How Proposed Johnson/Crapo Legislation Could Affect Multifamily

By Jessica Fiur, Senior Editor

Washington, D.C.—Recently Senate Banking Committee Chairman Tim Johnson (D) and Ranking Member Mike Crapo (R) drafted the Federal Housing Administration Solvency Act of 2013. If passed, this bill would have a direct impact on Fannie Mae and Freddie Mac and calls for the creation of a new enterprise called the Federal Mortgage Insurance Corporation (FMIC).

MHN talks to Willy Walker, CEO of Walker & Dunlop, about this new proposed legislation and how the bill could affect multifamily if it passes.

MHN: Describe the new Johnson/Crapo legislation. What does this mean for multifamily?

Walker: Lots of people are saying, “What are the impacts of this law,” and the first piece of that is that this likely doesn’t become law in 2014. You have to look at what happens in ’15, if the Senate were to be taken over by the Republicans, you’ve got a new chairman of the banking committee, Richard Shelby, would continue to push forward the Johnson/Crapo legislation. There are lots of uncertainties on the political front if this law ever gets enacted and what would happen after the midterm elections. With that said, there is no doubt that Johnson/Crapo is the framework upon which the debate on housing finance reform is now focused. It is a very important step forward as it relates to what the U.S. mortgage system will look like in the future.

The most important aspect of all that is an explicit government guarantee. And, as it relates to multifamily, the legislation is explicit in saying that multifamily businesses of Fannie and Freddie are not broken and did not cause the downturn, have significant amounts of private capital ahead of government capital and therefore should continue to operate. So that in and of itself is a huge step forward as it relates to the multifamily industry, as it relates to the multifamily businesses of Fannie and Freddie and as it relates to the ongoing supply of capital to the multifamily industry with a government backstop behind the bonds that are issued by Fannie, Freddie, or whatever successor is created.

MHN: When do you think this would go through?

Walker: My personal view is that you need to have a president, a House and a Senate controlled by one party to get a piece of legislation that is this broad and dramatic through and into being a law. Think about Obamacare. Obamacare was pushed through at a time when the Democrats held the House, the Senate and the White House. This bill is equally as broad and ambitious as Obamacare. The idea that you can get this bill through and into law with a divided Congress to the degree that they are today, does not, in my view, seem to be terribly likely. But it doesn’t mean that there’s not going to be a lot of effort towards it, and it doesn’t mean that the White House isn’t pushing very hard and it doesn’t mean that Senator Johnson and Senator Crapo don’t want to see their legislation move forward.

MHN: What are the implications of Johnson/Crapo to the Fannie and Freddie lawsuits filed against the Treasury?

Walker: The legislation is silent on that, and on purpose. Senators Johnson and Crapo didn’t want to, if you will, pass an opinion on that. They’re leaving it up to the courts to determine that issue. Those lawsuits have been filed and will work their way through the Justice Department. If you get the court system siding with the plaintiffs, the question becomes, does the federal government want to cut billion-dollar checks to hedge funds for their ownership interests in Fannie Mae and Freddie Mac? Or does the federal government want to spin Fannie and Freddie back out and make them public enterprises again? I think the chances of Fannie and Freddie spinning back out to be made public enterprises is a very low scenario. There’s nobody on Capitol Hill espousing for that. At the same time, I want to also put forth that there is an even smaller chance that the federal government would cut multi-billion dollar checks to hedge funds. They could find themselves in a very interesting position as to what to do if the courts rule on the shareholder cases prior to GSE reform legislation coming through.

MHN: How will this legislation affect Walker & Dunlop if it passes?

Walker: We’re a huge partner to Fannie Mae and Freddie Mac in their multifamily businesses. This legislation is essentially saying that the businesses they have and that we are partner to are good businesses and should continue forward. So as it relates to our core business with Fannie Mae and Freddie Mac in the multifamily space, the legislation is a fantastic endorsement, or affirmation, of the business we do with them today. We are very pleased with the draft legislation that is out there today. But there are a lot of question marks that need to be resolved or explicitly stated as this draft bill moves into an actual bill. There are a lot of gaps that need to be explicitly stated to know what the future state really looks like. It’s impossible today to be able to say we know exactly what the future looks like. With that said, there’s a very significant caveat—I’m hard pressed to think we could have gotten a better legislation out of Johnson/Crapo than we’ve got. It’s got all the major pieces that those of us who are big partners to Fannie and Freddie would like to see.