Expect Gradual Changes at Fannie & Freddie

Conversation with Douglas M. Bibby

January 1, 2012

Despite much legislative attention to government-sponsored enterprise reform, as evidenced by the three dozen Congressional bills dealing with Fannie Mae and Freddie Mac introduced in 2011, none had made it out of full committee by early December. Furthermore, action on GSE reform is unlikely before the 2012 elections, says Douglas M. Bibby, president of the National Multi Housing Council in Washington, D.C., an advocacy organization for the apartment industry. Bibby, who also spent 16 years as a senior officer at Fannie Mae, says the Federal Housing Finance Agency, now the conservator for the GSEs, may level the playing field in the mortgage market by administrative actions.

What kind of action do you think the FHFA will take before the 2012 elections?

What we’ve heard is that the conservator may adjust the pricing for Fannie Mae and Freddie Mac. If these agencies are pricing themselves under their private competitors, they can adjust their prices to be competitive or even higher than their competitors. Also, the regulator can raise Fannie Mae and Freddie Mac’s capital requirements, making it more costly for them to do business; stifle product innovation, which is to say put limits on the kinds of loans they can finance; and put Fannie and Freddie employees on the government pay scale, which would drive people out of these agencies, or require Treasury Department approval for any new debt issuances.

Among the possible scenarios suggested in the Obama administration’s February report to Congress on GSE reform was complete privatization of the mortgage market. Do you think this will happen?

It would be an enormous task, as the two entities have over $5 trillion in assets on and off balance sheets. Ironically, though, there’s been some talk among policy makers of spinning off the multifamily operations of Fannie Mae and Freddie Mac, and I know that some Wall Street firms have been asked to opine on whether or not this would be feasible and sensible. Although privatizing Fannie and Freddie could take as long as ten years, privatizing the multifamily business alone—which is worth billions of dollars, not trillions like the single-family business—would be quicker.

At this point, it is too difficult to predict whether or not privatization, even of the multifamily side, will happen. The private market must demonstrate that it has the willingness, capacity, and staying power to serve the full breadth of financing needs across all markets and in all economic climates. The private sector would have to replace the $30 billion to $40 billion that Fannie and Freddie provide annually in multifamily financing.

What’s the potential impact on affordable housing?

Should Fannie and Freddie be privatized, there is a strong sentiment among policy makers that the GSEs’ affordable housing goals got them into trouble, so any changes to their charters would likely not incorporate affordable housing mandates. Advocates for affordable housing are nervous that they would lose a valuable resource for getting affordable deals done in any recasting of the GSEs.

If Fannie and Freddie are privatized, what do you think will happen to interest rates?

First of all, we believe that the resolution of the debt crisis, despite the Fed’s current focus on keeping rates down to speed the recovery, eventually will send interest rates higher. Secondly, whatever changes are made at Fannie and Freddie, debt financing through these agencies will cost more.

Could the FHA pick up some of the slack for Fannie and Freddie either now or in the future?

The FHA is already handling five times the normal volume for construction financing for the multifamily market. The agency can’t increase its staff. They have to wait until someone retires or leaves, so they can’t change their regional offices in any meaningful way. The FHA was the lender of last resort for borrowers who couldn’t find other financing. But when banks left the market in 2008, many high-quality [multifamily] borrowers flooded the FHA with loan requests, and even today, the agency is drowning under the volume.

Hortense Leon is a Miami-based freelance business writer who has been covering commercial real estate for 20 years.