Will GSEs Curtail Financing?

Looking to refinance your property in 2010 and beyond? With Fannie Mae and Freddie Mac supplying the lion’s share of permanent financing for multifamily, the consequences could be serious if money from the two entities for the sector should be substantially curtailed in the next few years under the Obama Administration. Yet a reduction in financing from Fannie and Freddie is a distinct possibility. When the government assumed control of Fannie Mae and Freddie Mac in September 2008, placing them into conservatorship run by the Federal Housing Finance Agency (FHFA), the U.S. Treasury committed to up to $100 billion in future capital infusion into each Government Sponsored Enterprise (GSE). It also increased the GSEs’ portfolio limits to $850 billion each to help in the government efforts to stabilize the mortgage markets. One of the conditions of the Treasury’s capital infusion, however, was that the GSEs begin reducing their portfolio holdings by 10 percent per year beginning in 2010 until a portfolio size of $250 billion is reached, which is estimated to be by the year 2020. (Incidentally, the loan limits were further increased by $50 billion each, to $900 billion under President Obama’s foreclosure alleviation program, the Housing Affordability and Stability Plan, announced on Feb. 18.)If Freddie Mac and Fannie Mae should start implementing the 10 percent portfolio reduction beginning next year under the agreement with the Treasury, however, the industry’s fear is that it would begin to curtail liquidity in the multifamily industry. This is especially of concern since both GSEs are said to now supply more than 90 percent of at least some forms of financing for multifamily. In 2008, Fannie Mae supplied $35.5 billion in multifamily rental housing financing, while Freddie Mac set a record of $24 billion in volume for its multifamily whole loan and bond guarantee business. And any reduction in capital availability in years ahead is likely to come up concurrently against a surge of maturing loans. According to the Mortgage Bankers Association (MBA), large amounts of multifamily loans will be maturing in 2011. Prior to that, there will be about $29 billion in multifamily loans coming due in 2009, and $26 billion in 2010, according to Jamie Woodwell, MBA’s vice president of commercial real estate research. Woodwell said that the pressure for refinancing will be felt more on shorter-term loans. Fannie Mae and Freddie Mac have provided assurances. At a panel discussion during MBA’s multifamily and commercial real estate conference in early February, moderator Shekar Narasimhan, managing partner of Beekman Advisors, asked if Fannie Mae and Freddie Mac’s appetite for multifamily financing will decline when the portfolio cap reduction comes into effect and what actions the agencies might take. It appears that the ability to issue securities rather than keep the loans on portfolio may be a key part of the GSEs’ expectation of being able to continue maintaining the same level of liquidity in the multifamily markets despite the mandated portfolio caps. Phil Weber, senior vice president of multifamily at Fannie Mae, said during the MBA conference that Fannie Mae’s top priority is to increase its securitization of Mortgage Backed Securities (MBS). This way, more of Fannie Mae’s loans can bypass the portfolio restriction. In previous years, nearly 80 percent of Fannie Mae’s multifamily business was securitized as DUS MBS, and 20 percent as whole loans that went on its balance sheet, Weber told MHN. “That strikes us as a good objective to seek [going forward],” he said. Michael May, Freddie Mac senior vice president, multifamily sourcing, responded at the MBA panel that, of Freddie Mac’s $850 billion portfolio, $600 billion is held in securities, and Freddie Mac has the ability to trade off those securities to make room in its portfolio. He explained that additionally, a certain amount of Freddie Mac’s single-family loans are prepaid every month, and it needs only a few months of the prepayment to generate a certain amount of additional capital for lending. May also noted that Freddie Mac has the ability to issue markets executions. In the future, Freddie Mac can place the loans through a variety of ways, including portfolio, securitization or capital markets executions and that he “[does] not see a problem.” To what extent will these strategies work and keep liquidity in the multifamily market? In the bigger picture, many observers believe the government will not allow Fannie Mae and Freddie Mac to end their support of the multifamily market. Jonathan Rose, president of the New York-based apartment owner and manager Jonathan Rose Cos., says the mandate to reduce the portfolio was an “ideologically, and not economically, informed” decision under then-Treasury Secretary Henry Paulsen and the Republican leadership. “It was informed by the ideal of getting the GSEs out of the credit enhancement business,” says Rose. He believes that the Obama Administration will “budget for enough credit enhancement to meet the demands of the multifamily market.” Sam Chandan, president and chief economist of Real Estate Economics LLC, also suggests that the Obama Administration may not necessarily follow through with allowing the portfolio reductions to come into effect. “My view is that the original terms of the conservatorship were predicated on the stabilization of the housing market and of the GSEs themselves in late 2009, early 2010, as a precondition to reducing the size of their portfolios,” says Chandan. “At this point, I think that FHFA Director [James B. Lockhart III] will evaluate the options carefully in that Fannie and Freddie’s reduction in participation next year is not a foregone conclusion. I do not anticipate the private market will be in a position to fill the gap left by Fannie Mae and Freddie Mac if they should reduce their role in 2010.” Chandan added that the magnitude of the GSEs’ 2008 losses suggests that “the market will benefit from their remaining in conservatorship.” With regard to Fannie Mae’s increasing its MBS securitization as a way to bypass lower portfolio limits, Fannie Mae’s Weber also said in February that the GSE has seen encouraging signs of investor interest in MBS as the markets continue to normalize, and that a lot of securities have already been traded to third-party investors. Indeed, NCB, a Congressionally chartered national financial institution that lends to cooperatives and condominiums, is planning to sell its multifamily-backed MBS into the market for the first time in many years. “So far in 2009, there has been a lot of interest. Brokers and investors are reacquainting themselves with the MBS market,” says Casey Fannon, senior vice president at NCB. Fannon added that many DUS lenders are directing their business to Fannie Mae MBS as opposed to portfolio executions. (What this means for borrowers is that interest rates could be lower for loans that are to be sold as MBS, compared to loans held in portfolios. However, some lenders say the terms for MBS-backed loans can be more inflexible, since the securities have to be sold into the market, while others say there is not much difference between a Fannie Mae loan that is placed in its portfolio versus one sold as MBS.) “There does seem to be growing investor appetite for Fannie and Freddie multifamily mortgages,” agrees David Cardwell, National Multi Housing Council (NMHC) vice president of capital markets and technology. Chandan cautions, however, that the success of MBS compensating for portfolio reductions still depends on the availability of buyers for MBS. “That is a major complicating factor now,” says Chandan. Meanwhile, NMHC has been in communication with FHFA regarding the industry’s concerns on this issue. The group met in February with FHFA Director Lockhart. “Part of the objective was to seek better oversight of multifamily components of the portfolio,” says Cardwell. NMHC asked FHFA to carve out multifamily financing from requirements of the portfolio reduction in 2010, but Cardwell said FHFA could not provide such a commitment. What FH
FA did say, according to Cardwell, is that “they, as a regulator, will not prohibit Fannie and Freddie from purchasing multifamily due to the portfolio limitations” or “from participating actively as needed in the multifamily market.” Cardwell adds that FHFA recognizes that the two agencies contribute as much as 80 percent of multifamily financing. “We left the meeting feeling positive with the statements because of the assurances by the regulators, but there is still an incredible amount of uncertainty,” says Cardwell. A policy brief prepared by the Joint Center for Housing Studies, in conjunction with NMHC, suggests that Congress may be able to suspend the mandated reductions “as it focuses on the larger problem of ensuring that the housing markets remain liquid.” However, the report said it is “unclear” whether this will happen. For now, “the wild card, in the case of Freddie Mac and Fannie Mae’s situation, is the government, which can change its policy on the mandate to the agencies’ reducing their portfolios,” says David Hendrickson, managing director of Real Estate Investment Banking at real estate investment sales and banking advisor Jones Lang LaSalle. “The administration has a good thing going with the agencies right now—so maybe they will extend this deadline. I hope they do, and certainly a lot of people do.” To comment, email keat.foong@nielsen.com