Fannie, Freddie Conservatorship Receives Mixed Response

Washington, D.C.–The takeover of Fannie Mae and Freddie Mac has appeased many in the multifamily industry but doubts linger among others about the takeover’s long-term effects on the sector and the economy in general. MHN gathered comments from various sources that have so far come forward to help put the issue in perspective.Bill Hughes, senior vice president and managing director of Marcus & Millichap Capital Corp., tells MHN, “In the short term, the takeover is having a calming impact on the market. Fannie and Freddie have been given the liquidity they need to carry on their business and so far there is no change in their pricing.“I see this move as the first verse of a Sonata in which there are many more verses to come. This is a relatively short-term step to get us through 2009, one which will bring secondary investors back into the market. The spreads have already come in a little now that we know the government stands by the debt taken in by the GSEs. As we get out into the final quarter of the year, we will see what happens.“There is certain ambiguity, as no one knows how long this guarantee will last. It is structured in such a way that that next administration will have to make that call. How the GSEs will function going forward will also make a big difference to multifamily.“Having said that multifamily is the bright spot in the GSEs’ portfolio. So I cannot imagine any administration wanting to change the multifamily business of the two companies. At the same time Fannie and Freddie are expected to reduce the Commercial Backed Mortgage Securities (CMBS) they release into the market. And this could have a potential negative impact on multifamily, particularly if this happens before the CMBS product returns to the marketplace.“What I have heard so far from Fannie and Freddie officials is that it is business as usual, underwriting is crucial for them and they want to understand each market. So we’ll have to wait and see.”Andrew Jakabovics, associate director for the economic mobility program at the Center for American Progress, issued a statement, saying, “Placing Fannie Mae and Freddie Mac in conservatorship staved off a liquidity crisis by keeping money flowing for home mortgages, but we must be absolutely clear that those actions do not address the existing housing crisis directly.“It does, however, create an opportunity for Treasury to stabilize local housing markets through wholesale restructuring of loans it now holds or controls in conservatorship. The current housing crisis has been precipitated by an excess of loans issued using shoddy underwriting standards and/or difficult loan terms. By restructuring or refinancing those loans already delinquent or in default and those likely to soon follow into loans that the borrower can sustain, local housing markets will no longer be threatened by a flood of foreclosures and will be able to return to normal functioning. Given that the taxpayer is potentially on the hook for the GSE debt, maximizing the returns on the outstanding loans is in our collective best interest. To that end, American taxpayers do better when Treasury refinances or restructures the outstanding troubled mortgages to provide lower interest rates or loan balances (even if they don’t get one themselves) than having it sitting on a pile of delinquent, non-performing loans leading to  foreclosures next door.”John Berlau, director of Competitive Enterprise Institute’s, (CEI) Center for Entrepreneurship, explains why this move amounts to long overdue truth-in-advertising. “There are many words — and most them not nice — to describe the new government conservatorship and planned bailout of Fannie Mae and Freddie Mac. But “nationalization” and “end of the free market” are not accurately among them. One cliché is certainly true: a certain substance has hit the Fan (and Fred, for that matter). But so is another, there is really nothing new under the sun.“Whatever the problems of this scheme, and there are many that we will be dissecting, nationalization isn’t among them. The state is simply being more explicit in backing entities that CEI has always characterized as creatures of big government. Fannie and Freddie can’t really be nationalized, because they were never really private in the first place. “CEI believes the best option for the government to pursue — the only option to be forever rid of the GSEs risk to taxpayers and systemic risk to the economy — is an orderly liquidation of their assets. Government should sell their holdings piece by piece to the private sector just as the Federal Deposit Insurance Corporation does with a bad bank.”