Future of the Multifamily Secondary Market: Fannie Mae and Freddie Mac

CC&P from NMHC/NAA Joint Legislative Program

Future of the Multifamily Secondary Market:

Fannie Mae and Freddie Mac

Background

The apartment industry has coped with a capital crisis since the fourth quarter of 2008.

Even with improving access to

capital from other sources, government sponsored enterprises (GSE) Fannie Mae and Freddie Mac have been the most

consistent and primary source of permanent debt financing for apartment owners, accounting for approximately 80-90

percent of the funds provided to multifamily borrowers over the past year and virtually all non-construction-related capital.

All other market sources of funds (banks, insurance companies and conduits) have been sidelined and the FHA is being

stretched because FHA-insured loans have become a material source of construction financing.

As the Administration and Congress begin the process of

establishing a new secondary mortgage market system and

regulatory oversight for the GSEs, lawmakers should understand the unique needs of the multifamily sector and take steps to ensure that they do not restrict the supply of multifamily capital as they

work to reform the single-family financing

process. This is critical, as the industry will heavily rely

on Fannie Mae and Freddie Mac to help refinance the estimated

$200 billion in multifamily mortgages that will mature in the nex;t

two years. Without this liquidity backstop, the risk of

foreclosure (and bankruptcy) of otherwise performing loans is significant.

The lack of capital threatens the viability of the apartment sector at a time when America will increasingly rely on rental apartments to house our citizens. The largest generation of children currently under the age of 20 in the history of the U.S. will be entering the housing market in

the next few years, and the number of seniors who can no longer maintain a house will begin to skyrocket. In addition, the foreclosure crisis has increased the demand for affordable rental housing. Yet,

capital for new apartment construction has all but disappeared and new construction has virtually halted.

Fortunately, the multifamily foreclosure story is very different from the single-family story. The apartment sector is the only residential real estate sector that did not overbuild, and unlike in the single-family market, overall loan performance in the $2 trillion multifamily sector remains healthy. It accounts for 35 percent of all multifamily mortgage debt with combined multifamily loan and security portfolios of $204 billion, yet the seriously delinquent loan rates for the twoGSEss remain low at 0.45 percent as of December 31, 2009.

NMHC/NAA Position

As lawmakers embark on efforts to restructure theGSEss andth;e

e secondary market for housing, we strongly urge them to

take the following actions to preserve liquidity to the apartment industry:

1. Make the preservation of multifamily lending programs a

priority. Apartments are a critical component of our nation’s

housing market and are inherently affordable to a broad range of

families at or below the area median income in all markets. It is appropriate for the government to provide an effective financing system to ensure the nation's housing needs are met.

2. The private market simply cannot meet 100% of the multifamily sector’s demand for capital. Any new or revised secondary market system must recognize the unique needs of the multifamily

sector and create a capacity to fill the gap left by the private sector. The private market simply cannot meet the financing needs for all types of multifamily properties without an effective federal

secondary market provider. There are structural impediments facing banks, insurance companies and conduits that preclude them

from financing more than they traditionally have.

3. Preserve the ability of thGSEsEs to offer both portfolio lending ansecuritizeded lending programs. While thGSEsEs have increased theisecuritizeded multifamily lending activities, the market continues to require a portfolio lending option due to the industry's unique loan terms and requirements. A portfolio program is also more prudent for thGSEsEs as they need the ability to retain whole mortgages in certain cases as well as to aggregate loans beforsecuritizingng them.

4. Private capital is preferable to federalization of the secondary market and/or the creation of a new federal entity.

Federalization will limit the broad range of finance products

required to maintain a healthy and changing multifamily

market. Leveraging private capital based on the federal government guarantee allows for innovation and flexibility that would otherwise be limited in a government program.

5. We believe that any new system should provide access to explicit federal guarantees for multifamily mortgage securities and loans. We support a fee structure to support this backstop. Such a risk-based guarantee fee on the underlying mortgage would provide reserves against mortgage losses, thus protecting and insulating the taxpayer

from loss.

6. During transition years, we believe it is critical to retain many of the resources and capacity of the existinGSEsEs. The two firms have extensive personnel and technology expertise as well as established third-party relationships with lenders, mortgagservicersrs, appraisers, engineers and other service providers, which are critical to their past and future success.

The single-family housing meltdown confirms that the continued push fohomeownershipip ignores the need for a more balanced housing policy—and that policy needs to begin with ensuring a consistent and abundant flow of capital to rental housing.

Current Status

The Administration has postponed its plans for restructuring the secondary market, suggesting it will only provide broad guidance in 2010. The Treasury Department committed the government to unlimited financial support for thGSEsEs through December 31, 2012 and modified the required 10 percent portfolio reduction requirement that took effect January 1, 2010. It increased the allowable size of thGSEsEs’ retained mortgage portfolios to $900 billion per firm (from the current outstanding portfolio levels). This increases investor confidence in mortgage securities and bonds issued by thGSEsEs and reduces the likelihood of active selling of mortgages to reduce portfolio holdings. This is favorable for multifamily lending programs, because the two firms hold a greater percentage of multifamily mortgages that they purchase in their retained portfolios and they use the portfolios to

aggregate multifamily mortgages for latesecuritizationon.

Preliminary hearings on GSE reform are scheduled to take

place in the House starting March 23, 2010. NMHC/NAA will

represent the industry’s position at this initial hearing. There

is no indication or expectation for legislation; the hearing is intended to help lawmakers understand the variety of issues surrounding the restructuring of the government sponsored secondary mortgage market.

The Senate Banking Committee does not plan to take up the matter until it has completed financial regulatory reform; Committee Chairman ChristopheDodddd (D-CT) has stated that GSE reform will be taken up separately from the regulatory reform measures the Committee is currently debating.

Relevant Committees

Senate Banking Committee

House Financial Services Committee

Contact Information

DaviCardwellll

Vice President of Capital Markets and Technology

NMHC/NAA Joint Legislative Program

202/974-2336

dcardwell@nmhc.org

Last Updated:

March 2010

NMHC/NAA Joint Legislative Program

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