BANKTHINK

America's Renters Need a Government Guarantee

Print
Email
Reprints
Comment
Twitter
LinkedIn
Facebook
Google+

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.

Finally, the multifamily business has been both low-risk and profitable for Fannie, Freddie and taxpayers, even in the midst of the worst foreclosure crisis since the Great Depression. Today only about 0.2% of Fannie- or Freddie-backed multifamily loans are delinquent by 60 or more days, according to the Mortgage Bankers Association. As a point of comparison, 8.7% of loans in so-called "commercial mortgage-backed securities" not backed by the federal government are delinquent or somewhere in the foreclosure process.

As a result of these low credit losses in addition to revenue from fees and the capital and other benefits of the government guarantee Fannie's multifamily business reported a net income of $1.5 billion in 2012 while Freddie Mac reported $2.1 billion. Under the terms of the conservatorship, any positive net worth for the companies is returned to the taxpayers.

These findings come as the U.S. housing market is at a crucial crossroads. The market for single-family homes is showing promising signs of recovery, but many renters are facing a growing affordability crisis. According to a recent report from the Center for Housing Policy, housing costs for renters rose by 6% between 2008 and 2011, while incomes dropped more than 3%. Today, one in four working renters pays more than half of their incomes on housing, a severe cost burden that leaves little for food, healthcare and other life basics.

The data show that this crisis would be drastically worse if we were to do away with the government guarantee on multifamily mortgages and U.S. taxpayers would be no better off. So as policymakers weigh their options for establishing a new system of housing finance, we urge them to pursue reforms that support rental housing as a viable alternative for many families while preserving the policies and practices that work.

Andrew Jakabovics is the senior director for Policy Development and Research at Enterprise Community Partners. John Griffith is a senior analyst at Enterprise Community Partners.

JOIN THE DISCUSSION

SEE MORE IN

RELATED TAGS

'We Don't Want to Wage this Proxy Contest in the Gutter': Week's Best Quotes

The most notable quotes from American Banker stories of the previous week. Readers are encouraged to add their own observations in the Comments fields at the bottom of each slide.

(Image: Fotolia)

Comments (0)

Be the first to comment on this post using the section below.

Add Your Comments:
Not Registered?
You must be registered to post a comment. Click here to register.
Already registered? Log in here
Please note you must now log in with your email address and password.

This feature displays payments industry news and analysis from American Banker sibling brand PaymentsSource. Registration is required; for more information contact customer service.

TWITTER
FACEBOOK
LINKEDIN
Already a subscriber? Log in here
Please note you must now log in with your email address and password.