Willy Walker on Dodd-Frank, CMBS and the Forthcoming Economic Renewal

Willy Walker: In February we acquired Deerwood Real Estate Capital in New Jersey; that’s our sixth acquisition. It will be focused on the Manhattan market.

For multifamily?

No, for everything. But clearly multifamily as it relates to Manhattan has not been one of our larger markets, so it will be nice to have the Deerwood folks focused on Manhattan, which is such a large multifamily market.

Speaking of multifamily, what do you think about the plan to have Fannie Mae and Freddie Mac recapitalized through an administrative means and have them exit conservatorship?

I think that will be tough. Not that the administration has appeared to be overly sensitive to the Washington, D.C., rulebook—I think that if it were any other administration focusing on an administrative solution to something as big as Fannie and Freddie, it would be a nonstarter. But at the same time this administration has done many things that most people would have thought would be nonstarters. Of course, Mel Watt [the director of the Federal Housing Finance Agency] and Steven Mnuchin [the Treasury secretary] could get together and get [the recapitalization] done. But I think it would come with some very, very significant political backlash because…the regulator has been very clear that the solution for Fannie and Freddie is a legislative solution, not an administrative one.

We are talking about a federal guarantee, which cost taxpayers close to $100 billion during the crisis. Of course, we’ve been repaid multiple times. I think that there’s so much behind Fannie and Freddie on the guarantee that anything you did from an administrative standpoint … could have significant repercussions on other issues, in particular from a budget standpoint. If you wanted to have Fannie and Freddie retain capital, wanted to change it from having the complete sweep of profits, there’s a significant budget component to it. It’s one thing for the FHA to say, “Well, from the standpoint of the housing market, this makes sense,” but it completely leaves to the side the budgetary issues of losing $10 billion to $30 billion that comes to the federal government [from Fannie and Freddie].

Some people think that [hedge fund manager] John Paulson, as a shareholder [in the agencies], has his own interest in pushing this plan.

At the end of the day, I think what people really miss is that this is a massive issue. The entire U.S. economy is underpinned by the mortgage market and Fannie and Freddie’s explicit guarantee on the mortgages they are insuring. You do anything to change that and it has far, far reaching implications on the broader economy. Also, no one on Capitol Hill won or lost an election based on GSE [Government-Sponsored Enterprise] reform. Not a single person.

And there are plenty of people who are interested in it continuing. More broadly, what’s happening with multifamily nationally?

The multifamily market has been extremely healthy; it continues to grow at significant rates. Think back to the [George] Bush administration, the ownership nation that Bush really wanted to push. Then you had the big crash. Homeownership has come back down to 62 percent [from 68 percent of Americans owning]. We believe that the underlying fundamentals on housing are extremely compelling and strong. Household formation continues at about 1 million [households] per year. Many people are opting to rent vs. buy. Some of that is demographic trends. But I would also put forth to you that it’s financial reality for people who have a lot of student debt and haven’t seen their wages grow in a long time and just can’t afford a down payment.

Do you think there should be a legislative solution for that?

No, I do not. The mortgage interest deduction is a big enough inducement to owning a single-family home that there should be no other federal [incentive to do so].

But what about to alleviate the student loan debt?

No, I do not. I think that there’s a real issue on our hands as it relates to student loans. But at the end of the day, these people made a very direct decision, to get an education to further their careers, in the hopes that it would pay off. In some instances it has, and in other instances it has not. But to create some type of big debt relief program surrounding student debt—it’s just not the way our government has run. And you could say, well, we did mortgage relief. But we did mortgage relief on delinquent loans. We held very hard on the majority of outstandings and just had programs to help people get back above water.

But they haven’t even had any programs like that for student loan borrowers. They aren’t getting a write-down and arguably the lending practices were just as bad. The market can’t really sort it out because people can’t declare bankruptcy. We can’t even see what would be happening in this market—it’s become artificial—because there is no bankruptcy.

I do think we have a very significant issue with regard to the amount of student debt that’s outstanding in America today, but I just don’t see the federal government stepping in there.

Well, maybe they should step out.

It was privatized for a period of time, and then they decided to step back in and say, “This is how we should do this.” Also, I wouldn’t be surprised if the Trump administration took a very different tack on new student debt. We’ll see. It’s a big issue; it’s keeping a lot of people renting and not able to shore up the equity they would in a home. And as a public policy issue, a lot of these people who would have been creating equity for retirement—you’re not going to get that.

You guys also lend on office and retail.How are those markets doing?

Eighty-five percent of our total deal volume, which was close to $18 billion last year, was on multifamily. Last year about $4 billion of that was where we were brokering loans through life companies, CMBS and banks. And that was on non-multi-assets. We take no credit exposure on that brokerage activity. On a lot of our multi stuff we are the lender. And we’ve seen the office markets be very strong, and have done quite a bit of office lending. The retail market is sort of sporadic. We don’t do a lot of big-box lending; it’s not a space that’s overly concerning to us, but strip malls we do all the time. And the hospitality space has been really great over the last few years. I think a lot of people in hospitality are concerned about where we are in the cycle. Obviously, hospitality is first into and first out of a recession, since they change their rents every day. We clearly watch them.

What do you think of the attempts to at least partially repeal the Dodd-Frank Act?

