Dan Page

Edward DeMarco is running out of patience.

The acting director of the Federal Housing Finance Agency (FHFA) has taken it into his own hands to finish, or at least hasten, what Congress started when it seized control of Fannie Mae and Freddie Mac in September 2008.

DeMarco announced a plan for Fannie and Freddie to reduce their multifamily loan volumes by 10 percent in 2013 while addressing the National Association for Business Economics at its annual conference March 4.

The changes were proposed as part of the FHFA’s priorities for 2013 and to lay the groundwork for the creation of a new housing finance landscape. And they essentially mark the beginning of the end of the government-sponsored enterprises (GSEs) as we know them.

While 10 percent doesn’t sound like much, Fannie Mae and Freddie Mac combined to finance about $62.8 billion in multifamily deals last year, meaning about $6 billion in liquidity will have to come from other sources this year. That’s a pretty good chunk of change to suddenly yank out of the market.

But if the FHFA’s announcement sounds drastic, GSE leaders and their affiliated lenders are mostly shrugging it off and letting nature take its course.

Jeff Hayward, Washington, D.C.–based Fannie Mae’s head of multifamily, says the announcement doesn’t have the GSEs quivering in the background.

“I don’t think anybody thinks we’re out of the woods,” he says. “We all understand that the policymakers will do what they’re ­going to do with us. Our job is to really put the companies in the best position in terms of continuing to earn money to pay the taxpayers back.”

Hayward also says Fannie Mae will continue making the same kinds of loans it always has—especially in areas with the biggest need for liquidity—without focusing too much on what could happen in the halls of Congress. While life companies cherry-pick only the cream of the crop, for instance, the GSEs are continuing to serve the underserved.

“In the secondary/tertiary markets, we are still the biggest buyer of small multifamily loans in the country; we will not shy away from that,” Hayward says. “We’re still one of the largest buyers in the affordable product, and we’re still in that business. We haven’t really changed our business approach.”

The 10 Percent Lament?

Fannie Mae and Freddie Mac leadership publicly state that they were budgeting to do 10 percent less business this year anyway, regardless of DeMarco’s prescription. That reduction would have happened naturally, they believe, since both organizations were coming off of record years, and competition from the private sector is awakening in earnest.

GSE lenders from across the industry agree competition has become fierce as the private sector grows hungry for multifamily deals. So this prescribed shift in emphasis to the private sector shouldn’t squeeze the market, since there are enough competitors in the game, says Guy Johnson, president and CEO of Irvine, Calif.–based Johnson Capital.

To Johnson, that 10 percent mandate will be easily rectified.

“It sends a direction, it sends a statement, but I don’t think it practically will have that big of an impact,” he says. “There’s still plenty of liquidity.”

Commercial mortgage-backed securities (CMBS) loans are finally becoming a viable option again for multifamily borrowers, and the sector is poised to gain steam over the next year. In fact, a plain-­vanilla 10-year CMBS loan was pricing at around 4.25 percent in April, which is still much higher than GSE pricing, but much lower than it has been in years.

Between the third and fourth quarters of 2012, CMBS loan volume grew 141 percent, according to a Mortgage Bankers Association report. And while figures weren’t yet available as of press time, lenders report an even larger pipeline of CMBS deals being originated in the first quarter of this year.

“The CMBS market has been very robust in the first quarter, so perhaps that will pick up some of the slack,” Johnson says.

And still, there are more options in the marketplace ready to step up to the plate if the GSEs become less competitive (either by mandate or market conditions), including banks, life insurance companies, mortgage REITs, and other private lenders.

Life insurance companies have been particularly active the past two years, originating about $45.6 billion in commercial ­mortgages in 2012, according to the American Council of Life Insurers, up slightly from the $45.5 billion the sector recorded in 2011.

“Insurance companies would like to do a little bit more multifamily too, to diversify their portfolios,” Johnson says. “So, they’ll cover it. They’re coming off a gigantic year, so it should be fine.”

Consolidate to Save

Another part of the FHFA plan includes merging some of the functionality of the GSEs into one newly created entity. The initial focus would be on merging back-end functionality—the way the GSEs sell loans to investors, not the way they originate them—to save the government some money.

“In short, there must be some updating and continued maintenance of the enterprises’ securitization infrastructure, and to the extent possible, we should invest taxpayers’ dollars to this end once, not twice,” DeMarco noted in his remarks.

DeMarco also noted that Fannie Mae and Freddie Mac’s underwriting should become tighter this year to help drive down their volumes and open the space for other lenders.

But combining their securitization services, and tightening the GSEs’ credit boxes, could damage the market, says Paul Cairns, ­senior vice president of capital services for Minneapolis-based Freddie Mac seller–servicer NorthMarq.

“I worry, though, when you create less competition between those two, that they could become more stagnant, and when you only have one avenue to get the securities out, that it’s going to cause more problems [due to the] lack of competition,” Cairns says.

