Willy Walker Takes the Long View on Commercial Real Estate

The CEO of real estate lender Walker & Dunlop discusses what to do with Fannie and Freddie and the recovering market.


Willy Walker, CEO and president of Walker & Dunlop, a Bethesda, Maryland–headquartered multifamily and commercial real estate financing firm, knows something about long races. Walker has run a 2-hour 36-minute Boston Marathon and is a national-class triathlete. And he’s been leading his company, founded by his grandfather and great-uncle in 1937, through the long and treacherous recovery from the financial crisis. The firm, with 400 employees in 20 offices across the U.S., had its initial public offering on the New York Stock Exchange on December 2010 — not exactly a boom period for real estate. The firm originated $8.4 billion in loans in 2013, 52 percent of which were with government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

Much of the firm’s momentum has been provided by acquisitions. Walker & Dunlop picked up Freddie Mac and HUD originations by acquiring Column Guaranteed from Credit Suisse in 2009. In 2012 the company bought New York–based Fortress Investment Group’s CWCapital subsidiary and gained more Freddie Mac servicing. Walker & Dunlop is also a 20 percent partner in a Fortress commercial mortgage-backed securities conduit that launched in February and provides first-mortgage loans in all commercial real estate classes, including preferred equity and mezzanine debt.

Not only is the credit environment in flux these days but also the very nature of HUD lending looks poised for a shake-up. On March 16, Congress announced a 440-page bipartisan bill on GSE reform. Drafted by two senators, Democrat Tim Johnson of South Dakota and Republican Mike Crapo of Idaho — respectively, the chairman and ranking member of the Senate Banking Committee — the bill proposes the creation of the Federal Mortgage Insurance Corp. (FMIC), a new GSE that would effectively replace Fannie and Freddie, both of which were forced into government conservatorship in crisis-racked September 2008.

Walker recently spoke with Institutional Investor Content Editor Anne Szustek about how commercial real estate is faring during this market recovery and what the Johnson-Crapo bill indicates about the future of real estate lending.

Institutional Investor: What exactly is the Johnson-Crapo bill, and if passed, how would it affect your clients?


Walker: I believe the legislation is the roadmap for GSE reform. So whether Johnson-Crapo actually becomes law in 2014, 2015, ’16, ’17 — whenever the day might be — I think it’s fair to say it is the only piece of legislation, and it’s only a draft today, that has got bipartisan support with significant power bases and real thinking behind it. It has got input from industry association leadership. It’s got broad input from Republicans as well as Democrats. And as a result, it really is where the debate is happening today. It may not become law in 2014 or ’15 or even ’16, but it is establishing a framework for the future of the GSEs. And the Wall Street Journal, the day after the announcement, ran a banner saying that the GSEs are going away now. It might be what the Journal would like to see happen, but it’s a little presumptuous, given that it’s nothing but a draft of legislation.

The only other bipartisan bill on the topic is the Corker-Warner bill, which was introduced last year by Senators Bob Corker, a Republican from Tennessee, and Mark Warner, a Democrat from Virginia. Johnson-Crapo takes Corker-Warner to another level. It adds an explicit government guarantee. It uses the same insurance mechanism, the FMIC, to insure the mortgages. So beyond that, no, there is no other bipartisan effort. Right now Texas Republican Representative Jeb Hensarling, who is chairman of the House Committee on Financial Services, has got a bill called the PATH Act, which is going nowhere quickly. You’ve also got Democrat Representatives John Delaney from Maryland, Maxine Waters from California and Carolyn Maloney from New York who are working on their own pieces of legislation. But none of them are as comprehensive as Johnson-Crapo. Johnson-Crapo is 440 pages. It’s a big piece of legislation.

Have you read all of it? Any points of particular interest to investors?

I have, actually. On the single-family side, I have read it, but I have not studied it. I have, however, studied all the parts on the multifamily side. The most important piece of Johnson-Crapo as it relates to multifamily is that the draft legislation specifically endorses the businesses that Fannie and Freddie have today. It flat-out states that the multifamily businesses of Fannie and Freddie are good businesses; they have private capital ahead of government capital. And they provide broad liquidity to the multifamily markets.

