Fannie Mae and Freddie Mac: A Look Ahead

By David Cardwell, National Multi Housing CouncilAs everyone reading this magazine knows, the apartment industry has been affected by credit and liquidity problems. But multifamily mortgage finance has been shielded from the worst of the banking and mortgage meltdown. What’s behind this phenomenon? Simply put, Fannie Mae and Freddie Mac.The two firms have been critical in continuing to provide mortgage debt to apartment firms during the current economic crisis—just as they did during previous economic storms, including the 1998 Russian financial crisis and the 2001-2002 downturn. As lawmakers and regulators begin to recast the Government Sponsored Enterprises (GSEs), National Multi Housing Council (NMHC) is making sure they understand the differences between the single-family and the multifamily market—and why those differences require different regulatory approaches. Multifamily firms have several sources of mortgage capital other than the GSEs, including insurance companies, banks and even HUD. Still, for various reasons, Fannie and Freddie have been the most reliable source of debt to the full spectrum of apartment owners. Banks and insurance companies are major providers of mortgage capital, but they have more restrictive loan terms, are more selective in their investments and tend to lend for shorter terms. Banks are further limited by regulatory restrictions, and insurance companies continually reset their commercial real estate investment strategies. The Federal Housing Administration (FHA) has become a source of low cost-of-debt capital, but its programs are tightly controlled and it requires borrowers to have significant control or ownership over the land. It’s also resource-constrained. Fannie and Freddie, on the other hand, are in every market across the country, and they accommodate all conditions. This is their only business. Thus, they will continue to provide the widest range of options to the multifamily market. In fact, over the past year, when all of the other sources of mortgage capital left the market, the GSEs continued to meet industry needs. Some estimates suggest they now account for 85 to 90 percent of all mortgage debt issued. Even the federal takeover has not restricted the flow of mortgage capital from the firms; they funded more than $1.2 billion in multifamily mortgages in the first two weeks of the conservatorship.So, where do we go from here? NMHC’s priority is to maintain the ability of the secondary multifamily mortgage market to operate in a manner that has served the industry and the market investor so well. Making certain that the GSEs’ multifamily programs continue to serve the market during the conservatorship period will require diligence and effort. And ensuring that Fannie and Freddie’s multifamily lending programs survive the restructuring that is likely to occur will be even more of a challenge. Congress and the new Obama administration have many restructuring options to consider, including: the creation of a single government-owned or privatized agency that would bring Fannie and Freddie together; spreading risk among firms; or doing away with Fannie and Freddie entirely and letting the financial services sector implement a secondary mortgage market under tight federal regulatory oversight. Fannie Mae and Freddie Mac have met the initial challenge, but what happens in 2009 will be the true test of the government’s commitment to the rental housing industry. NMHC has always advocated for a world-class regulatory structure for the GSEs to support the world’s best financing system for rental housing. Now, we seek to ensure that the multifamily mortgage programs that are so important are not damaged while the GSEs’ single-family secondary mortgage system is restructured. Among other things, NMHC will specifically urge lawmakers and the federal conservator to leave the GSEs’ multifamily retained mortgage portfolio lending programs intact. This is critical because the GSEs typically hold multifamily loans in their portfolios instead of securitizing them. As of the second quarter of 2008, those retained multifamily mortgages were 11.3 percent of Fannie and Freddie’s combined portfolio holdings, totaling $172 billion.Any limits placed on the GSEs’ portfolios must include special considerations for their multifamily mortgages. Fortunately, a strong argument can be made for treating multifamily differently than single-family in the new GSE regulatory regime. Multifamily mortgages are the perfect investment for the GSEs, and unlike single-family mortgages, the multifamily mortgages they retain continue to yield profits for Fannie and Freddie. In fact, these profits are helping them rebuild their capital reserves.David Cardwell is VP of capital markets and technology at the National Multi Housing Council.