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Trouble in the multi-family housing mortgage market

There is a very disturbing report, The Multifamily Housing Market  and Value-at-Risk Implications for Multifamily Lending, just released by DePaul University’s Institute for Housing Studies regarding the impact of recent property price declines and foreclosure on multi-family housing mortgages in Cook County, Illinois.  The study found that 42% of small rental buildings (2 to 6 units) are in danger of default because they are upside down on their mortgage debt.  The study said that if the trend is similar across the nation, it would be on par with the subprime mortgage meltdown.  In Cook County, the property value of small rental buildings have fallen to 46%.  Few lenders want to provide financing for these types of buildings leaving only Freddie Mac and Fannie Mae as lenders of last resort. For many owners, the income from their buildings are less than the operating expenses.  Here’s what’s of concern for local jurisdictions:

The point, in any case, is that a significant amount of disinvestment could occur in this environment, particularly in
those markets where the housing inventory has been vastly overbuilt. The usual argument is that negative equity
and declining rents will fuel foreclosures, which in turn will force down multifamily property prices, setting off a
downward spiral, particularly if credit is tight and lenders (including Fannie Mae and Freddie Mac) are unwilling
to make loans. A side implication, of course, is that, other things equal, as rents decline, the quantity of space
demanded should increase. But where there are requirements that multifamily units meet some minimum building
standards, investors will generally find operating these units financially infeasible when rents fall below this
operating cost threshold level. Thus, at or below this point the property will generally be vacated or abandoned.

You can download the entire report at http://ihs.depaul.edu/ihs/

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