Industry Observers Agree Fannie, Freddie Takeover Was ‘Necessary,’ But Could Pose Long-Term Negative Impact on Multifamily

By Anuradha Kher, Online News Editor, MHN and Eugene Gilligan, Senior Editor, CPNWashington, D.C.–The U.S. government’s takeover of Fannie Mae and Freddie Mac is a necessary step to stabilize the U.S. housing market, according to multifamily industry experts who are still examining the ramifications of the announcement.The takeover will go a long way toward solving what Stuart Saft, partner in the law firm of Dewey & LeBoeuf, called a “Catch 22” that has been bedeviling a critical part of the economy— housing. Real estate, being an illiquid asset, needs a steady stream of capital inflows, Saft points out. The credit freeze-up has meant that home prices have fallen, thus causing lenders to be much more cautious on their home lending and starving the sector of capital.The takeover should help the multifamily securitization market get back on track, Saft predicts. But, he doesn’t expect that market to quickly reach the securitization levels of 2006, for example.Brian Harris, Moody’s senior vice president, tells MHN, “The fact that they can ensure availability of financing is the most significant impact, and a positive one at that, that the takeover will have on multifamily.”The takeover presents a “good news, bad news” dichotomy, says Paul Fried, principal of AFC Realty Capital. Jerry Howard, CEO of the National Association of Home Builders (NAHB), agrees.“My reaction is ‘What a disappointment,’” Fried says. “It’s another bailout of a financial institution. Twenty years after the FDIC and the RTC, we’re back there again.” Fried does see a silver lining, however. “We may have a bottom benchmark, and the markets may begin to repair themselves,” he notes.Howard tells MHN, “In the short-term, this is good; the markets, national and international, have reacted favorably to this move, interest rates are down and this move seems like it might turn things around for the economy. But in the long-term, this could negatively affect multifamily. The portfolio of Fannie Mae and Freddie Mac is expected to shrink with this move and it cannot be predicted where multifamily will land up in the process.”Howard says that there will be changes in the role and make-up of the two companies and in the process, some sector could be ignored. “This could create a vacuum and we don’t know if there is anything else to fill it,” he says.Fried adds that the takeover may dispel some myths about the relative safety of multifamily investments in comparison to other sectors, saying that multifamily investment has always been regarded as a “safe harbor” investment, due in large part to the implicit guarantee that the U.S. government would not let Fannie or Freddie fail.“It shows that investors were making riskier investments than they should have been making,” he says.Saft believes that talk of eventually making the GSEs smaller is a positive. He says he proposed creating a third GSE to the Treasury Department “to take the pressure off Fannie and Freddie.” He says the creation of five or six GSEs would create competition in the marketplace, comparing it to the breakup of AT&T in 1982. He says increased government oversight of the GSEs is a given, and Fried seconds that. “A big set of guardrails will be put in place,” he says.         Whatever the case, Howard advises borrowers to get back into the market now. “The interest rates are down so it’s time. Spreads have come down already and they will come down more, eventually settling at the rate prior to the crisis,” he says.Doug Bibby, president of the National Multi Housing Council (NMHC) issued a statement, saying, “The impact of the Treasury Department plan on the apartment sector remains to be seen as the details are worked out, but we are optimistic that there will be little to no disruption in the companies’ multifamily operations.”He went on to say that the government action is directly related to the companies’ single-family investments and their efforts to weather the ongoing decline in that sector. “The multifamily sector, on the other hand, remains strong and is actually producing profits for the firms that are helping rebuild their capital reserves. As a result, we expect them to remain active in the multifamily market.”