An Early Start for GSE Reform

Approximately 18 months after the Treasury Department took over Fannie Mae and Freddie Mac and placed them in conservatorship, reform of the troubled government-sponsored entities (GSEs) is still not likely to occur until 2011. The major reason behind this delay is the fragile recovery of both the housing market and the economy. The GSEs are still providing liquidity to the housing market at a time when other lenders are on the sidelines, and legislators are reluctant to rock the boat.

But, while both Fannie Mae and Freddie Mac are troubled, multifamily advocacy groups want to make sure that legislators draw a clear distinction between their single-family and multifamily businesses. The House Financial Services Committee held a hearing on the future of the GSEs on March 23. However, this is likely to be a single step on a long road to reform, says David Cardwell, vice president of capital markets and technology for the National Multi Housing Council (NMHC).

“There have been no indications from committee staff that legislation is likely to come out of this hearing,” says Cardwell. With this being an election year, many members of Congress are reluctant to deal with a housing market that, while fragile, is at least functioning. “The window for legislation to be enacted in 2010 is limited, at best,” Cardwell adds.

The delay could be a positive for the multifamily industry, though. The GSEs are providing capital to the multifamily industry at a time when other lending sources, such as banks and insurance companies, are restrained in their lending, and CMBS is still a shadow of what it once was. However, with the taxpayer tab for the Fannie and Freddie bailout now at approximately $125 billion and counting, GSE reform is a certainty.

“It’s pretty unanimous that Fannie and Freddie can’t go back to the way they were,” says David Ledford,  senior vice president of the National Association of Home Builders (NAHB). “The question is, what should be done?” Reform proposals fall across the legislative landscape and range from total federalization of the entities to their downsizing, to eventual phase-out and even abolition.

At the March 23 hearing, Treasury Secretary Timothy Geithner envisioned some role for the government to play in the mortgage market. “Without the continued activity of the GSEs and the Federal Housing Administration in the current environment, mortgage rates would be higher and homeowners would have a significantly harder time obtaining credit,” he said.

But Geithner also said there are problems with the GSEs’ structure as shareholder-owned, government-backed entities. Republicans in the House of Representatives have called for the complete phase-out of the GSEs within four years, and have called for them to be replaced by private lending entities.

The NMHC and National Apartment Association have not taken a position on how the GSEs should be structured in the future, since the agencies’ multifamily loan exposure of $204 billion is just a fraction of their $5 trillion of single-family loan exposure. However the entities are revamped, Cardwell says the positive aspects of Fannie Mae and Freddie Mac’s apartment lending cannot get lost in the shuffle.

“Their multifamily programs have performed well over the last two decades,” he explains. Presently, Fannie and Freddie provide about 90 percent of mortgage capital to the apartment industry. The GSEs provide funding for housing at all income levels, Cardwell adds, noting that 90 percent of multifamily loans purchased by Fannie and Freddie in the secondary market provide housing for the population at or below the median income level for an area. The availability of permanent financing for large multifamily properties from the GSEs is central to banks’ willingness to provide construction and land acquisition loans to developers of these properties.

Fannie and Freddie’s market presence has also led to a wider variety of loan offerings, both in rate and loan term, and the standardization of loan documents, notes Cardwell. Fannie Mae and Freddie Mac also historically have been major providers of equity for the production of low-income housing, through their major investments in the Low Income Housing Tax Credit program, even though that has now stopped because they do not have taxes to offset.

The private market does not have the capacity to meet 100 percent of the multifamily market’s needs, Cardwell says. Bank loans are typically limited to three- to five-year terms, while insurance companies typically favor high-end multifamily developments, he adds. CMBS also has its limitations, with what he called “homogenized” loans comprising most of these securities.

What characterizes the GSEs in the multifamily space is their reliability, notes Lawrence Stephenson, senior managing director of Northmarq Capital. They have been a lifesaver during the credit crunch, he says. And, in contrast to their problems with single-family loans, default rates in Fannie and Freddie’s loan portfolio are very low. In Northmarq’s $8.5 billion Freddie Mac loan portfolio, for example, there has only been one foreclosure, according to Paul Cairns, Northmarq Capital’s senior vice president and managing director.

Insurance companies have “pulled in their horns” on multifamily lending, and banks’ willingness to lend has been “sporadic,” Stephenson says. While CMBS is showing some tentative signs of a rebirth, it will be a while before conduit lenders become significant market players.

Stephenson is optimistic that the multifamily industry will continue to have the ability to access capital. “I think Congress will see the bigger picture, and there will be a continuation of the process to support affordable housing.”

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