Fannie/Freddie Reform a Wise Choice

BOSTON—It’s hard to believe that five years have passed since our nation’s devastating real estate crisis. After a multi-billion dollar taxpayer bailout to mortgage giants Fannie Mae and Freddie Mac, the two companies—more accurately, government sponsored enterprises (GSEs)—are posting record profits. In fact, along with the Federal Housing Financial Administration (FHFA), these GSEs now back a staggering 90 percent of mortgages in this country.

While news that Fannie and Freddie are thriving may seem to indicate that our economy is back on track and our housing market has been revived, the unrestricted growth of GSEs and their expanded role in mortgage finance is severely problematic. Fannie and Freddie have come to dominate the market—cutting out private lenders and controlling the terms of nearly all mortgages, the impact of which is felt most acutely by homebuyers and even renters. Likewise, if America did ever face another economic downturn, taxpayers would be on the hook to once again save Fannie and Freddie.

One area where these GSEs play an especially significant role is multifamily housing. Currently, over 15 million households rent homes in multifamily properties, and that number is only expected to grow. While a broad range of capital sources support the multifamily finance market, including some private capital sources, GSEs and FHFA are the most substantial contributors. Recently, Senators Bob Corker (R-TN) and Mark Warner (D-VA) introduced new legislation to overhaul GSEs in the real estate finance market. Their plan gives due attention to the importance of the multifamily rental market and even outlines a separate approach for this vital source of housing.

As Washington embarks down the path toward reform, the Mortgage Bankers Association (MBA) has outlined several additional recommendations to aid in the process. Foremost, the focus on preserving long-term liquidity and stability of the multifamily financial system in the market cycles should be a driver of whether GSEs’ multifamily businesses should operate on a standalone basis. Corker-Warner acknowledges this by ensuring continued backing of existing multi-family loan guarantees after the reform is completed.

Additionally, the MBA is on target by urging that the nation’s housing policies reflect the importance of multifamily rental housing, a full range of funding resources that support the market, and the need for access to capital regardless of the state of the market. MBA also calls for private capital as the primary source of financing for multifamily housing, with a governmentbacked insurance program ensuring the market has access to liquidity at all cycles. MBA has recommended that entities eligible to issue government-backed securities be mono-line, funded by private capital, focused on securitization, serving the workforce rental market, and regulated in a manner that protects taxpayers and ensures robust competition among capital sources. Further, stewardship of existing GSE assets and resources should be a core consideration for any policy action; they are invaluable and must be harnessed and deployed to support the future of multifamily housing.

More and more of our elected officials in Washington, including Massachusetts’ own U.S. Sen. Elizabeth Warren, recognize the need for a major overhaul of the nation’s real estate finance system. Everybody in the multifamily housing finance sector is hopeful that meaningful progress is within reach. When it comes to GSEs, maintaining the status quo is not good for taxpayers or the American people.

James M. Murphy is Managing Director of Northmarq Capital, LLC,
a leading global commercial real estate mortgage banking firm