That in and of itself is something that we in the industry have been working for years to accomplish. When the GSEs were taken into conservatorship in 2008, very few members of Congress even knew that Fannie and Freddie made loans on apartment buildings. In Johnson-Crapo, not only do they validate the multifamily businesses, but the entire Article 7 of the legislation focuses on those properties. First of all, it calls for the existing businesses of Fannie Mae and Freddie Mac to be spun off into distinct subsidiaries within 12 months of Johnson-Crapo being passed. So the moment the law gets passed, there’s a 12-month clock that starts for the Federal Housing Finance Agency [FHFA], which is the regulator for Fannie and Freddie today, to have Fannie and Freddie set up distinct subsidiaries for the multifamily businesses. In Corker-Warner, a paragraph that was basically a placeholder said, “We think the multifamily businesses of Fannie and Freddie are great. We’ll figure out how to deal with it.”

The final piece is that the legislation then calls for the FMIC, which is what will come in five years after Fannie and Freddie are wound down, to have a multifamily business. What you could end up having is the spun-off Fannie Mae and Freddie Mac doing their multifamily lending. And then under the new FMIC structure, you could have one, two or several, I don’t know what number, players in the multifamily space who use the FMIC model to guarantee multifamily mortgages. Another thing Johnson-Crapo calls for is for the FMIC to ensure that the multifamily businesses are adequately capitalized to be able to continue doing their business. The third thing it calls for is for FHFA to analyze whether they should spin off the subsidiaries and take them private or turn them into public corporations.

The legislation does not call for an explicit government guarantee to go with the spinning off of the multifamily businesses. They’d have to go to Congress and get that guarantee.

Why is this legislation coming now? Does the government see the real estate market perking up — thus needing new, clear regulation?

Oh, I wish it was market focused. This is all politics; there’s nothing from a market standpoint. I would say the market driver right now which is pushing this is the fact that Fannie and Freddie are making money and have returned all of the capital that was given to them by the federal government. There are plenty of people who feel that once Fannie and Freddie really start contributing to the annual budget of the federal government, they will never, ever be touched and they will become wards of the state, if you will.

So I think in the background there is clearly the thought that we’re more than five years after these things went to conservatorship, and nothing has been done, no real legislation has been brought to the floor of the Senate or the House for debate, and it’s time to start moving forward on GSE reform. They’re not going to get tax reform through. They’re not going to get immigration reform through. Especially because this is a bipartisan bill, I believe the White House thinks there might be the chance that they could pass housing and finance reform under President Obama’s watch.

Does this focus on multifamily reflect any sort of demographic shift back toward cities? The bill was drafted by members of both parties, but will it gain support from largely rural states?

I’m not a big believer that this bill will get passed. Most experts would tell you that this bill has a slim-to-zero chance of passing the House and the Senate and getting a signature by the president in 2014 — and slim might have just left the room. It needs to come through the Senate Banking Committee with broad bipartisan support. As of March 24, 12 members of the Banking Committee were in support of it. It probably needs between 18 and 22 to be able to get Senate majority leader Harry Reid to say, “Okay, I’ve got the entire Senate Banking Committee in favor of this legislation.” But people like [Democratic Senator of Massachusetts] Elizabeth Warren have not signed on to the bill yet. So there’s that piece to it.

There are people like New York Senator Chuck Schumer, who has a huge amount of multifamily in his state. Schumer should like this because of the amount of multifamily housing stock in the state of New York, more specifically in New York City, and the need for broad access to capital that the agency’s multifamily businesses bring.

There was a Senate Banking Committee hearing, probably about seven months ago, where they spoke specifically about multifamily. What was very interesting is that you had senators from urban states — and I’d call New York a very urban state, generally speaking, given the amount of its population that lives in New York City — and from very rural states, like Senator Crapo from Idaho, talking about the merits of Fannie- and Freddie-backed multifamily businesses. If you pulled Fannie and Freddie out of the market today, would there be enough private capital to replace the close to $54 billion of capital Fannie and Freddie provided last year to the multifamily industry? Is there $54 billion of capital that would come in? There probably is. It might be at a higher price point. But in times of crisis, Fannie and Freddie have been there to supply capital and to provide liquidity, and, as many people have talked about during GSE reform, you cannot think there is some springing mechanism that, when all hell breaks loose, will restore these systems. The Troubled Asset Relief Program is a perfect example of how it just doesn’t work to take a big check of $700 billion and give it to the banks and say, Go lend it. None of them lent it. They took it and put it on their balance sheets and sat back and said, “Great, I’m not going to go out of business tomorrow, but I’m also not making any new loans.”

