Industry officials are struggling to figure out the intentions of the federal government as it troubleshoots the reduction of the government-sponsored enterprises (GSEs) in the multifamily space.
Federal Housing Finance Agency (FHFA) officials announced Aug. 9 that they are seeking public input on alternative solutions for reducing Fannie Mae's and Freddie Mac’s multifamily presence in the upcoming year.
Possible strategies to help with the reduction of the GSEs' multifamily business in 2014 were posed as questions in the agency's press release. However, industry officials are having a hard time reading between the lines.
David Cardwell, National Multi Housing Council vice president of capital markets, says it’s unclear why the FHFA would want to reduce liquidity when the multifamily market is doing so well.
“We favor having as liquid a market as you possibly can,” Cardwell says. “The demand for apartments over the next decade is going to be huge. It’s costly to build, and they’re expensive to maintain, and we need to reinvest in the stock that is there, not take away from it.”
One proposal the FHFA is considering is limiting or eliminating short-term financing options while pushing longer-term permanent financing. The agency also asks what would happen if loan products were simplified and standardized.
Ethan Handelman, vice president for policy and advocacy at the National Housing Conference, says he’s unclear as to why the FHFA would want to change underwriting for the GSEs if it’s worked so well in the past.
“One of the strengths of multifamily during the crisis was their underwriting,” Handelman says. “One of the reasons the Freddie Mac and Fannie Mae portfolios had default rates of [about] 1 percent is because of careful underwriting. There’s a strong culture of integrity in underwriting.”
Limiting business activity to allow more space for alternative sources of capital to provide financing options to developers is another proposed solution. Cardwell believes this is where the regulator feels that private capital investors are expected to fill in the gap as the GSEs are pulled back.
Pinning Hopes on the Private Sector
Federal officials ordered the GSEs to reduce their loan volume by at least 10 percent before the end of this year without a solution or direction as to how to do it.
“Their actions have already had some ramifications on the marketplace,” Cardwell says. “Borrowers are indicating concern over whether the GSE programs will be ramped back every year to a point where they are not going to be a viable source anymore.”
But Ed Pinto, resident fellow at the American Enterprise Institute, doesn’t think the reduction or an eventual removal of the GSEs from the market is a terrible idea. Most industry officials who are against reform are concerned that the other lenders will not step into the space, but Pinto believes the market will adjust to it.
“I don’t think they serve a purpose in this space,” he says. “Taxpayers shouldn’t be on the hook for private business.”
Waiting on Congress
Both sides of the reform argument agree: Policymakers need to step in.
“It’s left up to Congress waking up at some point and saying, ‘We’re giving a benefit here to multifamily owners and, therefore, we should get something in return in the form of affordable housing,’ ” Pinto says.
And everyone agrees that nothing is going to happen overnight.
“You’re going to see a gradual change,” Handelman says. “In terms of change, it will be when Congress takes action.”
In May, President Barack Obama nominated Rep. Mel Watt (D–N.C.) to lead the FHFA. The endorsement elicited an array of reactions from both sides of the aisle and across the industry. If Watt can secure a Senate vote for the appointment, he will oust current FHFA acting director Edward DeMarco.
The agency will continue to collect responses until Oct. 8, by mail or e-mail, to help supplement the Multifamily Scorecard for next year.
Lindsay Machak is an associate editor for Multifamily Executive. Connect with her on Twitter @LMachak.