The Federal Housing Finance Agency is seeking public input by Oct. 8 on strategies for reducing Fannie Mae and Freddie Mac's presence in the multifamily housing finance market in 2014.  How about firing luxury developers on the Donald Trump end of the pricing spectrum?

One proposed strategy is crucial: limit or even stop Fannie Mae and Freddie Mac from refinancing the largest mortgages, like Fannie Mae's December 2012 loan of $28.9 million to refinance "a luxury, over 55 market-rate rental community" of "luxury townhouse apartment buildings, plus a clubhouse," and "garages with automatic openers." 

Luxury apartments and mortgages over $25 million certainly fulfill some market demand, but there is no shortage of credit there.  Fannie Mae and Freddie Mac should see that the need for additional financing for small rental properties is hiding in plain sight.

There is a major blind spot in America's mortgage finance system that is preventing more and more families from finding "naturally affordable" rental homes – the lack of a functioning secondary market for small properties.  Defined as having five to 49 units or mortgages under $3 million, small rental properties contain 90% of the nation's rental units. The biggest unmet need in the secondary mortgage market is access to credit for these small properties.  More than half are located in suburban and rural communities, and primarily owned by "mom-and-pop" entrepreneurs. 

Housing experts have documented that nearly three-quarters of these small rental properties are affordable to households earning half the area median income without any government assistance.

The supply of naturally affordable rental properties across the country can only be expanded and improved with access to readilyavailable, reasonably priced, stable sources of mortgage finance.  We have already lost ground because of the credit crunch in this underserved sector.  As the Chicago Tribune reported in March 2012, "new small investors were shut out of the mortgage market at a time when affordability is high and demand for rental housing is strong."  And small rental property owners also faced limited access to credit when record low mortgage interest rates should have allowed them to refinance on more affordable terms.

Banks and mission-based lenders report having three to four times the demand for small property mortgages, without any ability to sell into the secondary market to make more loans. Fannie Mae and Freddie Mac have overlooked this growing need even as they have significantly increased their share of the higher end multifamily market. As the Government Accountability Office pointed out in September 2012, the "enterprises have played a limited role in financing small properties, which tend to have lower rents than large properties." 

By 2011, the average multifamily mortgage financed through Fannie Mae, Freddie Mac and even the Federal Housing Administration, ranged from $9 to 16 million.  Historically, the federal government's support for multifamily mortgages has focused on the most lucrative, "top 10%" of rental properties in 100-plus-unit buildings, mostly owned by corporations. 

In 1998, Congress actually repealed any per-unit loan limits on Fannie Mae and Freddie Mac's multifamily mortgages.  Bipartisan legislation enacted in 2008 encouraged Fannie Mae and Freddie Mac to make a secondary market in mortgages on small rental properties.  Instead, Fannie Mae and Freddie Mac have increasingly targeted the most lucrative, largest loans, even on luxury properties.

  • Fannie Mae said that in 2011 it was the "largest purchaser of permanent debt in the multifamily sector," with $24.4 billion in debt financing, and that it nearly doubled the amount of the largest loans ($25 million and above), to about 28% of its multifamily total.  It also reported that 10% of its financing was for loans under $5 million, including some small properties, and incredibly, that 49% of its multifamily small loan book of business is highly concentrated in just two MSAs, Los Angeles and New York.
  • Freddie Mac reported $20.3 billion in multifamily loan purchases and bond guarantees in 2011.  Incredibly, only 691 units were in small properties, according to FHFA.  The company also announced in 2011 that it transacted $1.5 billion in targeted affordable housing products, including $1 billion in multifamily bond enhancements, leaving just $500 million, or 2% of its multifamily activity, in mortgages on targeted affordable properties.

The GAO reports that "Freddie Mac officials noted that because the cost of underwriting is essentially the same for loans on larger and smaller properties, purchasing loans on small income properties … is less cost effective."  But since 2011, luxury developers have many other financing sources.  Fannie Mae and Freddie Mac should be increasing the availability of loans to the most underserved segment of the market: small rental properties across the country that are naturally affordable.

Judy Kennedy is the president and CEO of the National Association of Affordable Housing Lenders.