US Taxpayer Set To Bank-Roll Biggest Billionaire Builders

Just days after the potential for more capital injections for Fannie Mae and Freddie Mac (GSEs) are admitted to, we discover another 'scheme' to enrich the 'have-yachts' on the backs of the 'have-nots'.

At the behest of the government, apparently to provide 'affordable' housing for the least creditworthy individuals - just as they did in the not-so-distant past to such cataclysmic ends, GSE's "commitment to providing critical financing for multi-family housing in all markets," has, as Bloomberg reports, enabled billionaires such as Starwood's Barry Sternlicht and Blackstone's Stephen Schwarzmann to cheaply finance two transactions totaling more than $10 billion, implicitly subsidized by the US taxpayer. Even more ironic is that the provision of this 'cheap debt' is helping sustain just the unaffordable surges in rents and prices that are forcing Milennials to live with their parents for longer.

Who do billionaires turn to when they want to buy apartment complexes? The U.S. taxpayer. Bloomberg explains...

Barry Sternlicht’s Starwood Capital Group and Stephen Schwarzman’s Blackstone Group LP are in talks with Freddie Mac to finance two transactions totaling more than $10 billion, according to people with knowledge of the negotiations. Those discussions come after the government-owned mortgage giant already agreed to back Lone Star Funds’ $7.6 billion deal to buy Home Properties Inc. and Brookfield Asset Management Inc.’s $2.5 billion takeover of Associated Estates Realty Corp.


The mortgage guarantor -- which along with its larger counterpart Fannie Mae was rescued in a $187.5 billion taxpayer bailout in 2008 -- is boosting its multifamily lending as their regulator eases restrictions on that part of their business. Cheap debt from the U.S.-backed companies is helping sustain a five-year surge in values for apartment buildings and fueling some of the biggest real estate deals since the financial crisis.


“They wield a very big stick,” said John Levy, a principal at a real estate investment banking firm in Richmond, Virginia, that bears his name. “It takes more time and it’s going to be more expensive” to get transactions done without the two companies, which can lend at rock-bottom rates because their deals have implicit government backing.

And so there we have it - the GSEs are providing 'cheap' loans to the extremely wealthy (with the US taxpayer's shoulders bearingthe weight of the gap between the underlying risk of the loan and the free money being offered).

Freddie Mac’s deals are getting bigger as its regulator expands the definition of affordable housing, enabling the company to make more loans. Properties that are deemed affordable by the Federal Housing Finance Agency are exempt from a $30 billion cap that limits how much the government-sponsored entities can lend to apartment landlords each year.


“We’re helping to push more capital into this part of multifamily,” said David Brickman, head of multifamily operations at McLean, Virginia-based Freddie Mac. “A very small percentage of what we’re doing is luxury.”


Freddie Mac provided $34.1 billion for multifamily acquisitions and refinancings this year through September, more than double the $14.1 billion for the same period in 2014.

So if you wondered why you could not afford to rent (let alone buy) a home, it's not just the Chinese hot money flows, it's an implicit subsidy by the US government (using US taxpayer funds)

Other than the government-sponsored companies, there aren’t many lenders that have the capacity to fund a purchase as large as Blackstone’s, according to Sam Chandan, president of Chandan Economics, a provider of real estate data and analysis.


“You could argue convincingly that the deal wouldn’t get done in its current form without agency financing in the market,” he said.

Will they never learn?

U.S. multifamily-building prices are 33 percent higher than they were at the prior peak in 2007, according to Moody’s Investors Service and Real Capital Analytics Inc., a jump stoked partly by the abundant financing from Fannie Mae and Freddie Mac.


That’s raised concerns that a bubble is forming that might pop when interest rates rise, according to Levy, the investment banker.


Taxpayers could be on the hook for losses incurred by the mortgage companies if apartment values were to fall sharply.

Detractors argue that providing subsidized loans to deep-pocketed real estate investors isn’t in line with the mandate of the government-sponsored entities.

"If the purpose of the GSEs is to provide liquidity to the secondary mortgage market, in an effort to promote homeownership, a focus on funding multifamily rental properties seems inappropriate,” Josh Rosner, an analyst at research firm Graham Fisher & Co., said in an e-mail. “This approach only serves to deliver a public subsidy to private players.”


Brickman said Freddie Mac doesn’t view its business through the prism of the institutions it lends to.


“Our focus in on supporting middle-income and workforce housing,” he said. “Who owns it is somewhat irrelevant.”

Yeah it's irrelevant who gains from the US taxpayer subsidy, as long as the number of home units is rising...