96,000 Multifamily Housing Buildings in Chicago Area are Underwater ; 42 Percent of Small Rental Buildings at Risk of Default

.” Lenders have delayed foreclosures on about $1.5 billion of multifamily mortgage debt in Cook County.As local lending institutions have scaled backed their lending to large 7+ unit properties in 2008 and 2009, Fannie Mae and Freddie Mac have essentially become indispensable to the Cook County multifamily mortgage market. The GSEs’ share of the large 7+ unit multifamily mortgage market in Cook County is around 65 to 70% of all lending. Fannie Mae and Freddie Mac are also indispensable to the small 2–6 unit multifamily mortgage market in Cook County, but for an altogether different reason.Net rental revenues are currently at or below total operating costs for about 74,000 rental units in the city of Chicago.Long-run policy must necessarily take into account the extent to which Fannie Mae and Freddie Mac subsidize interest and create an incentive to take on excessive debt.
Loan to Value Ratios for 2-6 Unit Properties

Loan to Value Ratios for 7+ Unit Properties

Multifamily Foreclosure Rates In Cook County

Multifamily GSE Originations

As is typically the case in such studies, the author’s proposed solutions leave much to be desired. Shilling discusses an expanded role for the FHA, I suggest shutting it down. Shilling discusses proposals for Fannie Mae and Freddie Mac, I suggest shutting them down.

To be fair, Shilling discusses the pros and cons of many ideas, including two paragraphs on Japan that hit the nail on the head.

Fannie Mae and Freddie Mac could be required to expand their multifamily housing lending, which already has been expanded under the 2010–2011 Enterprise Affordable Housing Goals. Expanding lending in these areas could be risky. But presumably the public should be willing to bear some of this increased risk, especially if this increased lending activity were to reduce the feedback effects in the short-run from falling property prices to increased foreclosures, back to reduced property prices and increased foreclosures.

But there are some caveats to this policy prescription: if the US economy were to stumble along for years—like Japan’s economy did during the “lost decade” in the 1990s—then presumably it would be best to accelerate foreclosures and abandonment, rather than take steps that might prolong the process. The sooner properties are removed from the housing stock, the sooner rents will begin to rise and the sooner the long-run equilibrium will be restored.

It should be obvious by now, that government interference in housing, especially the creation of Fannie Mae and Freddie Mac has been a total disaster. Going forward, the best approach would be to dismantle Fannie and Freddie in a reasonable timeframe, and let prices settle where genuine buyers will step up to the plate and invest.

Unfortunately, Shilling quickly discards that idea in favor of government intervention to prevent Japanese malaise. The sad thing is, government intervention is exactly what will guarantee Japanese style malaise.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
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