The U.S. system for financing multifamily rental properties has changed considerably since the early 1980s. The June 1998 issue of Cityscape probes some of the effects of these changes, especially for affordable housing. "The Evolution of Multifamily Financing" examines the rise of nontraditional multifamily lenders that have lower cost access to the general capital markets than banks and thrifts. This and other changes have uncoupled underwriting decisions from servicing and investment decisions. As a result, several parties now perform due diligence for a single transaction -- not a single, local portfolio lender, as was common in the past.

In "Financing Multifamily Properties," the authors discuss the most recent changes in this field. In addition to the rise of nontraditional multifamily lenders, the authors note a rise in nontraditional ownership by large, publicly traded real estate investment trusts. Fannie Mae, Freddie Mac, and Wall Street firms are leading unparalleled growth in the secondary market for multifamily mortgages. The authors caution that increased investor demand for multifamily-backed assets will require institutions to maintain underwriting discipline to avoid a cyclical downturn in the multifamily market.

The next article, "Developing a Secondary Market for Affordable Rental Housing," presents two case studies that illustrate why the underwriting and due diligence of multiple institutions, common in today's market, can be particularly problematic for affordable housing. The authors suggest a need for more industry leadership to fully develop the secondary market for affordable multifamily mortgages.

The next two articles discuss recent efforts by HUD and two government-sponsored enterprises -- Freddie Mac and Fannie Mae -- to support the financing of affordable multifamily housing. In "A New Initiative in the Federal Housing Administration's Office of Multifamily Housing," the authors document a case study of how the Federal Housing Administration (FHA) developed its small projects processing initiative. The initiative targets FHA's mortgage insurance programs to an affordable housing niche market without the use of project-based rental subsidies. "Fannie Mae, Freddie Mac, and the Multifamily Mortgage Market" looks at the role that these institutions play in the multifamily market. The authors find that the total multifamily mortgage volume of these two enterprises has increased since HUD established legislatively mandated affordable housing goals for them, although their approach to affordable multifamily housing remains cautious.

Cityscape concludes with an analysis of multifamily mortgage defaults. In "Multifamily Mortgage Credit Risk," the authors develop an empirical default model and find that properties underwritten to conventional underwriting ratios -- such as a debt coverage ratio of at least 130 percent and a loan-to-value ratio of no more than 70 percent -- start with substantial financial cushions. The authors show that relaxation of standard ratios does increase the probability of default.

Cityscape 4(1) is available from HUD USER for $5. Please use the order form to obtain copies.