According to Instutional Investor, Freddie Mac is bringing its high leverage crack pipes back to the multi-family market. But the move is less a return to the go-go days than a sign of just how weak the market is, and it appears to be driven more by the fact that Freddie is running out of underwriting capacity rather than any real confidence in the apartment market.

Under the plan, Freddie intends to bribe join forces with a handful of mezzanine lenders to “expand its multifamily mortgage origination program”. However, the new program is definitely more about saving Freddie’s existing program than expanding it. Freddie Mac has already been offering relatively high LTV loans for some time, but the agency lender relies on liquidity in the CMBS market to refresh its underwriting capacity. With the CMBS market only now starting to show signs of life, Freddie is holding on to much more of this paper than it originally intended.

And this is where Freddie Mac wants its mezzanine lender “partners” to do some heavy lifting. In return for buying the lowest tranche of equity in Freddie Mac CMBS securitizations – the hardest bit to sell – Freddie will reward them with a well-priced senior loan at no more than 85% loan to value. Publicly, the program is geared toward helping over leveraged borrowers deal with looming mortgage maturities. “There is a market need for this,” said Patricia Boerger, a spokeswoman for the agency. “It is part of our mission to keep the market liquid and capital flowing.”

Privately however, Freddie now seems unable to fulfill that mission without the aid of private sector lenders, which ironically include still crippled Mortgage REITs like Winthrop Realty Trust. Even with the “new”, safer underwriting standards of today’s market, Freddie Mac intends to hold only the most senior paper, up to approximately 65% loan to value.

The more junior tranches, including the “B Piece” kryptonite, will sluffed off to the more servile Mortgage REITs, up to a combined 85% loan to value. I’m not a borrower in trouble, but if I were a borrower in trouble, I’m pretty certain that 85% of today’s value isn’t going to solve my 2006 problems. This “expansion” program is definitely more focused on saving Freddie Mac’s balance sheet, not those of its customers, and it’s another indication of what will most likely be a very prolonged recovery. Chris Germain San Francisco

After a furious year of churning CMBS, repurchasing outstanding corporate debt and refinancing its bank loans, among other feats, Northstar actually ended the year with a little bit of cash. That’s the good news. The bad news is they’re going to need it.

Northstar now has about $238 million in the bank, which includes the all important figure of $138.9 million in unrestricted cash. This is discretionary cash, the kind of stuff that Hamamoto can use to expense dinners at Bobby Van’s. The remaining $99.4 million is bottled up inside Northstar’s CDOs, and the ability to profitably reinvest that cash is diminishing by the day as credit spreads tighten and the CDO reinvestment periods expire.

If you strip out all the non-GAAP AFFO noise from NAREIT, you can see the nail-biting story unfolding: Northstar’s cash flows from continuing operations have been declining rapidly. It’s true, Northstar did manage to generate $54 million in cash for all of 2009, but that’s down from $88 million in 2008 and $102 million in 2007. Obviously, an almost 50% drop in operating cash flow is not the sign of a healthy business, but the fact that Northstar is currently in an unhealthy business should also come as no surprise.

The question is, what can Northstar do about it? In the short term, the answer is not much. Northstar’s portfolio is running off, interest rates are at all time lows, and Northstar’s CDO funding model is dead. 2009 interest income of $142.2 million was $70 million less than 2008, and $150 million less than 2007. As Northstar’s asset balances decline, so too have Northstar’s advisory fees and rental income.

The lack of good options may be why NRF is attempting replace this revenue with management fees, and in the meantime Hamamoto is generating a lot of work for his accounting department with the debt buybacks and CMBS trading, but all of this is clearly a stop gap, and it’s just not enough.

Not only that, management fees are not ramping up nearly as fast as Northstar needs them to ramp up, and at the current pace, they may never ramp up. Northstar Realty Income Trust, the new non-traded REIT, has not yet been declared effective by the SEC, and Northstar can’t start raising money in earnest until that happens.

However, judging by its new Reg D offering, Northstar Income Opportunity REIT I, Northstar’s shiny new Denver broker/dealer operation isn’t knocking the cover off the ball. The first investor commitment was made on September 24th, but as of early February, Northstar Income REIT I had only raised $3.1 million in equity. This is certainly not failure, but managing $3.1 million will definitely not pay the rent at 399 Park Avenue. Furthermore, starting a broker/dealer from scratch is neither cheap nor risk free. Northstar must now comply with a whole new raft of federal and state securities laws, and be exposed to the liability that arises from selling shares to retail investors through hundreds of rowdy, independent securities brokers across the country.

On top of paying rent on the 18th floor, dinner at Bobby Van’s, and the expense of starting up a brand new broker/dealer, under its new credit facility with Wells Fargo, Northstar must make $30 million in annual amortization payments. Also, through its loan book, NRF is on the hook for $80 million in future funding commitments, of which only $51.9 million will come out of the CDOs. $50 million in operating cash flow doesn’t create a huge margin for error in a capital intensive business, so Northstar will likely have to borrow most of the remaining $28.1 million using credit facilities.

So what is Hamamoto thinking? That’s unclear, but NRF is definitely walking a tightrope, and that may explain the management and board changes at the end of Q4. Curiously, REITs have collectively raised almost $30 billion of debt and equity capital since the crisis began, and Crexus, Colony Capital and Starwood Capital were among several Mortgage REITs to raise almost $1.5 billion. Somehow, despite the stellar performance of its portfolio, NRF just barely managed to squeeze $25.7 million out of this deluge.

Some portfolio managers I know have said that Hamamoto is not part of the “REIT Mafia”, and therefore he is not always invited to the REIT fundraising parties. This may or may not be true, but I’m not sure what else could explain NRF’s decision to throw a hail mary into the cesspool of Reg D offerings and non-traded REITs.

I spent all day reading the 10K in search of an answer, and it seemed to confirm the REIT Mafia conspiracy theory, as well as the fact that NRF has chosen a particularly rocky path to circumvent it:

“we cannot currently raise large amounts of corporate equity capital at attractive levels…we hope that our reputation in the marketplace will enable us to be early in raising corporate capital when market conditions improve.”

One thing is for sure, Reg D offerings and non-traded REITs won’t do much for NRF’s reputation, so shareholders may also want to hope there is a contingency plan brewing somewhere on the 18th floor.