Denise DiPasquale, associate director of the Joint Center for Housing Studies at Harvard University, addressed a recent Housing Roundtable forum on affordable housing. She noted the importance of multifamily housing to meet the needs of low- and moderate-income families and said the secondary market is a growing source of funds. Printed here are excerpts from her speech.
You might ask what kind of a secondary market we currently have on the multifamily side of the mortgage market? In 1990, $9 blllion in multifamily mort. gages were sold, either in the form of securities or as whole loans. That represents roughly 28% of multifamily mortgage loans that were originated. On the single-family side in 1990, there were $411 billion in single-family mortgage loans sold, which represented roughly 90% of all loans that were originated. There's clearly a very active secondary market on the singlefamily side and considerably less activity on the multiramfly side. For mortgage-backed securities, the federal credit agencies issued $7.3 billion in multifamily mortgage-backed securities in 1990, and $225 billion in single-family mortgage-backed securities in 1990.
If the secondary market is an alternative source of funding, how do we increase the secondary market activity in multifamily lending? When I think about the history of the development of the secondary market for single-family mortgage loans, the multifamily secondary market today reminds me of that market about 20 years ago. Because funding has traditionally come from local sources, there is very little standardization in multifamily mortgage loans. That standardization is clearly required in order to have any type of secondary market activity.
One of the triumphs of the single-family secondary mortgage market was generating the standardization of the single-family mortgage instrument. It didn't matter ff the mortgage loan was originated in New York or in Iowa. You knew what the contract was and what the terms were. You had a single product that investors and borrowers understood. That standardization was incredibly important to the development of the secondary market. That has not occurred on the multifamilyside of the market today.
The problem of standardization is one of the chickenand-egg stories. A lender will say, 'I would standardize my mortgage if there was a secondary market.' The secondary market actor will say, 'Well, there would be more of a secondary market if there were standard products that we could purchase.' The standardization issue is an extremely important on for the future.
The other major Issue in the financing of rental housing is the extent to which we understand the performance of multifamily mortgages as investments and the determinants of default in multifamily lending. In reviewing research that has been done in the mortgage market, it becomes very clear that most of the research in the last two decades has focused on the single family side of the market. We have lots of experience and studies that have indicated what the major determinants of default on the single farofly side of the market are. We have virtually no information on the multifamily side of the market. A.s a result, if you are trying to open the doors to the institutional investing community for investment in multifamily mortgage, it's pretty tough sell. Why? Partly because there's no track record, and there's no history. There's no real understanding of the underlying mortgages, the structure of the securities and the performance of those investments over time. An increased understanding of the multifamily market in general and of the performance of multifamily mortgages is required.
In addition, there's precious little in the way of statistics on delinquencies and foreclosures. The available data point to a fairly bleak picture. The only sources of long-term data that we really have are from the American Council of Life Insurers, which publishes reports on delinquencies and foreclosures for mortgage loans, which are being held in their portfolios. In the last couple of years, weve seen delinquency rates rise dramatically. In 1989 the ACLI delinquency numbers were in the 3% range. In 1991, numbers came in around 7%. If you look at the publicity of the FHA or the Freddie Mac portfolios, those performances do not look good. One of the problems is that we are aware of those reported delinquency numbers, but we don't understand why the problem in those portfolios occurred.
Although there's been a lot of attention paid to the performance of the Freddie Mac and FHA portfolios, an often overlooked group Is the many specialists In the area of low- and moderate-income rental housing who have been originating and investing in these loans-- whether they are the Community Reinvestment Act departments of banks or other social investing arms of life insurance companies. etc. When you talk with these specialists, you discover that their experiences dramatically differ from those reported by Freddie Mac or FHA.
In my research, one of the puzzles that I have not been able to unravel is why the difference in the experience? Why would a low- and moderate-income housing specialist end up reporting virtually no defaults or very little problem with delinquency? I have a couple of ideas. One, there may be some differences in definitions and standards. When they see a project in trouble, a number of low- and moderate-income housing specialists intervene very early. It is not clear what their standards are for considering a project delinquent, and perhaps their standards vary.
These specialists also argue that they have lower market risk. As I said, in many markets around the country, there is still a strong need for high quality, low cost rental units. These specialists find that they have very low vacancies and very little turnover in their units because of high demand in the market they they're serving, which results in lower market risk. But it is clear that there are differences in how these mortgages are originated and how they are underwritten, which is an area that we need to explore more. Perhaps the larger industry could learn something from the expertise of the specialists in the low and moderate end of the market in evaluating a rental housing transaction.
