America's Renters Need a Government Guarantee

Last week the conservator of mortgage giants Fannie Mae and Freddie Mac confirmed what housing experts have long suspected: a limited government guarantee is critical to a well-functioning U.S. rental market.

That was the upshot of a series of well-researched reports published Friday by the Federal Housing Finance Agency. More than a year ago the agency asked Fannie and Freddie to study the consequences of spinning off their multifamily businesses without a guarantee from the federal government.

According to FHFA, the two companies concluded that "there is little inherent value in their current multifamily businesses without the government guarantee" and that "the sale of these businesses without the guarantee would return little or no value to the U.S. Treasury and to taxpayers."

This conclusion should inform FHFA's next strategic plan, which in its current form discusses the "potential value for taxpayers" in "contracting (Fannie's and Freddie's) multifamily market footprint." The agency in March unveiled plans to reduce each firm's new multifamily business by 10% — more than two months after Fannie and Freddie submitted their reports.

We now know that there is tremendous value to the government guarantee, and that fully privatizing the multifamily mortgage market would actually harm taxpayers. Here are a few reasons why, based on data from last week's reports.

First, this business brings important social and economic benefits to working families. By issuing and guaranteeing securities backed by multifamily mortgages, Fannie and Freddie provide liquidity to the U.S. rental market, translating into more rental homes, better maintained properties and lower, more stable rents.

According to Freddie Mac's estimates, without the government guarantee rents would rise by as much as 2%, as the total supply and value of rental homes would fall significantly. And since the vast majority of these loans support lower-income families, the most vulnerable families would be hit hardest.

Second, the guarantee on Fannie- and Freddie-backed mortgages serves a critical countercyclical role. Private capital is a key player in multifamily housing finance, both by funding projects without a government guarantee and sharing a portion of the risk on Fannie and Freddie loans. But those who provide this capital — such as life companies and Real Estate Investment Trusts — tend to be procyclical, providing ample capital when the market is booming and holding back when the market is struggling. It's also worth noting that purely private capital tends to flow to higher-end apartments in major cities, not the more affordable rental properties in smaller towns and rural areas.

The guarantee helps to keep money flowing to the rental market during economic downturns. The Freddie Mac report concludes that "withdrawing a government guarantee would affect the ability of the multifamily market to sustain boom-and-bust cycles," causing such cycles to become "more frequent and severe."

This countercyclical support was particularly important during the most recent housing crisis. In 2007, Fannie and Freddie combined for less than 30% of multifamily loan originations, as private investors were champing at the bit for any mortgage debt they could find. By 2009 — the year after the housing market collapsed, taking the entire financial system with it — that number nearly tripled to 85% as investors were leery of putting their money into housing without a government guarantee.