AS CONGRESS GETS READY to debate the future of housing finance,apartments appear to be taking center stage.

The colossal failure of the single-family mortgage industry, coupled with falling home values, has resulted in many voices de- emphasizing homeownership and re- emphasizing apartment housing. This is a positive notion but requires a strong note of caution.

Lessons from the single-family disaster have direct parallels in apartments. Primarily, a major part of the problem, perhaps the cause of the crisis, was the federal government's eff orts to push lenders into risky and unprofitable loans.

Word on the Street

Currently, the National Housing Conference, the Center for American Progress, and other institutions are disregarding the lessons learned. Instead, they are calling for governmental guarantees and mandates to stimulate multifamily lending in general, and loans with higher risk specifically. This would be bad policy and bad economics.

Their argument is based on the strong performance of the Fannie Mae and Freddie Mac lending programs. However, both Fannie Mae and Freddie Mac have experienced disasters previously with apartment lending.

Freddie Mac withdrew from the business altogether in the early 1990s, and Fannie Mae had to rewrite its products after the failures of the 1980s.

These earlier experiences suff ered because lenders were either not required to have enough skin in the game or were not subject to sufficiently rigorous and conservative lending standards— or both. Right now, the government—between the FHA, Fannie, and Freddie—is doing the vast majority of multifamily lending. If the government encourages risky loans, as it did in single-family, the country would be repeating the mistakes of the past.

At the end of the day, the root cause of these failures seems to be the presence of federal guarantees and mandates, which distort the behavior of borrowers, lenders, and politicians alike. The better path would be to phase out off -budget federal guarantees for Fannie, Freddie, or any form of apartment securitization.

Without this crucial step, there will be more of the type of trouble that periodically crops up in the Fannie, Freddie, and FHA multifamily portfolios.

What's more, multifamily financing requires a functioning secondary market in order to compete and survive in the global markets. Those securities, however, must be based on solid underwriting and can be achieved through several financing mechanisms already available.

This may mean modestly tighter lending criteria and somewhat higher interest rates than borrowers have become accustomed to, but those are small prices to pay to avoid the recurrence of the single-family debacle.

Subsidized Housing

Still, market-rate apartments are only part of the story. As of 2001, some 4 million units are directly subsidized or benefit from a government program, according to the Millennial Housing Commission. Many of these subsidized apartment properties began as shallow subsidy workforce housing. When properties failed, bailouts followed in the form of more government subsidies, and workforce properties were subsequently converted to concentrated low-income housing as part of those bailouts.

These bailouts have had many negative eff ects. Residents are lured by dirt-cheap rents to live in subpar units. The worst of these properties are poorly run with a myriad of social problems that, if not fixed, will ultimately ruin neighborhoods and drain limited housing funds.

In trying to produce as many subsidized units as it could with limited budget dollars, the government loosened underwriting requirements, allowing excessive loan amounts and providing inadequate funding for maintenance and repairs.

This created inherently unstable properties.

Going forward, the industry should seek to shed light on the problems of subsidized housing; bring independent voices to the table; and work to preserve only properties that are worth keeping. In the long run, if the country chooses direct housing subsidies instead of other safety net programs, a shift to vouchers could off er residents greater choice and require government housing providers to compete for tenants.

This may require more initial money in the housing budget than we have spent on these properties in the past, but it will produce superior outcomes for communities and residents with the promise of reducing costs over time.

TOM WHITE is the former head of Fannie Mae's multifamily business and was the first executive vice president of the National Council of State Housing Agencies. CHARLIE WILKINS was formerly responsible for the nation's largest portfolio of affordable rental housing and is now a consultant.