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As everyone reading this
magazine knows, the
apartment industry has been
affected by credit and
liquidity problems. But
multifamily mortgage finance
has been shielded from the
worst of the banking and
mortgage meltdown. What's
behind this phenomenon?
Simply put, Fannie Mae and
Freddie Mac.
The two firms have been
critical in continuing to
provide mortgage debt to
apartment firms during the
current economic crisis—just
as they did during previous
economic storms, including
the 1998 Russian financial
crisis and the 2001-2002
downturn.
As lawmakers and regulators
begin to recast the
Government Sponsored
Enterprises (GSEs), National
Multi Housing Council (NMHC)
is making sure they
understand the differences
between the single-family
and the multifamily
market—and why those
differences require
different regulatory
approaches.
Multifamily firms have
several sources of mortgage
capital other than the GSEs,
including insurance
companies, banks and even
HUD. Still, for various
reasons, Fannie and Freddie
have been the most reliable
source of debt to the full
spectrum of apartment
owners.
Banks and insurance
companies are major
providers of mortgage
capital, but they have more
restrictive loan terms, are
more selective in their
investments and tend to lend
for shorter terms. Banks are
further limited by
regulatory restrictions, and
insurance companies
continually reset their
commercial real estate
investment strategies.
The Federal Housing
Administration (FHA) has
become a source of low
cost-of-debt capital, but
its programs are tightly
controlled and it requires
borrowers to have
significant control or
ownership over the land.
It's also
resource-constrained.
Fannie and Freddie, on the
other hand, are in every
market across the country,
and they accommodate all
conditions. This is their
only business. Thus, they
will continue to provide the
widest range of options to
the multifamily market. In
fact, over the past year,
when all of the other
sources of mortgage capital
left the market, the GSEs
continued to meet industry
needs. Some estimates
suggest they now account for
85 to 90 percent of all
mortgage debt issued. Even
the federal takeover has not
restricted the flow of
mortgage capital from the
firms; they funded more than
$1.2 billion in multifamily
mortgages in the first two
weeks of the
conservatorship.
So, where do we go from
here? NMHC's priority is to
maintain the ability of the
secondary multifamily
mortgage market to operate
in a manner that has served
the industry and the market
investor so well.
Making certain that the GSEs'
multifamily programs
continue to serve the market
during the conservatorship
period will require
diligence and effort. And
ensuring that Fannie and
Freddie's multifamily
lending programs survive the
restructuring that is likely
to occur will be even more
of a challenge.
Congress and the new Obama
administration have many
restructuring options to
consider, including: the
creation of a single
government-owned or
privatized agency that would
bring Fannie and Freddie
together; spreading risk
among firms; or doing away
with Fannie and Freddie
entirely and letting the
financial services sector
implement a secondary
mortgage market under tight
federal regulatory
oversight.
Fannie Mae and Freddie Mac
have met the initial
challenge, but what happens
in 2009 will be the true
test of the government's
commitment to the rental
housing industry. NMHC has
always advocated for a
world-class regulatory
structure for the GSEs to
support the world's best
financing system for rental
housing. Now, we seek to
ensure that the multifamily
mortgage programs that are
so important are not damaged
while the GSEs'
single-family secondary
mortgage system is
restructured.
Among other things, NMHC
will specifically urge
lawmakers and the federal
conservator to leave the
GSEs' multifamily retained
mortgage portfolio lending
programs intact. This is
critical because the GSEs
typically hold multifamily
loans in their portfolios
instead of securitizing
them. As of the second
quarter of 2008, those
retained multifamily
mortgages were 11.3 percent
of Fannie and Freddie's
combined portfolio holdings,
totaling $172 billion.
Any limits placed on the
GSEs' portfolios must
include special
considerations for their
multifamily mortgages.
Fortunately, a strong
argument can be made for
treating multifamily
differently than
single-family in the new GSE
regulatory regime.
Multifamily mortgages are
the perfect investment for
the GSEs, and unlike
single-family mortgages, the
multifamily mortgages they
retain continue to yield
profits for Fannie and
Freddie. In fact, these
profits are helping them
rebuild their capital
reserves.
David Cardwell is VP of
capital markets and
technology at the National
Multi Housing Council. |
