FHFA's New Strategy
- Apr 20, 2012
In February, the Federal Housing Finance Agency (FHFA) sent to Congress “a strategic plan for the next phase of the conservatorships” of the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac.
In the plan, the federal regulator and conservator of Fannie Mae and Freddie Mac identified three strategic goals for the “next phase” of the GSEs’ conservatorships: 1.) build a new infrastructure for the secondary mortgage market; 2.) gradually contract the GSEs’ dominant presence in the marketplace while simplifying and shrinking their operations; and 3.) maintain foreclosure prevention activities and credit availability for new and refinanced mortgages.
Based on FHFA’s stated strategic plan, one thing seems certain: FHFA is preparing for a new secondary finance system with reduced Fannie Mae and Freddie Mac roles. In an interview with Keat Foong, executive editor of MHN, Chris Tawa, manager, Multifamily Housing Policy, Office of Housing and Regulatory Policy at FHFA, says that the strategic plan does not intend to recommend specific solutions so much as to “clarify FHFA’s intent” to “support the development of the future housing finance system.” Tawa also says that no specific steps have been taken to reduce the GSEs’ role in multifamily financing yet, but that interim steps are currently being developed “to encourage private capital to continue to return to the market.”
Tawa also answers MHN’s questions about how satisfied FHFA is with Fannie Mae and Freddie Mac’s multifamily business performances, and investor response to the REO-to-rental sales program.
What is FHA’s mission with regard to the multifamily businesses of Fannie Mae and Freddie Mac?
The agency’s mission regarding Fannie Mae and Freddie Mac multifamily businesses is: (a.) to preserve the value of their current and future assets and holdings; (b.) to monitor their business activities to assure safety and soundness, avoid credit losses and support achievement of their public purpose mission; and (c.) to support the companies’ continued delivery of liquidity to all segments of the multifamily finance market.
What prompted FHFA to recently draw up the strategic plan for Freddie Mac and Fannie Mae’s conservatorships?
After three years of conservatorship and with the future of the housing finance system not yet resolved, FHFA issued the strategic plan to further the public dialogue. The plan does not recommend specific solutions but instead seeks to clarify FHFA’s intent to leverage the Enterprises’ existing infrastructure and capacities to support the development of the future housing finance system.
In the building of a new infrastructure for the secondary mortgage market as proposed in the strategic plan, is there a need for an equally strong federal backstop for the multifamily and single-family sectors?
As noted in the strategic plan, there are significant differences between the single-family and multifamily markets which may require different approaches to the government guarantee so as to assure that all segments of the market have access to liquidity and can attract private capital.
One of the stated goals under FHFA’s strategic plan is to gradually reduce Fannie Mae and Freddie Mac’s dominant presence in the marketplace. In the multifamily sector, has implementation of this goal begun? What are some of the steps?
While it is accurate to say that the Enterprises (and FHA) continue to provide the majority of permanent financing for multifamily properties, there is significant recent evidence that this is changing and that other lenders are returning to the market, particularly large banks and insurance companies. The continued flows of new equity investment into multifamily properties also relieve the demand for debt financing from the Enterprises. This increased lending and investing activity is because multifamily is seen as a strong asset class with proven performance and positive returns during even the most difficult real estate cycles, and such continued improvement in property performance is expected during the current economic recovery. No specific steps have been taken yet to reduce the Enterprises’ role, but interim steps are being developed with the goal of encouraging private capital to continue to return to the market.
Is there a date by which FHFA hopes to begin reductions in the volume of the GSEs’ multifamily mortgage financing?
There is no specific or planned date by which a gradual pull-back in the Enterprises’ multifamily production is expected since this largely depends on recovery of the private finance market which, as was noted, appears to be well underway.
How well are Fannie Mae and Freddie Mac’s multifamily businesses operating under conservatorship? Why is the current arrangement not viable for the long-term?
The Enterprises’ multifamily business activities continue to show very strong performance, with positive returns and very low defaults and credit losses. They have also successfully managed their term loan refinance risk, despite cap rate volatility. As noted in the strategic plan, there are many positive aspects of the Enterprises’ current multifamily businesses that should be considered for preservation in any future housing finance system.
Is there a brain drain at the GSEs’ multifamily operations? What actions are being taken to mitigate a possible loss of valuable and high-quality staff due to an uncertain future, cuts in staff compensation and negative rhetoric coming from politicians?
There have been some senior staff departures from the Enterprises’ multifamily business units, but these have been relatively fewer than from their single-family businesses. In fact, many of the Enterprises’ long-term multifamily staff members remain in place, which has supported continuity in their business operations. The multifamily units have also had success in attracting very high-quality replacements for those staff members who have departed, in part because the multifamily businesses continue to be so high-performing.
What is the current status of the Pilot REO Property Sales program? How would you describe the degree of interest and response from private investors?
The single-family REO-to-rental sales program has shown very strong interest among investors. FHFA is currently working with the Enterprises to develop specialized multifamily financing programs to support these sales, which are expected to be announced later this year.