Willy Walker Keeps His Bets on Fannie and Freddie While Preparing to Branch Out

Walker & Dunlop, the No. 1 Fannie Mae (FNMA) DUS lender and the No. 5 Freddie Mac (FMCC) seller-servicer, according to 2012 agency and MBA rankings, relies heavily on both of the GSEs, which have seen their market shares decline. Fannie’s estimated mortgage holdings in 2013 will amount to $590.49 billion, down 10 percent from $656.1 billion in 2012 and 18.2 percent from $722.16 billion in 2011, according to government records.

Mr. Walker, who took the business co-founded by his grandfather in 1937 public in December 2010, has spent a significant amount of his time on Capitol Hill this year talking to congressional leaders about the importance of Fannie Mae and Freddie Mac. Those conversations have come at a vital time—a little over a year after Walker & Dunlop beefed up its multifamily platform with its $234 million acquisition of CWCapital, the country’s second-largest special servicer. The acquisition was agreed to in June 2012 and completed the following September—with the purchase price consisting of $80 million in cash and the issuance of $154 million in stock. As a result, Walker & Dunlop, which has more than 400 employees, became one of the largest commercial real estate lenders in the country, albeit one with bolstered ties to agencies that may be disappearing.

“We’ve been very involved in the political dialogue as it relates to the future of Fannie and Freddie,” said the D.C. native, who in 2007 became the third generation of Walkers to run the commercial mortgage company. “They know we’re out there working on their behalf.”

On Oct. 9, the Senate Banking Committee held a hearing on the reform of Fannie and Freddie, focusing on their multifamily operations. Witnesses at the hearing heavily leaned in favor of housing finance reform legislation that would ensure that the federal government continues to play a role in multifamily financing.

Mr. Walker and his team worked on several fronts prior to the hearing, such as informing senators and their staffs of Fannie’s and Freddie’s multifamily business models and the agencies’ affordable housing provisions.

The CEO, who noted that his involvement on Capitol Hill started long before Fannie and Freddie went into conservatorship, has become an increasingly vocal proponent of the agencies as their futures have become more uncertain.

Jeffery Hayward, Fannie Mae’s head of multifamily, referred to the dynamic between the agency and Walker & Dunlop as a “a partnership” that equally affects both parties. “Willy depends on us, and we depend on him,” Mr. Hayward, who oversees the agency’s $200 billion multifamily portfolio, told Mortgage Observer. “That is what the DUS program is about.”

Maintaining Walker & Dunlop’s growth while fighting on behalf of the agencies has been an uphill battle for Mr. Walker this year as the second and third quarter of 2013 presented several unexpected challenges.

First, Walker & Dunlop lowered its third-quarter 2013 guidance range for origination volume to $1.7 billion-$1.9 billion from $2 billion-$2.5 billion—the result of “rising interest rates and a slowdown in lending activity by Fannie Mae and Freddie Mac,” according to a Sept. 30 company filing. Following that filing, the company’s shares fell to a 52-week low of $12.50 by the first day of October. This marked a 42.6 percent decrease from July’s 52-week high of $21.76.

Throughout the process, analysts were taking note and reacting.

Cheryl Pate, an analyst at Morgan Stanley, downgraded Walker & Dunlop’s stock from buy to hold, while Bose George, an analyst at Keefe, Bruyette & Woods, cut his earnings-per-share estimates for the company. “The move reflects management’s recent guidance and commentary on the multifamily market, and our concerns that the GSE lending to the sector could continue to decline,” Mr. George wrote in an Oct. 3 report.

In the first three quarters of 2013, nonetheless, Walker & Dunlop did $6 billion to $6.2 billion of origination volume, up between 43 and 48 percent from $4.2 billion in the same period last year.

While the CWCapital acquisition has been “a rewarding transaction for both companies with all internal workings of the deal meeting expectations,” the external market presented an unexpected challenge in the second and third quarters of 2013, Mr. Walker said. The combined platforms of CWCapital and Walker & Dunlop, pre- and post-acquisition, did $9.5 billion of origination volume in 2012. “We looked at that number and said, ‘O.K., we’re probably going up from here. Let’s establish origination guidance between $10 billion and $12 billion,’” Mr. Walker said. “At the time, that seemed to make great sense and would have been continued growth off of a very strong year.”

What the CEO of six years said he hadn’t expected was FHFA to come out and give a 10 percent reduction in Fannie’s and Freddie’s 2013 origination volumes and HUD running out of money in March and then again in October.

“I think one of the things that is most unsettling for our investors is that there’s a ton of noise coming out of Capitol Hill on the future of Fannie and Freddie and then the president comes out and makes a speech about wanting Fannie and Freddie to go away,” Mr. Walker said. “The reality of the situation is that Fannie and Freddie aren’t going anywhere anytime soon.”

