Plan of Attack

CHANGE IS COMING. As Congress works to reform the government-sponsored enterprises (GSEs) and America's housing finance system, the National Multi Housing Council (NMHC) suggests that lawmakers look to the highly successful governmentsupported multifamily secondary market programs as a model for this reform.

For the past two decades, the existing housing finance system—backed by Fannie Mae and Freddie Mac—has ensured a reasonably-priced, reliable source of liquidity to the apartment sector. What's more, the story for the GSEs' multifamily loans is very different from the well-documented problems in the single-family market: Overall loan performance in the $2 trillion multifamily sector remains healthy, with delinquency and default rates falling under 1 percent—a tenth of the size of the delinquency/ default rates plaguing single-family.

In the fall of 2009, NMHC and the National Apartment Association (NAA) created a special GSE Reform Task Force to discuss the best strategies for change. The task force has told Congress, HUD, and the Treasury eight key messages to consider:

1. Preserve Lending Programs.

Apartments are a critical component of our nation's housing market and are inherently affordable to a broad range of families at or below their area's median income.

2. Private Capital is Preferable to a Government Entity.

The apartment sector fully supports the return to a marketplace dominated by private capital. Leveraging private capital allows for innovation and flexibility to meet the industry's evolving needs.

3. Federal Guarantee Should Be Explicit; Market Pricing Should Apply.

Attracting sufficient private capital, however, requires an explicit federal government guarantee on multifamily mortgage securities and portfolio-held loans. Such a guarantee should be priced at an appropriate level that reflects the mortgage risk and the value of the government's credit enhancement— and in such a way that it does not compete unfairly with private credit.

4. Liquidity Backstop Should be Available at All Times.

Any federal credit facility should be available to the entire apartment sector and not restricted to specific housing types or renter populations. Narrowing any future credit source would remove a tremendously important source of capital to a large portion of our industry, namely market-rate developers who actually provide a large volume of unsubsidized workforce housing.

5. Mission Should Focus on Liquidity, Not Mandates.

The public mission of a federally-supported secondary market should be focused primarily on using a government guarantee to provide liquidity. Instead of requiring affordable housing mandates, the new system should provide incentives to support affordable housing. Absent incentives, the government should re-direct the affordability mission to HUD/FHA and the Low- Income Housing Tax Credit program.

6. Retain Portfolio Lending and Expand Securitization.

Securitization must be used to attract private capital for multifamily mortgage capital.

However, unlike single-family loans, multifamily loans are difficult to “commoditize.” Without the ability to hold some loans in portfolio, multifamily lending activities will be significantly curtailed. In addition, securitizing multifamily loans is not always the best way to manage credit risk. Portfolio capacity is also required to aggregate mortgages for a structured securities sale.

7. Maintain Strong Regulatory Oversight and Risk Retention.

The government must ensure proper oversight and consider means (including retained risk by mortgage originators and servicers) to both preserve the strong mortgage loan performance and track record and protect the taxpayer.

8. Retain Existing Resources and Capacity During the Transition.

During the transition, it's important to retain many of the resources of the existing GSEs. They have extensive expertise as well as established third-party relationships with lenders, mortgage servicers, appraisers, engineers, and other service providers who are critical to a well-functioning secondary market.

Let Us Be Heard I am happy to report that the multifamily message is taking hold. For example, Rep. Paul Kanjorski (D-Pa.), chairman of the House Capital Markets Subcommittee, recently said that any GSE reform should take a cue from the multifamily sector, which is still profitable.

Policy makers should know that the secondary market systems have met the test: They helped finance an enormous volume of affordable units; they sustained liquidity in all economic climates; and they ensured safety in their multifamily loans and securities.

Surely that's worth keeping.

DOUG BIBBY is president of the National Multi Housing Council in Washington, D.C.