Reform of the secondary market for housing finance is a big topic now among think tanks, industry representatives and on Capitol Hill. Most of this discussion has centered on the single-family market, because that is the market that collapsed, helped to precipitate the Great Recession. This recession led to 4 million American families losing their homes, according to RealtyTrac data, and the conservatorship of Fannie Mae and Freddie Mac.
Yet Fannie and Freddie have long played another critical role in our housing market: providing a secure secondary market for multifamily housing finance. One-third of all Americans rent their homes and over 16 million households live in multifamily developments, according to the U.S. Census Bureau.
There is finally some momentum towards reform as Fannie Mae and Freddie Mac enter their sixth year of conservatorship. There is a growing consensus it is time to downsize the government's massive involvement in the housing market. Bills have been introduced in both the House and the Senate to wind down enterprises over a five-year period and reduce the direct government role in the conventional mortgage markets. Both bills mean to protect taxpayers from another bailout, buy they have very different end games. The Senate bill, introduced by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., would maintain a limited government guarantee for mortgage-backed securities, but only after private capital has taken significant first-loss risk. The House bill, introduced by Rep. Jeb Hensarling, R-Texas, would eliminate any role for the government other than as a market overseer.
While it is not debatable that the current situation is untenable long-term, disagreement over the endgame could paralyze any attempt to come up with a solution. This, in turn, could leave room for those who would prefer the status quo. These advocates argue that the current GSEs, with a few changes, could simply continue to contribute their growing profits to reduce government deficits.
However, this would leave the financial system open to what happened before. It would also render the housing market unable to attract the private capital needed to protect the taxpayer from further risk. It would also lead to the permanent nationalization of the system, which is not a solution we support. Therefore, change is needed now, so where do we start? Multifamily finance reform, of course. Three key facts are important to understand:
- The multifamily market remained healthy during the housing bust. These businesses have consistently been profitable activities for Fannie Mae and Freddie Mac because they were designed around good underwriting and risk-sharing.
- The financing and management of multifamily housing varies greatly from the model used for single-family housing, and calls for different solutions.
- During the crisis, the government-backed share of single-family mortgage originations peaked above 90% and remains above 80%, according to a presentation by Beekman Advisors to the Cleveland Fed. The multifamily share is now only 40%, down from the peak of 80%, according to the Mortgage Bankers Association.
Because the multifamily financial markets have performed well for many years, it is our key goal that they not be disrupted during the restructuring period. Accordingly, our proposal would do the following:
- Spin off the Fannie and Freddie multifamily operations in carefully planned phases, ending with privately owned entities.
- Continue the existing successful risk-sharing multifamily programs as the successors to Fannie Mae's Delegated Underwriting and Servicing and Freddie Mac securitizations, where up to 15% of the first loss by pool is taken by private capital. The programs should focus on affordable housing as they have always have had.
- Place adequate private capital at risk before a catastrophic guarantee provided by the government could be accessed.
- Maintain a catastrophic government guarantee for qualified multifamily securities, but make it explicit and paid for with appropriate guarantee fees.
- A government guarantee should promote counter-cyclicality by increasing fees or reducing commitments if prices get out of line with historical trends.
- The successor entities would issue securitized pools of multifamily mortgages, but they would not be permitted to retain a large portfolio in pursuit of additional profits.
- Allow additional securitizers, including a mutual model that could ensure that smaller lenders have access to credit, which could possibly expand the role of the Federal Home Loan Banks.
- Ensure that the entities serving the multifamily secondary market cover its key aspects, including geographical coverage, affordability levels and size of developments.
- Fund support for affordable housing with a portion of the fees paid for securitization and guarantee.
- Assess a surcharge on high-end developments seeking a loan with the catastrophic government guarantee.
- Give the Federal Housing Finance Agency the powers to be a strong regulator to oversee multifamily operations.
Multifamily is the foundation of America's housing system and for many, the first step into homeownership. The support for multifamily housing finance remains central to the GSEs' public purpose. Reforming the multifamily housing market first will help lead the way to the housing finance system of the future where private capital takes first-loss risk and uses its ingenuity to serve all markets at all times with responsible lending products. This will make us face up to our obligations to support affordable housing for all Americans while preserving and enhancing the role of private capital.
We understand several members from both parties of the Senate Banking Committee are working on a bill that accomplishes many of these goals, and we look forward to seeing this bill introduced. It is important to reform our housing finance system and better to do it sooner rather than later.
Shekar Narasimhan, currently managing partner at Beekman Advisors, has over 35 years' experience in real estate finance. He previously ran one of the first publicly traded companies in the multifamily finance business. James B. Lockhart is vice chairman of WL Ross & Co. LLC. He has previously served as director of the FHFA, regulator of Fannie Mae, Freddie Mac and the 12 Federal Home Loan banks, and its predecessor agency the Office of Federal Housing Enterprise Oversight.