Whatever happens to them happens to all of us.

Fannie Mae and Freddie Mac's uncertain future looms large over housing: a dark cloud with the potential to, on the one hand, precipitously disrupt or, on the other, gently flow us into a brave new housing finance world.

The two government-sponsored enterprises (GSEs) account for more than 60 percent of the total market for multifamily permanent debt, a figure that has held steady for the past three years.

But as their market share sustains itself, Congress' inertia on the matter continues.

Uncertainty Risk

About a year ago, the Treasury Department released its white paper on GSE reform and expressed its interest in “winding down” the GSEs. Shortly after that paper came out, the National Multi Housing Council (NMHC) spoke with some senior Treasury officials to get some clarity about their intentions.

“I asked them what ”˜wind down' means— and I got no answer,” says Doug Bibby, president of the Washington, D.C.–based NMHC. “Treasury is expected to come out very shortly with a further statement on GSE reform, but we've been hearing that for a while. So stay tuned, but don't stay up too late.”

In February, the GSEs' conservator, the Federal Housing Finance Agency (FHFA), grew impatient with Congress and issued its own proposals, with one giant takeaway: The FHFA asked the GSEs to study the viability of spinning out their multifamily divisions—the first time the federal government has hinted that there should be a separate solution for the multifamily groups.

But that doesn't mean we're going to see Fannie and Freddie 2.0 any time soon. The Obama administration has been clear that while a separate solution is possible, a separate time frame is not, according to Peter Donovan, the NMHC's immediate past chairman and senior managing director of New York–based CBRE Capital Markets.

“However long it's going to take us to solve the $5.5 trillion single-family problem at Fannie and Freddie is how long it's going to take us to solve the multihousing problem, even if we come up with a separate solution,” says Donovan. “There's been serious conversation about spinning out the multifamily businesses. But Congress doesn't do transformational kinds of legislation; it tends to be more transitional, more incremental; so this will be [on] a political timetable.”

For the nation's top GSE lenders, like Walker & Dunlop, such uncertainty is unsettling. The Bethesda, Md.–based company originated more than $4 billion in multifamily debt last year, and more than 70 percent of it, $2.9 billion, was a Fannie or Freddie loan.

“There are many of us who would like to have a playbook,” says Willy Walker, chairman and CEO of Walker & Dunlop. “We have scenario-ed out every single possible way to react to a wind-down of Fannie and Freddie. But it's that black box—it's not knowing what's on the other side of the curtain—that's very difficult to deal with.”

Alternative-Capital Search

Borrowers are also beginning to feel the strain that the agencies are under. Both Donovan and Walker have seen an increasing number of their larger, institutional clients begin searching for alternative capital providers, such as life insurance companies and commercial banks, in response to the uncertainty surrounding the GSEs.

Last year, life insurance companies issued about $11 billion in multifamily debt, one of the sector's biggest years on record. While there's not enough capital in the private sector to fully replace the GSEs, there's enough to push them away from certain deals. And industry stakeholders believe that the FHFA will direct Fannie and Freddie to inch away from certain assets going forward.

“I think we'll potentially see a pullback of funding a product that otherwise can get done on the market, where there are alternative sources of capital readily available,” says Donovan. “We don't know if there will be limitations in terms of dollars per unit, or absolute limitations in terms of size, but it wouldn't surprise me if there's a pullback over time in that direction.”

Life companies traditionally target Class A, luxury deals, and Fannie and Freddie seem content to step out of their way, when they can. To hear GSE execs tell it, that pullback mentality has already begun.

“We pretty much yield to life companies when they have an appetite, but we're consistently in the market,” says Paul Angle, Freddie Mac's managing director of the West region. “In the last year, when rates dropped, life companies had floors, or they may have met their allocations, and we were happy to do the Class A product. But Class B product, Class B locations, are really the bread and butter of what we do.”