The market most likely will see a drop in GSE volume, regardless of DeMarco’s plan, Cairns says. While NorthMarq processed about $1.8 billion in Freddie Mac transactions in 2012, Cairns says it’s not budgeting for the same amount this year.

“I think they would shrink naturally this year, even if there were no change in the underwriting,” Cairns says.

Paul Angle, Freddie Mac managing regional director, agrees that the GSEs would function with business as usual and still meet the reduction’s goal and that some tweaks here and there would also add to a decline.

“We had a record year last year,” Angle says. “Just by doing the same thing we’ve done, but by tightening up a little bit on the credit margins with respect to less IO [interest-only terms], less proceeds, we’ll probably get to where we need to be. I don’t think it’ll change our appetite for A-quality property versus C-plus or tertiary markets; we’ll still have that same appetite.”

Elimination Game

Looking far beyond the FHFA’s piecemeal approach to weaning the market off of GSE dependency, a national think tank proposed the eventual elimination of the GSEs altogether.

The Washington, D.C.–based Bipartisan Policy Center (BPC) released a report just two weeks before DeMarco’s remarks, calling for the eventual elimination of Fannie Mae and Freddie Mac.

The report, “Housing America’s Future: New Directions for National Policy,” proposes a reformed housing finance system with a greater influence from the private sector and a limited government role.

As that limited government role gets scaled back, the goal is to eliminate the government’s hand in the multifamily loan market over time. It appears that DeMarco was listening.

The report calls for the creation of an independent government corporation, referred to as a “public guarantor,” which would not buy or sell mortgages but would guarantee investors payment of principal and interest on securities.

The BPC also suggests creating a more sustainable approach to making homeownership a reality for creditworthy households; pushing the private sector to take on more responsibility in bearing credit risk; taking a more focused approach in providing rental assistance to those who need it most; and placing a greater focus on how to serve the nation’s growing senior citizen population.

Former Department of Housing and Urban Development (HUD) secretary Henry Cisneros served as a co-chair of the BPC commission studying the subject and led the presentation of the report at a press conference in Washington, D.C.

Cisneros said the two most urgent issues are restructuring the housing finance system and rebalancing government spending to help focus on vulnerable households.

As he and the commission members were putting together the report, Cisneros visited California to attend a hearing at a local public housing authority, as well as visiting many low-income housing communities in San Antonio.

“I saw the effects of high prices on rentals for folks,” he says. “Situations like those are what really drives it home in a persuasive way, for me to see that there’s a need for affordable housing.”

George Mitchell, a former senator and co-founder of the Bipartisan Policy Center, was also a co-chair and says only about one in four renter households eligible for assistance actually receive it. Many of those in need are forced to apply to long waiting lists or enter into lotteries for the scarce affordable rentals.

“Problems in housing remain severe and urgent,” Mitchell says.

According to the report, about 80 percent of the lowest-income households in the country spend about 30 percent of their income on rent.

“There are far more extremely low-income renters than available units they can afford,” the report states.

Mitchell has called on the government to create more help for those involved in the current “rental crisis.”

The think tank’s report channels much of the current thinking across the ideological divide as to the role of a government guarantee. The future of that guarantee—the GSEs’ ability to provide loans backed by the full faith and credit of the U.S. Government—is the biggest mystery in the housing finance reform debate.

The “countercyclical” liquidity provided by the guarantee will likely survive. During the Great Recession, Fannie and Freddie kept the firehose of liquidity flowing, in stark contrast to the private sector, which basically just shut down. And the GSEs’ ability to stay in the game put a safety net under the apartment industry, allowing it to be insulated from greater economic shocks—the office, retail, industrial, and hotel sectors certainly didn’t have that luxury.

But that guarantee was indiscriminate of asset type, and those days appear to be coming to an end. The BPC believes the federal government should focus on the lower end of the market and only serve as “the insurance backstop of last resort.”

Looming Boom

The BPC commission also looked at the nation’s changing demographics and how the ever-diversifying population will change the landscape of affordable housing.

The number of Americans age 65 and older will rise to more than 90 million in 2060, compared with about 40 million in 2010, Cisneros noted in the presentation. As the baby boomer generation ages, the echo boomers, people born between 1981 and 1995, are driving the present rental market, according to the report.

However, by 2020, the commission estimates, many echo boomers will be ready to buy homes, and it suggests the nation will need to increase the supply of affordable homes and should expand the low-income housing tax credit and create additional federal funding to address housing quality.

Many industry luminaries believe the multifamily sector should be fine in the long run, though nobody knows for sure just what a fully private market would look like.

Rick Graf, a 36-year veteran of the industry who serves as president of Pinnacle, one of the nation’s largest multifamily management companies, isn’t alarmed by the whittling away of the GSEs.

“That GSE space will be filled by other sources, like life companies and CMBS,” Graf says. “I think in the long term, as long as there’s still a solid market and no major meltdowns, there will be capital.”

Additional reporting by Christine Serlin