At Freddie Mac, head of multifamily David Brickman voiced his appreciation for Mr. Walker’s unwavering support, while expressing confidence that Walker & Dunlop will expand beyond agency lending as its primary business in the long term if need be.

“Their successful acquisition and integration of CWCapital is the main reason they have risen through the ranks of our league tables,” said Mr. Brickman, who oversees the agency’s more than $173 billion multifamily portfolio. “Willy has been candid about the need to diversify and build upon Walker & Dunlop’s existing business, but the agencies still serve as the foundation, and, if the foundation has significant cracks in it, that is likely to be a problem.”

As of now, Walker & Dunlop, which reported 2012 annual revenue of $256.8 million—a 69 percent increase over the previous year—continues to do quarterly earnings results that focus specifically on Fannie and Freddie, something its larger competitors have put less of an emphasis on.

“When Wells Fargo, a big player in Fannie’s and Freddie’s multifamily businesses, does their earnings release, the CEO of Wells Fargo ain’t talking about Fannie and Freddie,” Mr. Walker said. “And he ain’t talking about their multifamily businesses.”

Wells Fargo, the San Francisco-based banking and financial services giant, declined to speak about Walker & Dunlop as a direct competitor but noted in an email that its multifamily division is committed to working with the agencies.

While multifamily lending makes up a large part of Walker & Dunlop’s current business, the commercial mortgage company has additional revenue sources. As a whole, 87 percent of the company’s $38 billion loan portfolio is comprised of multifamily, while the other 13 percent is divided among all other commercial real estate asset classes, including office, retail, hospitality, industrial and self-storage, which the company brokers off to other capital sources. Walker & Dunlop provides financing for properties located in 49 states around the country.

This year, the company has closed several big multifamily and other commercial real estate deals. Among them are three loans totaling $117 million for 2,400 housing units in Tennessee, which closed in September; a $70 million bridge loan for Novarr-Mackesey’s newly built student-housing property Collegetown Terrace Apartments near Cornell University in Ithaca, N.Y., which closed in August; and a $120 million Fannie Mae loan for TF Cornerstone’s rental apartment tower at 45-40 Center Boulevard in Long Island City, Queens, which closed in January. The company also recently closed a $90 million multifamily loan with a life insurance company in the greater D.C. area, about which Mr. Walker declined to give further details.

The husband and father of three has witnessed varying cycles in the level of competition for deals since he joined Walker & Dunlop as its executive vice president and chief operating officer in 2003, before becoming CEO in 2007. As a small, privately held company going up against top CMBS lenders, life insurance companies and banks before the financial collapse, it was difficult for Walker & Dunlop to grow and attract new clients, he said. During the financial crisis, competition narrowed to agency lenders, which gave Walker & Dunlop a leg up in the race for multifamily clients. Now, post-crisis, “there’s robust competition to get the deal, and then, once you’ve got the deal, there’s lots of other capital sources out there competing to win on the deal,” Mr. Walker said.

Walker & Dunlop is now “going through some growing pains as a larger organization, particularly in an environment where you are a bit highly leveraged to the agency market,” said Mr. Brickman, who referred to Mr. Walker as one of his best friends of the past few years, since Walker & Dunlop catapulted onto Freddie Mac’s radar. “Obviously, there have been regulatory challenges and greater competitive challenges.”

Going forward, Walker & Dunlop is indeed working to diversify its lending operations by expanding its brokerage business and also by raising capital through additional equity sources. In August, the company successfully raised its first scaled fund, a separate account in the form of a private REIT to do large multifamily bridge loans. “We’ve got commitments there for $380 million, and Walker & Dunlop is doing a co-investment of $20 million,” Mr. Walker said. “We will continue to add to that and do other separate accounts.”

Mr. Hayward of Fannie Mae noted that if market forces bring additional pressures to bear, Walker & Dunlop would be able to find its footing in new, unexplored territory. “I’m sure, given the skill set that Walker & Dunlop has, if they had to use the CMBS market more, they would do that,” he said. Indeed, the commercial mortgage company is in talks of launching a conduit in the near future, Mr. Walker confirmed, calling it a “likely” possibility. He also spoke about his interest in lending more aggressively on other asset classes, particularly retail and office.

“Walker & Dunlop isn’t going anywhere,” he told Mortgage Observer in his sparsely decorated office on the 12th floor of 7501 Wisconsin Avenue’s East Tower. “In the long term, what drives our business and what makes people want to join this platform is our scale, our access to capital and the relationships that we have. But borrowers need to understand that the agencies are still going to be major players in this marketplace not matter what.”