BLOG VIEW: Fannie, Freddie And The “Original” Rental Housing

Troubled government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, still snugly nestled in their federal conservatorships, have officially begun helping homeowners become renters.

As reported recently on MortgageOrb, Fannie and Freddie will now allow ‘qualified’ occupants of single-family foreclosed properties to remain in their homes and pay market-rate monthly rent rather than send a mortgage check.

Although this program is not expected to induce a dramatic nationwide healing of the housing market, many economists and fair-housing arguments believe the own-to-rent concept may sculpt broad housing-policy decisions in the future, according to a recent Los Angeles Times report.

But more immediately, this latest move from the GSEs indirectly highlights yet again our potential looming crisis in financing actual rental housing – and the government's alarmingly intertwined role in preserving that market's liquidity.

When the global credit crunch began crunching and commercial mortgage-backed securities (CMBS) left the building, the multifamily sector managed to maintain some semblance of lively loan origination activity thanks to Fannie Mae and Freddie Mac. According to a recent research paper from the National Multi Housing Council (NMHC), multifamily mortgage debt outstanding grew by $83 billion from October 2007 to September 2008. The GSEs provided a full $68 billion – or 82% – of that total.

‘Clearly, without Fannie and Freddie, the apartment industry would have been virtually unable to obtain acquisition financing or to refinance existing debt,’ NMHC says.

In fact, because depository institutions – which provided around $16 billion in multifamily financing during the same time period – likely focused on construction financing, the GSEs may very well have been responsible for a staggering 100% of permanent funding doled out for multifamily over the past year or so.

But with mandatory portfolio reductions now in the cards for Fannie and Freddie next year, such substantial support to multifamily property financing may be threatened. Furthermore, the GSEs' portfolio-shrinking is scheduled to occur at a time when NMHC says demand for multifamily housing is projected to dramatically increase – with crowds of seniors, Echo Boomers, would-be homebuyers who are now unwilling or unable to obtain a mortgage, eco-conscious urban dwellers and other growing population segments all expected to join the apartment party.

Unfortunately, because portfolio-constrained Fannie and Freddie are essentially the only financiers left at that party, the punch bowl of mortgage liquidity could quickly run dry unless policy-makers intervene – or at least begin considering methods to mitigate the possibly detrimental effects of the existing plan.

‘The debate over the broader reform of the housing finance system should not only examine how to ensure liquidity to multifamily housing in the near-to-intermediate term, but also what more fundamental changes would make the multifamily finance system more effective over the long term,’ states a recent policy brief from the Joint Center for Housing Studies at Harvard University.

The report, titled ‘Meeting Multifamily Housing Finance Needs During And After The Credit Crisis,’ additionally notes that certain multifamily market segments – such as small rental properties with under 50 units, and land acquisition and construction loans for multifamily buildings – will require especially intensive strengthening.

Although the case for ensuring continued funding for multifamily mortgages is clear, the set of specific mechanisms for doing so appears less firmly established at this point. Harvard's Center for Housing Studies points out in its brief that the emergence of any new set of institutions resulting from the reform of the existing system (such as the GSEs) should involve, most critically, some sort of ‘liquidity backstop during periods of extreme credit market stress.’

Credit enhancements, tax incentives and new mortgage products – perhaps one specially designed for small-balance multifamily loans – might also help, along with a range of other possibilities that, under the best-case scenario, would ease the current crisis while also paving the way for a new and improved GSE-supported multifamily finance system for the future.

In any sort of Fannie/Freddie reform or liquidity-compensation effort tied to the GSEs' portfolio reductions, the two keys to preserving multifamily lending health will be to act early and resist the temptation to group this market with the single-family segment. The differences in outstanding loan performance and in recent underwriting standards, of course, go without saying. Moreover, as NMHC points out, the GSEs tend to hold their multifamily loans in their portfolios rather than sell them as securities – a departure from their business model for single-family loans.

The myriad factors involved with an undertaking as substantial as reprogramming the giant GSEs to meet their distinct and disparate market needs will guarantee that decisions to institute a federal liquidity backstop for multifamily, for instance, will take some time. Thus, the dialogue among industry leaders, stakeholders, experts and policy-makers alike must begin immediately.

(What are your thoughts on helping the GSEs help multifamily finance? Or should the federal government simply step back this time? Please send your ideas to

Jessica Lillian, Commercial Mortgage Insight


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