Fannie Mae and Freddie Mac have been the primary source of multifamily financing since the financial crisis. But in crafting legislation to wind down the government-sponsored enterprises and restructure the housing finance system, the lawmakers in the House and Senate have largely ignored the GSEs' multifamily businesses.
It was their single-family programs that led to colossal losses and forced the federal government to bail them out in 2008.
Fannie and Freddie's smaller multifamily businesses performed well throughout the financial crisis and they continue to be profitable.
"When private capital withdrew from the market in 2009, Fannie Mae and Freddie Mac expanded to support 86% of multifamily originationsnearly triple their average share in the years leading up the crisis," according to a report by the Bipartisan Policy Center.
Their market share dropped to 40% in 2012. During the first half of 2013, Fannie provided financing for 283,000 units of multifamily housing and Freddie provided financing for 185,000 apartment units.
Housing groups want to preserve the GSEs' multifamily business so they can eventually be spun off and sold to private entities.
But House lawmakers made no distinctions between the single-family and multifamily programs in drafting the Protect American Taxpayers and Homeowners Act, according to Michael Borden, counsel at Sidley Austin LLP.
The House GSE reform bill would wind down and liquidate Fannie and Freddie's mortgage programs over five years.
In drafting the PATH Act, "the leadership of the House Financial Services Committee had no interest in making those kinds of distinctions," Borden said in briefing members of the Mortgage Bankers Association. He previously served as senior counsel to the House committee.
Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., didn't spend much time on the multifamily question in drafting their GSE reform bill, says Dwight Fettig, a partner at Porterfield, Lowenthal & Fettig.
"They have acknowledged publicly that they didn't take the time and effort needed to really address the multifamily sector," he told MBA members.
The Corker-Warner bill simply transfers Fannie and Freddie's multifamily units to a new federal regulator that would also provide a government backstop to protect mortgage-backed securities investors.
But lawmakers on the Senate Banking Committee are getting an earful now about the distinctions between the single-family and multifamily programs.
"There is recognition in the Senate that they will need to make sure they address this,"Fettig says, so the GSE multifamily programs are not disrupted during the transition to the new housing finance system.
The distinctions between the GSE multifamily and single-family programs are quite profound. The multifamily programs have developed risk-sharing features, which have not been adopted on the single-family side.
In securitizing the multifamily loans, Freddie Mac uses a senior/subordinated structure where the investors are at risk. In a typical transaction, private investors in the subordinate bonds are in a first-loss position for the first 15% of loan defaults.
This multifamily structure effectively shields taxpayers from 90% of the credit risk, says Freddie chief executive Donald Layton. Freddie launched the K-Deals in 2009 and so far there have been "zero losses," according to the secondary market agency.
These risk-sharing structures will likely be adopted by the single-family market as a result of housing finance reform.
Meanwhile, the Federal Housing Finance Agency is considering scaling back the GSEs' multifamily programs by another 10% in 2014. The 10% reduction mandated for 2013 has not had much of an impact so far. It appears Fannie and Freddie can satisfy the mandate by selling multifamily loans held in portfolio.
But in 2014, the GSE regulator is proposing to restrict loan terms and loan products along with re-imposing multifamily loan limits.
The National Association of Home Builders and 13 other housing, banking and real estate groups are urging the FHFA to refrain from taking any action until Congress acts on housing finance reform and determines the future of the GSEs' multifamily programs.
"We do not believe that FHFA should unnecessarily limit the GSEs' multifamily activities at this time," according to a joint letter.
NAHB senior director Claudia Kedda noted that Fannie and Freddie's multifamily programs have been successful and very profitable.
"We are fearful that FHFA may start dismantling successful programs and products that our members use and other developers use. If that happens, it will be very difficult to rebuild that kind of infrastructure later on," Kedda says.
As GSE reform advances, industry groups are hoping that Congress will recognize that Fannie Mae and Freddie Mac's multifamily platforms should be sold to private entities that will continue to serve the multifamily market.
The Mortgage Bankers Association new chairman, E.J. Burke, recently testified before the Senate Banking Committee on GSE reform.
He stressed that the private multifamily entities could be regulated by a new Federal Mortgage Insurance Corp. that would be created under the Corker-Warner bill.
Moving Fannie and Freddie's multifamily businesses to the "private sector through a sale or public offeringwith continued access to a government guaranteewould likely return substantial capital to the U.S. Treasury," Burke said.