Is there a Multifamily Foreclosure Crisis on the Way?

I am seeing more evidence that a wave of multifamily apartment buildings are about to enter foreclosure, and the prospect of that development seem very concerning.

While the peak for resets on sub-prime loans issued in the last decade has already crested, lots of commercial real estate debt is only now coming to maturation. The Washington Post reports that $1.4 trillion in commercial estate debt should roll over in the next three years. Half of those loans will be underwater by 2011, which should thwart demand for new financing.

While this is troublesome for investors and lenders working in the multifamily housing industry, it is also something that poses significant challenges for neighbors.  One issue is the loss of many affordable rental units. Another concern is crime. The possibility for a vacant complex to become a warren of hiding places for all kinds of crime seems obvious, and in an era where many municipalities are having trouble paying for police and fire services, it seems very likely.

My initial sense of this problem is triggered by a bankruptcy in my own community. An owner of a 2,000 unit multifamily property declared bankruptcy in January. Miles Properties owes more than $17 million on a multi-project loan that Wachovia made to them in 2007. The City of Durham puts a tax value of about $14 million on two different parcels within the Hampton Forest community.

Miles has more than 80 properties. Thirty-six are in Georgia, and all but one are located on the East Coast. According to their website, they buy “B or C class assets in need of substantial rehabilitation, maintenance and repair.” They buy properties that are more than 10 years old and with more than 150 units.  They have responded to the economic downturn by re-marketing condominiums into apartments. Miles might have created some of its own problems, too. There is no deposit required for new tenants – only a small application fee and a small maintenance fee. Such a policy would seem to bias their population toward households with few reserves and little ability to endure even a short period of time without work.

It is the same story elsewhere in the state.  The Enclave, a 12 unit multi-family with an additional 17 acres of land and more than 55 subdivided, but as yet developed lots, was just sold by Wachovia to a local non-profit.

It is a large problem that seems to have no boundary.  HUD continues to dispose of hundreds of multi-family properties.  Housing researchers at DePaul University have documented the scale of this in Chicago.  They have conclusions for how disinvestment in this sector will impact the availability of affordable housing.  One problem is the schedule for the maturity of debt. Although about $1.5 billion in multifamily debt is expected to mature in Cook County in 2010, that number will double by 2012 and increase more than 3 times in 2014.

Public resources within affordable housing may struggle to respond to this crisis, as well.  The demand for affordable housing tax credits has dried up.  Neighborhood Stabilization Program funding, ideally suited for this problem, has already been awarded.  On the household level, Section 8 resources are scarce, so fewer housing authorities will have a ready pool of voucher holders if a housing authority did attempt to buy a property.

The staff at DePauls’ Institute for Housings suggests a few remedies. For one, they argue that competition between Fannie and Freddie is harmful, enhancing the demand for multifamily debt. Instead, focus one GSE on single-family mortgages and another on multi-family. They also ask if there is more of a place for FHA in this area. Long-run, they argue that we need tighter lending standards on investment properties.