takeover of Associated Estates Realty Corp.

The mortgage guarantor — which along with its larger counterpart Fannie Mae was rescued in a $187.5 billion taxpayer bailout in 2008 — is boosting its multifamily lending as their regulator eases restrictions on that part of their business. Cheap debt from the U.S.-backed companies is helping sustain a five-year surge in values for apartment buildings and fueling some of the biggest real estate deals since the financial crisis.

“They wield a very big stick,” said John Levy, a principal at a real estate investment banking firm in Richmond, Virginia, that bears his name. “It takes more time and it’s going to be more expensive” to get transactions done without the two companies, which can lend at rock-bottom rates because their deals have implicit government backing.

Winning Bet

Buying apartment buildings in the U.S. has been a winning bet for the past several years as rents rise amid a shift away from homeownership. That’s attracting investors such as Starwood, which on Oct. 26 said it agreed to purchase 72 rental communities across the country from Equity Residential for $5.4 billion. The announcement came just days after Blackstone reached a $5.3 billion deal to buy Stuyvesant Town-Peter Cooper Village, Manhattan’s largest apartment complex.

Freddie Mac’s deals are getting bigger as its regulator expands the definition of affordable housing, enabling the company to make more loans. Properties that are deemed affordable by the Federal Housing Finance Agency are exempt from a $30 billion cap that limits how much the government-sponsored entities can lend to apartment landlords each year.

“We’re helping to push more capital into this part of multifamily,” said David Brickman, head of multifamily operations at McLean, Virginia-based Freddie Mac. “A very small percentage of what we’re doing is luxury.”


Freddie Mac provided $34.1 billion for multifamily acquisitions and refinancings this year through September, more than double the $14.1 billion for the same period in 2014.

Stuyvesant Town

At Stuyvesant Town, home to about 30,000 New Yorkers and one of the last bastions of affordable housing in Manhattan, Blackstone worked out a deal with the city to protect residents from skyrocketing rents. The New York-based private equity firm and its partner in the transaction, Canadian investor Ivanhoe Cambridge Inc., agreed to keep about half of the more than 11,000 units affordable for 20 years.

Relatively cheap financing supplied by Fannie Mae and Freddie Mac makes large debt loads for projects such as Stuyvesant Town more manageable. Interest rates on mortgages from the agencies can be below 3 percent, compared with average financing costs of 4.5 percent from Wall Street banks, according to Richard Hill, an analyst at Morgan Stanley.

Other than the government-sponsored companies, there aren’t many lenders that have the capacity to fund a purchase as large as Blackstone’s, according to Sam Chandan, president of Chandan Economics, a provider of real estate data and analysis.

“You could argue convincingly that the deal wouldn’t get done in its current form without agency financing in the market,” he said.

Lone Star

Freddie Mac granted its largest apartment loan ever to Lone Star, a $5 billion mortgage to fund the private equity firm’s takeover of Home Properties. More than 30 percent of that deal met the FHFA’s guidelines for affordable housing, Brickman said.

Lone Star, based in Dallas and founded by billionaire John Grayken, said in June that the acquisition of Home Properties — with 121 communities, primarily along the East Coast — was consistent with its strategy of buying second-tier apartment complexes, such as workforce housing, rather than expensive newly built properties.

Representatives from Blackstone, Lone Star and Starwood declined to comment on their financing strategies.

Bubble Fears

U.S. multifamily-building prices are 33 percent higher than they were at the prior peak in 2007, according to Moody’s Investors Service and Real Capital Analytics Inc., a jump stoked partly by the abundant financing from Fannie Mae and Freddie Mac. That’s raised concerns that a bubble is forming that might pop when interest rates rise, according to Levy, the investment banker. Taxpayers could be on the hook for losses incurred by the mortgage companies if apartment values were to fall sharply.

The losses that dragged Fannie Mae and Freddie Mac to the brink of insolvency seven years ago sprung from the companies’ single-family portfolios, which dwarf their apartment holdings. The multifamily segment of their businesses emerged from the financial crisis relatively unscathed and stayed profitable during the recession.

At Freddie Mac, private investors would shoulder about the first 15 percent of losses on multifamily deals, providing a cushion in the event of a decline in building values, Brickman said.

“It would be extremely unlikely that we would ever be called upon to support our guarantee,” he said. “We are sticking to our principles and underwriting prudently.”

‘Public Subsidy’

Detractors argue that providing subsidized loans to deep-pocketed real estate investors isn’t in line with the mandate of the government-sponsored entities.

“If the purpose of the GSEs is to provide liquidity to the secondary mortgage market, in an effort to promote homeownership, a focus on funding multifamily rental properties seems inappropriate,” Josh Rosner, an analyst at research firm Graham Fisher & Co., said in an e-mail. “This approach only serves to deliver a public subsidy to private players.”

Brickman said Freddie Mac doesn’t view its business through the prism of the institutions it lends to.

“Our focus in on supporting middle-income and workforce housing,” he said. “Who owns it is somewhat irrelevant.”

Fannie Mae

Fannie Mae, which hasn’t been involved in the year’s biggest multifamily deals, said it evaluates each request for financing based on its terms.

The company “is committed to providing critical financing for multifamily housing in all markets,” Andrew Wilson, a spokesman for Washington-based Fannie Mae, said in an e-mailed statement. “We’ve done this throughout the year, working to effectively maintain our business and support rental-housing needs.”

The real power of Fannie Mae and Freddie Mac is that they continue to lend in times of difficulty, according to Warren Friend, executive managing director at Situs, a commercial real estate consulting firm. They kept the multifamily market humming in the depths of the recession in 2009, he said.

“What they provide is that stability when everybody else shuts down,” he said.