Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs), played a crucial countercyclical role during the recession. They provided liquidity when private capital sources largely scaled back.
But what now? The current state of the GSEs—which hold or guarantee about 35 percent of multifamily mortgages in this country—in government conservatorship is unique and unprecedented and requires a long-term policy solution.
The multifamily housing market serves more than 15 million—that’s one in seven—American households, spanning workforce housing, seniors housing, student housing, and market-rate and affordable rental properties.
In fact, multifamily rental housing is a critical source of affordable housing for Americans: 93 percent of apartments have rents affordable to households earning the area median income or less.
With greater policy focus on housing finance reform anticipated in 2013, the Mortgage Bankers Association’s GSE Multifamily Task Force, which I chair, developed “Ensuring Liquidity and Stability: The Future of Multifamily Housing Finance and the Government-Sponsored Enterprises,” a white paper in which we laid out a framework for attracting greater private capital while providing for a government-backed insurance program to ensure that the market has access to liquidity in all conditions—good and not so good.
Our five primary recommendations for the future of Fannie and Freddie are:
Cyclical stability. First, and fundamentally, our nation’s housing policies should reflect the need for liquidity and stability in all multifamily market cycles. The roles of the GSEs and the Federal Housing Administration (FHA) in financing multifamily mortgages have been substantial, but other market participants—including life insurance companies, banks, and other lenders—have maintained a strong presence as well. Our task force recommends that policymakers keep this in mind, along with the countercyclical role of the GSEs during periods of illiquidity, as they move forward with their work.
Private capital. Second, private capital should be the primary source of financing for multifamily housing, with support from a well-defined government-backed insurance program that ensures the market has access to liquidity in all cycles.
We believe that a focused role for the federal government through a government-backed risk insurance fund with a federal catastrophic backstop would safeguard liquidity and stability in all market cycles. Eligible mortgage-backed securities would have a Ginnie Mae–like wrap. The insurance fund, paid for through risk-based premiums, could be modeled after Federal Deposit Insurance Corp. (FDIC) programs and would support such mortgage-backed securities, not at the level of the issuer as is the case today.
Regulated securities issuers. Well-regulated entities should be eligible to issue government-backed multifamily securities. These entities should be monoline, funded by private capital, and focused on securitization, and they should serve the workforce rental market.
Under our recommendations, a strong government regulator with market expertise would provide oversight regarding the entities that issue government-backed securities, including their safety and soundness, risk-based capital requirements, and products offered. The issuing entities would assume a significant risk position, providing an entity-level buffer, placing private capital at risk ahead of any government backstop.
GSE assets. Stewardship of the existing GSE assets and resources on behalf of taxpayers should be a core consideration of any policy action. The talent and expertise at the GSEs, their existing books of business, their market executions, and any profits generated by their multifamily businesses are valuable to U.S. taxpayers—and, indeed, the nation’s housing system—and should be viewed and deployed in a manner that supports the future state of multifamily housing finance.
Multifamily as a stand-alone business. Finally, the long-term liquidity and stability of the multifamily finance system in all market conditions should be the core driver of whether the GSEs’ multifamily business should operate on a stand-alone basis relative to their single-family credit guarantee businesses. We strongly believe that this decision should not be determined in a vacuum, nor should it be based solely on the financial viability of multifamily stand-alone enterprises. That would be shortsighted. The primary criterion, rather, should be the long-term strength of the multifamily housing market.
In short, we believe that any policies enacted must reflect a focused but important government role while encouraging private capital to enter and remain in the market as the primary source of financing for multifamily housing.
The Obama administration’s 2011 white paper on reforming the housing finance system called for a “renewed commitment to affordable rental housing.”
We agree. Let’s work together toward this end.