Government-Sponsored Enterprises (Fannie Mae and Freddie Mac)

Housing Finance Reform: The Multifamily Perspective

The Case For Multifamily     Key Reform Principles    

Private Capital is Necessary, But Not Sufficient

We are encouraged by the thawing in the private capital markets and support a return to a marketplace dominated by pri-vate capital.  But lawmakers need to understand that even in healthy economic times the private market simply cannot meet all of the rental housing industry’s capital needs.  Banks are limited by capital requirements and have never been a source of long-term financing.  Life insurance companies have typically been less than 10 percent of the market, lend primarily to newer, high-end properties and enter and exit the multifamily market based on their investment needs and economic conditions.  The private-label CMBS market is unlikely to return to the volume and market share it reached a few years ago, and the FHA has exceeded its capacity.  

Growing Importance of Rental Housing, Demand Surpassing New Supply

Changing demographics are causing a surge in rental demand that will continue long after the economic recovery.  Renters could make up half of all new households this decade—upwards of seven million new renter households. We need to build an estimated 300,000 units a year to meet expected demand. Yet, new development virtually halted for two years during the capital market collapse. The number of apartments started in 2011—167,400—was just barely enough to replace the units lost to demolition and obsolescence. Without government credit support to ensure a reliable source of capital going forward, the apartment industry will not be able to meet the nation’s housing needs, and Americans will pay more for workforce housing.

Workforce Housing Without Federal Subsidies

Policymakers should understand that nearly ALL of the multifamily funding provided by the existing GSEs helped create workforce housing (not just the capital they provided to properties designated “affordable”).  Fully 90 percent of the apartment units financed by Fannie Mae and Freddie Mac over the past 15 years—more than 10 million units—were affordable to families at or below the median income for their community.  This includes an overwhelming number of market-rate apartments with no direct federal appropriations, produced with virtually no risk to the taxpayer.

Key Principles of Housing Finance Reform

1. Do No Harm: Preserve Multifamily Lending Programs
   The multifamily sector produces the vast majority of this nation’s affordable, workforce housing.  Therefore there is an appropriate public mission for the government to provide an effective financing system to ensure the nation’s housing needs are met.  Since the multifamily sector, and more specifically the GSEs’ multifamily programs, did not contribute to the housing meltdown, they should not become a collateral victim of efforts to fix the single-family problems. 
   
   
2. Protect the Taxpayer: Look to Proven Multifamily Models 
   The GSEs’ multifamily programs can serve as a model for a reformed housing finance system.  They have performed extraordinarily well and have less than a one-percent delinquency rate.  Historically, they have been well capitalized, have covered all their losses through the loss reserves and have earned a profit.  Even during conservatorship, the GSEs’ multifamily programs have earned net revenues (profits) of more than $7 billion. Their success is the result of strong business models that use retained risk and stringent underwriting criteria.  These models should be studied for broader application to the larger housing finance system.  To protect the taxpayer going forward, the government must ensure strong regulatory oversight.  It should require mortgage originators and servicers to retain some risk, and it should establish adequate capital standards to fund loan-loss reserves. 
   
   
3. Federal Government Involvement Necessary and Should be Appropriately Priced 
   Even after we transition to a new housing finance system, there will be an ongoing need for an explicit federal gov-ernment backstop on multifamily mortgage securities and portfolio-held loans.  Over the past 40 years, there have been numerous occasions when the private sector has been unable or unwilling to finance multifamily loans.  Hence it is hard to envision a reformed housing finance system without some form of federal credit enhancement.  However, that credit should be priced at an appropriate level that reflects the mortgage risk and the value of the government’s credit enhancement and in such a way that it complements, but does not unfairly compete with, private debt capital.  
   
   
4. Liquidity Support Should be Broad and Available at All Times, Not Just “Stop-Gap” or Emergency 
   Any federal credit facility should be available to the entire apartment sector and not be restricted to specific housing types or specific renter populations.  Narrowing any future credit source would remove a tremendously important source of capital to a large portion of our industry, namely market-rate developers who actually provide a large volume of unsubsidized workforce housing.  Such a facility should also be available at all times to ensure constancy in the U.S. housing market throughout all business cycles.  It would be impossible to turn on and off a government-backed facility without seriously jeopardizing capital flows.   
   
   
5. Mission Should Focus on Liquidity, Not Mandates 
   The public mission of a federally supported secondary market for multifamily should be clearly defined and focused primarily on using a government backstop to provide liquidity and not for specific affordable housing mandates.  Such mandates create conflicts within the secondary market and are partially responsible for the housing crisis because of the distortions the mandates introduced into the GSEs’ business practices.  Instead of mandates, the new housing finance system should provide incentives to support the production and preservation of affordable multifamily housing.  Absent incentives, the government should redirect the affordability mission to HUD/FHA and the Low-Income Housing Tax Credit program.
   
   
6. Retain Portfolio Lending While Expanding Securitization 
   Securitization must be used to attract private capital for multifamily mortgage capital.  However, unlike single-family loans, multifamily loans are not easily “commoditized.”  Without the ability to hold some loans in portfolio, multifamily lending activities could be significantly curtailed.  In addition, securitizing multifamily loans is not always the best way to manage credit risk.  Portfolio capacity is also required to aggregate mortgages for a structured securities sale.
   
   
7. Create Certainty and Retain Existing Resources/Capacity During the Transition
   To avoid market disruption it is important that policymakers clearly define the role of the government in a reformed system and the timeline for transition.  Without that certainty, private capital providers (e.g., warehouse lenders and institutional investors) are likely to limit their exposure to the market, which could cause a serious capital shortfall to rental housing.  In addition, during the transition years, we believe it is critical to retain many of the resources and ca-pacity of the existing GSEs.  The two firms have extensive personnel and technology expertise as well as established third-party relationships with lenders, mortgage servicers, appraisers, engineers and other service providers that are critical to a well-functioning secondary market. 

Contact Information

David Cardwell
Vice President of Capital Markets and Technology
NMHC/NAA Joint Legislative Program
202/974-2336
dcardwell@nmhc.org