On that note, let’s talk a bit about the post–financial crisis regulatory climate. How do you see this unfolding in real estate?

Wells Fargo made $21.8 billion in 2013. I think J.P. Morgan made slightly more than $5 billion [editor: $5.3 billion] in the fourth quarter; they would have made $13 billion if they hadn’t had to pay $8 billion in fines and penalties.

CEOs John Stumpf of Wells Fargo and Jamie Dimon of J.P. Morgan at a conference that I attended were both saying that the regulatory oversight on banks is massive. But they seemed to be well out of the whining stage and much more focused on the “Just get it done,” which I think is a shift.

Then, Republican Congressman Scott Garrett from New Jersey, the chairman of the House Subcommittee on Capital Markets and Government-Sponsored Enterprises, gets up, and all he does is whine the entire time. He doesn’t talk about the fact that the regulatory environment is actually getting something done or that there are modifications to be done to it. He just kind of throws his hands up and says, “I can’t believe we’ve got all this regulation.”

I said to myself, “If Jamie Dimon and John Stumpf aren’t whining about it, why is Representative Garrett whining about it, rather than just doing something to make modifications to Dodd-Frank?”

Banks clearly are being regulated very hard. The impact of Dodd-Frank on bank lending on the CMBS [commercial mortgage-backed securities] markets has been de minimis. There’s no major structural change whatsoever to the CMBS market today compared with where it was back in the mid-2000s. There’s no change to risk retention, which was very much needed, very much called for and very effectively written out of Dodd-Frank.

Has litigation against banks tied to mortgage-backed securities effectively worked as a regulator?

Most of those fines have all been paid because of the single-family real estate segment. As a result of that, there’s still not a residential mortgage-backed securities market. The RMBS market really doesn’t exist. There’s a pretty significant force right now on the part of the commercial banks to just sort of say, “Let Fannie and Freddie continue to do it.” On the commercial side, there’s really no change. In January [former Securities and Exchange Commission chairman] Christopher Cox made a speech in which he basically said nothing is going to happen on agency reform until at least after the 2016 presidential election. A poll of people at the conference where he spoke showed that 50 percent of the audience agreed with him, and 28 percent said nothing ever gets done with Fannie and Freddie.

What’s been the postrecession feeling among large-scale investors?

Most institutional investors are focused on REITs [real estate investment trusts]. They’re looking at the major-property REITs, whether it’s Equity Residential or Avalon Bay on the multifamily side, or any of the major-property or retail REITs that are out there. My sense from having talked to all of the REIT CEOs that I know is that they feel long-term interest rates will move up. But most of the major REITs use unsecured lines of credit to finance their acquisitions and their properties, so they’re basically getting the great benefit of low short-term rates.

Most people don’t see much movement on short-term rates. I think they feel very good about their cost of capital and that a moderately recovering economy makes it a very positive environment for commercial real estate and that they can manage those factors.

The most out-of-favor asset class is probably suburban office. There are a lot of people scratching their heads over when that market is coming back. You see some pretty significant operators like Mack-Cali, which is a big, suburban office owner, shifting their strategy and moving to multifamily.

Then you have the opposite: multifamily operators who are trying to shift into office because they want to derisk their position on the multifamily markets. They’re really moving into office in other cities. For example, one big client of ours in Manhattan, who owns a ton of multifamily in the city, is buying office assets in D.C.

Shifting gears, I understand you have some elite-level marathon and triathlon times. How did you get into endurance sports?

I ran cross-country in high school and was recruited to run in college, but I played lacrosse in college. My first year at Harvard Business School, a bunch of people were running the Boston Marathon. I got in shape for it, and I ran a 2:45 in my first marathon in Boston, and it was like, “Hey, I’m pretty good at this.” My second year of business school, I ran a 2:36 Boston. I ran Boston again two years later, and then, for all practical purposes, I was done with marathons.

I got into triathlons because triathlete and former D.C. mayor Adrian Fenty convinced me to start training with him. I went to the national championships two years ago and came in fourth in my age group at the Olympic-Distance National Championships in 2011.

When the bombs went off in Boston last April, I woke up the next day and said to my wife that I was going to go back and run Boston again. The best way not to let terrorists change our way of life is to participate. I’m running Boston again this April.