Fannie Mae and Freddie Mac have played a vital role in
the affordable housing world, but the government-sponsored
enterprises (GSEs) are an endangered species.
As Congress begins to remake our nation’s
housing finance system, one of the biggest issues is to
what extent the next generation of housing finance agencies
will play in the affordable housing arena.
All options, at this point, are on the table.
“I don’t think anything is immune from
being re-engineered,” says Sheila Crowley,
president of the Washington, D.C.-based National Low Income
Housing Coalition (NLIHC). “The whole system,
including the Federal Home Loan Banks and the FHA, is up
for review at this point.”
The right wing in Congress wants a fully private market,
and to make affordable housing efforts the FHA’s
domain. The left wing wants the next generation of
government-chartered entities to concentrate only on
affordable housing, and remain largely in the
government’s control. But a hybrid system
incorporating elements of both is much more likely.
In analyzing diverse proposals—from the Cato
Institute, the Center for American Progress, the Mortgage
Bankers Association, and our industry’s trade
groups, the National Multi Housing Council (NMHC) and
National Apartment Association—a way forward is
beginning to emerge. Here are three general points of
consensus that will likely survive the debate.
1. There will be multiple entities.
The housing finance system of tomorrow will include
several new government-chartered entities, built on the
ruins of the GSEs. These entities will all be private
companies, capitalized with private equity. As such, the
entities can fail like any other private company. But a
regulator modeled on the FDIC will be able to put them into
conservatorship if necessary.
Having several entities ensures that none of them are
too big to fail, and it might bring more attention to
underserved parts of the market, such as small properties.
While Fannie Mae has a dedicated small loan program,
Freddie Mac is less interested in anything that small. Yet
a large portion of the nation’s multifamily stock
can’t support millions of dollars in debt.
“No one at the national level, neither Fannie,
Freddie nor the FHA, has been really able to address
financing for smaller properties,” says Buzz
Roberts, a senior vice president for policy at the Local
Initiatives Support Corp. “It’s great if
Fannie can go down to $1 million, but we need more than
just one way to go. Competition encourages innovation, and
The fledgling entities will be hungry to build up a
market niche, Roberts says, and if an entity is a fraction
of the size of Fannie Mae, small loans might look like a
more attractive business line.
But having multifamily-specific entities is unlikely.
“Capital markets like the brand comfort of the
much larger market that is single family,” says
Sarah Rosen Wartell, executive vice president for the
Washington, D.C.-based Center for American Progress.
“So, if you take the rental market and put it in
separate institutions, you actually may increase the cost
2. They will likely have a government guarantee.
These chartered mortgage issuers will likely have access
to an explicit government guarantee for the securities they
issue, much like the Ginnie Mae structure of securitizing
FHA-insured loans. And that guarantee will have a few
strings attached to it, namely a public mission, and a
“More of the loans will be securitized and
there will be some public mission tied to it,”
predicts David Cardwell, vice president of capital markets
for the Washington, D.C.-based National Multi Housing
Council. “And I think that luxury properties will
probably not be looking to the GSEs the way they are today.
But how you define luxury is going to be the $64,000
The NLIHC naturally hopes to see deeper affordability
goals than were previously imposed on the GSEs. The lowest
income level the GSEs are now required to serve is 50
percent of the AMI, which the NLIHC says is a drop in the
bucket. “That’s all well and good, but
there’s no shortage of rental housing for people
at 50 percent of AMI and above,” says Crowley.
“The shortage is for 30 percent of AMI and below,
and in some markets, between 30 and 50
The government guarantee won’t be provided for
free: the entities will pay for it in the form of fees or
additional basis points built into the interest rate of
each loan. Those fees will be collected in a reserve to
protect against losses, and some portion of those fees
might be diverted to support affordable housing
The guarantee will help these entities provide
countercyclical liquidity, to serve the market in good
times and bad. When the rest of the market is healthy, the
entities will see a reduced market share. And when the
private market craters, the entities will scale up to pick
up the slack. Importantly, the guarantee would also ensure
a lower cost of capital in times of illiquidity.
“It’s possible, and almost very highly
likely, that with industry support and public policy
support, some kind of government guarantee for a preferred
portion of the market will revive,” Wartell
3. They will have limited capacity.
These entities will focus on securitization first and
foremost. They will have very limited portfolio capacity,
just enough to warehouse loans pre-securitization and to
offer mortgages that don’t have broad investor
interest. As such, there may also be some level of
government guarantee on the portfolio.
The GSEs have a wide range of products, not all of which
can be securitized. This is particularly true in the
affordable housing space, where tax-exempt bond credit
enhancements, or forward commitments on tax-credit
properties, are still portfolio executions.
“There should be some portfolio availability
for highly-structured transactions, and specifically in the
affordable multifamily sphere,” says Michael
Berman, chairman-elect of the Washington, D.C-based
Mortgage Bankers Association and CEO of agency lender
CWCapital. “But the total portfolio now is
something like $1.5 trillion, and we don’t even
need a peppercorn compared to that.”