Conflicting Visions for GSEs in Multifamily

When the FHFA asked the public for ideas on how to get Fannie Mae and Freddie Mac out of the mortgage market for multifamily properties, they got some surprising results.

November 2, 2013

This past August, the Federal Housing Finance Agency, conservator for Fannie Mae and Freddie Mac, asked for public comment on ways to reduce the government-sponsored enterprises’ roles in the multifamily finance market in 2014. But rather than suggestions on how to shrink Fannie and Freddie’s multifamily loan volume for next year, 60 out of 67 respondents said that the rules governing those loan volumes should undergo little, if any, change.

The respondents ranged from small businesses to national nonprofits to members of Congress. In their joint response to the FHFA, the National Multi Housing Council and National Apartment Association objected to further decreases in loan volume. They questioned the FHFA’s premise that caps on lending are desirable and countered that such restrictions could hamper the economic recovery.

“While the apartment industry supports the return of a more robust private capital market, we believe that setting caps on the GSEs’ multifamily lending volumes and reducing the diversity and availability of multifamily mortgage products could interfere with stabilizing market forces currently at work,” the joint letter stated.

Though the National Association of REALTORS® offered no official response to the call for comment, the association has been deeply involved in discussions over the future of Fannie Mae and Freddie Mac. NAR acknowledges that GSE reform is necessary but advocates strongly for the preservation of the government’s role as a guarantor in the secondary mortgage market. Learn more about the association's position.

The FHFA’s request for comment, which closed Oct. 8, was released less than six months after it published a Conservatorship Strategic Plan for 2013 with performance goals for Fannie Mae and Freddie Mac. One of those goals was to reduce the volume of new multifamily business by 10 percent compared to 2012. The two GSEs were expected to do so by “tightening their underwriting, adjusting pricing and limiting product offerings, while not increasing the proportion of [their] retained risk,” according to the plan.

By many accounts, the strategic plan was successful. According to High Ridge Costa Investors, the GSEs’ share in the market “has actually fallen more than the 10 percent [the] FHFA mandated early in the year.” The company says that if economic models for the multifamily market are correct, Fannie Mae and Freddie Mac’s share of the market will decrease from 44 percent in 2012 “to the 30 percent level or below” for 2013.

Reports such as that one help to engender objections to further reductions in multifamily lending at the GSEs.

“Fannie Mae and Freddie Mac served as an essential backstop during the economic downturn, maintaining liquidity in the market when private capital retreated,” according to the NMHC/NAA letter. But as private capital has returned to the market, it is helping to reduce the GSEs’ share, it said.

“It is the private market today that is dictating the government’s market share, based on private capital’s willingness to lend in the market,” says Dave Cardwell, vice president of capital markets at the NMHA. He noted that the 30 percent loan volume share the GSEs are predicted to reach in 2013 will be about the same percentage as before the recession.

Cardwell added that, although multifamily loans represent only about a tenth of the Fannie and Freddie’s total business, they have helped to offset losses from the single-family business side. Cardwell’s organization told the FHFA that pulling the GSEs out of this market now would hurt taxpayers.

“Imposing further restrictions on the Enterprises’ multifamily mortgage activities effectively denies the government the ability to recoup borrowed capital that would otherwise be generated from the strong performance of the multifamily business,” said the NMHC/NAA comment letter. “The Enterprises’ multifamily mortgage activities are currently generating a substantial positive return to taxpayers.”

A Different World

GSEs’ multifamily business should not be treated the same way as its involvement in single-family lending, says Tom Bozzuto, chairman and CEO of the Bozzuto Group, an apartment development and management company, based in Greenbelt, Md. Bozzuto represented the NMHC and the NAA at an Oct. 9 hearing before the U.S. Senate Committee on Banking, Housing and Urban Affairs.

“Not only are the sectors very different in how they operate, they also have much different performance records,” he said. “The delinquency and default rates of Fannie Mae and Freddie Mac’s multifamily programs are less than one percent, a tenth of the size of the rates plaguing their single-family programs. It comes as a surprise to many that their multifamily programs have generated more than $13.6 billion in net profits for the federal government since they were put into conservatorship,” he said.

Importance for Niche Markets

The Center for American Progress, in conjunction with a number of other nonprofit organizations, also attested to the importance of Fannie and Freddie’s multifamily business in its comment letter to the FHFA: The GSEs “meet financing needs across the nation, including in tertiary markets and for less expensive buildings often ignored by the private sector,” it said. “Additionally, they offer long-term financing needed to fund affordable housing development that is rarely available through private market channels.”

Michael McDougal works in one of those tertiary markets. As president of McDougal Properties, a company affiliated with the MacDougal Cos. of Lubbock, Texas, which owns and operates over 3,000 apartments, including market rate, student, and affordable units, McDougal’s perception varies from that expressed in the FHFA’s request for comment.

“We find it difficult to comment on the FHFA’s options to implement program changes to shrink Fannie Mae and Freddie Mac’s capacity because we view the proposed action as wholly unnecessary. While the perception might be that Fannie Mae and Freddie Mac play an ‘outsized’ role in multifamily mortgage markets, the facts tell a wholly different story,” he said in a statement to the agency.

Eliminating Overlap

But as dominant as opinions like the ones expressed in the NMHC/NAA letter were among the respondents to the FHFA survey, not everyone was completely happy with the status quo at the GSEs either. At the end of the FHFA questionnaire, respondents were asked to suggest alternatives to the conservator’s proposals. Martell & Associates, a Washington D.C.–based law firm headed up by Mary Martell, formerly an attorney at the Department of Housing and Urban Development, suggested that the FHFA eliminate multifamily programs at the GSEs that duplicate or overlap with existing programs at HUD or other federal agencies.

The Mortgage Bankers Association wants to limit government support for market-rate housing. Andrew Little, principal at investment banking firm John B. Levy & Co. agrees. “Why [are] Fannie and Freddie lending to the largest apartment REITs in the country?” he asks.

Little says Fannie and Freddie dominated the multifamily market from 2008 to 2012 and pushed out more traditional permanent lenders—such as life insurance companies and pension funds, who wanted to lend to market-rate multifamily projects—with their aggressive pricing. However, he says that in the last year or so, Fannie and Freddie pricing has come more in line with the market; now they are participants among other multifamily lenders in the market.

As for the future of the GSEs, their path is still unclear. “The FHFA takes all the input we have received [from the comment letters] seriously,” says a spokesperson for the conservator in an e-mail. “We are still reviewing the responses and considering our options for next steps.”

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