We are big proponents of risk retention. We were fine, sort of, with Dodd-Frank and the Volcker rule. What we found were the questions marks around Basel III, around Dodd-Frank, around what kind of structure in the CMBS markets [would be allowed] made it very confusing about who was going to hold what, how it was going to be tranched up, could you do these L [shape structured ]loans. We ended up leaving the CMBS space right as this was happening, during the third quarter of last year. Obviously, the elections sort of turned Dodd-Frank on its head. But we think the Volcker rule is likely to get repealed at some point, and there won’t be risk retention on CMBS.

Would that make you want to go back?

No.

What made you want to leave it?

We didn’t have the scale or balance sheet to be a big player in CMBS. Also, our borrower base really isn’t a CMBS borrower base. We’d say, “We’ve got Fannie, Freddie, HUD, a life insurance quote, and we’ve got [our own] CMBS platform.” And they are usually lower leverage, and they might not love having their docs where everyone can look through [them]. So we just didn’t see it as commercially viable for us. And from a buyer’s standpoint, the big banks have the balance sheet to hold the bonds and you have the b-piece buyers who unless you were doing a lot of volume…they would kick out loans…just to exert pressure. So unless you were doing serious volume where you could turn the pressure back on them, you were just in between a rock and a hard place. So we just said, “We’re out.”

How long had you been in that business?

About two-and-a-half years.

Was that a strange time to go into CMBS?

We thought the CMBS markets would come back a lot stronger than they did, and we thought it was a natural extension of our scale.

What do you think it means about the market that CMBS didn’t come back so strong?

That a lot of people lost a lot of money and that memories are long. People have been able to get their exposure to commercial real estate lending in other ways.

Through all the new alternative debt platforms?

Through investing in mortgage REITs, through extending debt to mortgage REITs, buying Fannie and Freddie securities on the multifamily side. Through—if you were a life insurance company that was doing CMBS deals—just doing whole loans. Then you’ve got banks like Wells Fargo who have huge exposure to commercial real estate. Banks have also pulled back over the last couple years, because of the regulator. They’ve been pulled back over the last 18 months by the Office of the Comptroller of the Currency. That has made bank loans on multifamily very hard to come by. That has also made it so that at the back end of 2017, 2018, there will be a supply constraint.

How much construction lending does Walker & Dunlop do?

Almost none. Because we are not a bank, we don’t have a deposit base. That’s sort of been the domain of banks and we’ve been long-term permanent lenders. Their cost of capital is just significantly lower. To be able to put capital out at a yield that is acceptable … [construction lending] just doesn’t work for us. We don’t want a 10-year loan sitting on our balance sheet, but we’re happy to take longer term maturity risk, like a life insurance company. Life companies and agencies have pushed out [in terms of the length of term they will offer].

What kind of rate could I get on, say a 10-year multifamily, take-out loan for a stabilized property?  Let’s say it’s a good asset and let’s pretend I’m a good borrower.

It would depend.

Let’s say a 65 percent LTV and fixed-rate.

It would depend on where the asset is located, if there is an affordable component. Fannie and Freddie are both very focused on affordability and green. The more green you have, the better pricing you’re going to get. If I say that at the low end of the scale, we did a financing last month at a 375 coupon, you’d say ‘wow.’ It was a floating-rate loan, 10 years IO, great borrower, low leverage. But we also did a loan last month at a 435 [coupon]. There’s a pretty big delta between those two. It was a fixed-rate loan, a smaller asset. Basically you’re looking at 4 percent money. And if it’s got a few things in it that make it attractive, you’ll bring that down in the mid-3s, or if it’s something that’s got a little hair on it, you’re going to be up in the mid-4s. There was a time after the election where I thought everything was going to be north of 4. And for most of the first quarter everything was, and then it came back down, and we’re doing a lot of financing in the high 3s right now. A lot.

In New York at least, for the investment sales market, it’s been quite slow recently.

I would put forth that I’m very happy that we didn’t go out and write big checks for investment sales professionals in New York to come over to Walker & Dunlop last year. New York’s had a lot of inventory come on. Everyone’s wondering when developments like Hudson Yards will have really made their impact. It’s more of a wait-and-see market right now. There are other markets where people are transacting.

I saw in your profile in the Washington Post that you told the reporter that he misses important business stories. So, what are the most important business stories that reporters are missing?

I have no idea what everyone is missing. But there has just been a general sense of confidence in the underlying economy that I have not seen in a very long period of time. I don’t think it’s necessarily the Trump administration, although I think that’s definitely the catalyst in creating this sense of optimism. It’s clearly not tax reform or Dodd-Frank reform or anything else. There’s just a sense that there’s growth, that there’s the opportunity for growth. That people can invest and not worry about everything falling off the table the next day. And I do think that makes a material difference to how people think about what they’re doing. I go up to the J.P. Morgan bank CEO conference every year. The conversation three years ago was, “When will banks be freed up to start lending again?” And then this past December after the election it was a little less than euphoric. In the sense that we can get back to business now, we can get back to making loans. I don’t think anyone realizes how much of a difference that makes. We’ve not changed our lending standards since the election one iota. But you can just tell that there are people who are saying, “I’ve gotta put money out, I’m going to buy.” The numbers aren’t there yet, but there is this general sense that the economy is healthy again, and I think that will soon start to play out in the numbers.