Although Freddie Mac had a record-breaking 2012 and Fannie Mae made an even stronger showing, the national discussion about the future of the government-sponsored enterprises (GSEs) is less than hopeful.
The Federal Housing Finance Agency (FHFA) announced a plan to shrink the role of the GSEs in the marketplace while an influential think tank, the Bipartisan Policy Center, called for the elimination of the GSEs altogether.
The changes proposed by the FHFA lay the groundwork for the creation of a new housing finance landscape. Edward DeMarco, acting director of the FHFA, announced the plans during remarks addressing the National Association for Business Economics at its annual conference.
Last year, the GSEs combined to finance about $62.8 billion in multifamily deals. DeMarco hopes to reduce that volume by about 10 percent this year through increased pricing, limited product offerings, and tighter underwriting in the multifamily business.
But even before the push from the FHFA, officials at Freddie Mac expected its 2013 numbers to stay on par or even fall below its volume in 2012.
Freddie’s affordable housing year
About a month prior to FHFA’s announcement, Freddie Mac officials touted a record-breaking year of $28.8 billion in overall multifamily volume.
About $3 billion of the volume was through targeted affordable housing, with 80 percent of it coming in the form of bond credit enhancements, says Kim Griffith, vice president of affordable sales and investment at McLean, Va.-based Freddie Mac.
Griffith notes an increase in tax-exempt bond deals in 2012 will foreshadow a stronger comeback in 2013, but with caution. And as the 4 percent low-income housing tax credit (LIHTC) market remains cautious, the 9 percent world is also feeling a little more tentative these days.
“I think people are a little anxious about the tax credit market,” Griffith says. “The prices [that are being paid for the credits] have come down a little bit, and that market has been pretty darn volatile over the last few years.”
Griffith attributes Freddie Mac’s soaring numbers to the preservation and acquisition market.
Financing for in-place rehabilitation projects constitutes the overwhelming majority of preservation deals, since they allow a borrower to have money coming in from tenants as the project moves forward, Griffith says.
Gut-rehab projects, where the tenants move out during the renovation, are tricky to finance as officials will have to make projections about the market for when the project is completed rather than for right now.
“Projecting the market in three years is where it becomes difficult,” he says.
Griffith expects rehab deals to continue fueling Freddie Mac’s numbers to be similar to last year’s.
FHFA’s plan
But if a 10 percent reduction in activity is felt across the boards, then the GSEs’ affordable housing volume would have to take a similar cut.
Another part of the FHFA plan includes merging some of the functionality of the GSEs into one newly created entity to share functionality and save the government money.
“In short, there must be some updating and continued maintenance of the enterprises’ securitization infrastructure, and to the extent possible, we should invest taxpayers’ dollars to this end once, not twice,” DeMarco noted in his remarks.
But taking steps toward eliminating the GSEs would damage the market, says Paul Cairns, senior vice president of capital services for Freddie lender NorthMarq Capital.
“I worry, though, when you create less competition between those two that they could become more stagnant, and when you only have one avenue to get the securities out that it’s going to cause more problems as lack of competition.”
While the announcement may have sounded drastic, multifamily financial experts aren’t alarmed.
It comes as the private sector is starting to fire on all cylinders, says Guy Johnson, president and CEO of Irvine, Calif.-based Johnson Capital.
“It sends a direction, it sends a statement, but I don’t think it practically will have that big of an impact,” he says. “There’s still plenty of liquidity.”
Johnson notes the robust volume the GSEs showed in 2012 and says even with a 10 percent reduction, which would slice off about $6 billion from their combined volumes, they would still have a good 2013 coming in around $54 billion.
However, DeMarco noted tight underwriting should drive down volume and open space for other lenders.
NorthMarq’s Cairns says the market most likely will see a drop in the GSE volume, regardless of the FHFA plan.
The Minneapolis-based company did about $1.8 billion in Freddie Mac transactions in 2012, Cairns says, though it’s not budgeting for the same amount this year.
“I think they would shrink naturally this coming year even if there was no change in the underwriting,” he says.
