In January, Rep. Barney Frank (D-Mass.), chairman of the powerful House Financial Services Committee, sent ripples through the U.S. financial sector when he said he favored “abolishing the government-sponsored enterprises (GSEs) in their present form and coming up with a whole new system of housing finance.” Abolish Fannie Mae and Freddie Mac? Bad idea.
A government-supported secondary market is absolutely critical to ensuring liquidity in the apartment sector and to our industry’s ability to continue to meet the nation’s demand for affordable and workforce housing. Fannie and Freddie have provided $94 billion in mortgage debt to our industry over the past two years, during a time when virtually every other capital source has left the market—and a total of $535 billion in multifamily mortgage debt since 1996. They have been a vital source of capital in both good and bad economic times.
Thus, NMHC is encouraging lawmakers to proceed thoughtfully as they begin what will surely be a lengthy effort to determine the GSEs’ future. Congress should work to design solutions that “fix” the single-family problem, but not at the expense of creating liquidity or capital access problems for the multifamily sector.
We’re also working to ensure that lawmakers understand the significant differences between the single-family and multifamily mortgage markets. Because single-family mortgages are like commodities, the private sector is much more able to step in and take over for the government-supported secondary market. This is not the case in the multifamily sector, and it is unreasonable—and risky—to believe that other capital sources could fill this gap.
In today’s market, these other sources (banks, insurance companies, conduits) account for 5 percent to 10 percent of the debt capital accessible to the apartment market. In a normalized market, they account for, at most, 75 percent of the capital needed. Therefore, it is unrealistic to assume that alternate sources will be able or willing to step up and meet 100 percent of the industry’s capital needs.
Moreover, the huge problems with single-family loan defaults have been well-documented. The seasonally-adjusted delinquency rate for mortgages on one- to four-unit residential properties was 9.47 percent of all loans outstanding as of the end of the fourth quarter of 2009. What is not commonly known, however, is that over the past 20 years, the GSEs’ multifamily loan delinquency and defaults have been less than one-fifth of 1 percent. In fact, at the end of 2009, the GSEs’ multifamily delinquency rates were still at or below 1 percent.
Last fall, the National Multi Housing Council (NMHC) and National Apartment Association (NAA) established a GSE Reform Task Force to develop a policy framework for any reform of the secondary market. These key principles include:
Any new or revised secondary market system must explicitly recognize the distinct needs of the multifamily sector. With other capital sources such as banks, life insurance companies, and CMBS constrained by market conditions, regulatory requirements, or capacity issues, the GSEs will continue to be the primary source of the apartment sector’s mortgage capital for the foreseeable future.
Our future secondary market should also provide an active secondary multifamily mortgage market for all times; it shouldn’t just serve as a “stop gap” for illiquid times.
The GSEs should not be folded permanently into the federal government, and there is no need for the creation of a new federal entity. Leveraging private capital based on the federal government guarantee has served the multifamily marketplace well for many years and should be retained.
Any new system should provide access to explicit federal guarantees to multifamily mortgage securities and loans. However, firms accessing a federal guarantee need to “pay to play” for this privilege.
The new system should retain portfolio lending while expanding securitized lending, since not all multifamily loans are easily “commoditized” for securities, and securitizing multifamily loans is not always the best way for the secondary market to manage credit risk.
The resources and capacity of the existing GSEs should be retained. The two firms have extensive personnel, technology, and established third-party relationships with lenders and mortgage servicers, appraisers, engineers, and others critical to their success.
Finally, the GSEs’ public mission needs to be clearly defined, and it should be focused primarily on using a government guarantee to provide liquidity to the multifamily mortgage market.
The GSE system has enabled the multifamily industry to provide housing to millions of Americans at affordable rents. Fully 90 percent of the apartment units financed by the GSEs over the past 15 years were affordable to families at or below area median income. This includes an overwhelming majority of market-rate apartments with no federal subsidy. That is because multifamily housing is inherently affordable.
As the primary source of mortgage liquidity to the apartment industry today, a government-supported secondary market is essential to ensure that the rental housing sector has access to the broad range of mortgage products and capital we need to continue to provide housing to one-third of Americans.
Doug Bibby is president of the National Multi Housing Council in Washington, D.C.
Editor’s note: To express your opinions about the existing GSE system as it pertains to the multifamily sector, contact your representatives in Congress (www.congress.org).