Fannie, Freddie Face Reform

In a surprising twist of bipartisan cooperation, plans for craft and implement a reform bill that would overhaul government-sponsored entities Fannie Mae and Freddie Mac are moving along …

In a surprising twist of bipartisan cooperation, plans for craft and implement a reform bill that would overhaul government-sponsored entities Fannie Mae and Freddie Mac are moving along at a brisk pace. The plan is to shift control the lending agencies back to the private sector while retaining a mortgage insurance mechanism supplied by the government. If implemented, the plan would ensure that taxpayers would not face risk of paying for defaulted loans backed by the government unless a particular foreclosed property lost half of its value. The plan has wide bipartisan support and has been endorsed by the president. For more on this continue reading the following article from National Real Estate Investor.

As the first shutdown of the federal government since the 1990s continues, the Banking Committee of the U.S. Senate held a hearing on the reform of mortgage giants Fannie Mae and Freddie Mac that focused on multifamily lending.

“We all agree that the status quo in housing finance is not an option,” said Sen. Mike Crapo at the October 9 hearing.

However, despite the tumult in Washington, the Banking Committee hearing was almost bizarrely collegial. The Senators were focused on fine details. No one made long or angry speeches. There seems to be a growing consensus that Fannie and Freddie’s multifamily would be spun off as privately-owned businesses to issue bonds backed by apartment loans. These loans would have an explicit, limited guarantee from an insurance fund backed by the federal government, according to proposals discussed by the witnesses at the hearing.

“I was pleasantly surprised that there was such a coalescing of groups around principals,” says Doug Bibby, president of the National Multi Housing Council (NMHC).

An explicit and limited guarantee

A few months ago, President Obama effectively endorsed the approach being taken by the Senate. “Right now there’s a bipartisan group of senators working to end Fannie and Freddie as we know them. And I support these kinds of reform efforts,” said President Obama, speaking in Phoenix, Ariz., August 6. The Senate Banking Committee is currently considering and expanding on that bi-partisan proposal by Senator Bob Corker (R-Tenn.) and Senator Mark Warner (D-Va.).

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“The centerpiece of this new system is an explicit and limited government guarantee on certain kinds of single-family and multifamily mortgages,” according  to a description by Enterprise Community Partners Inc. This guarantee would probably be carried out by a government insurance fund that would guarantee mortgage bonds backed by home loans and commercial mortgages made through certain government-sponsored loan programs, according to experts such as David Cardwell, vice president of capital markets for NMHC..

The Corker/Warner bill didn’t say much about multifamily lending, however. The committee is now fleshing out what was basically a placeholder in the bill, adds Bibby.

“They been meeting with as many stakeholders as possible, holding hearing every other week,” Cardwell says. Senate staffers have also been very engaged in the process. “There are more people working on this than worked on Dodd Frank,” says Cardwell, referring to the Dodd Frank Financial Reform Act.

Taxpayers would not be subject to much risk under this model, even with a government guarantee through the insurance fund. The mortgage would only cover 80 percent of the value of the property, so the first 20 percent of losses strike the owner’s equity. The next 10-to-15 percent of losses strike B-piece investors. The next 10 percent of losses strikes that lender’s risk-based capital. The next 5 percent would hit the insurance fund. So a foreclosed property would have to lose half its value before the taxpayer was at risk. Foreclosed multifamily properties sell for more than 80 cents on the dollar, according to Cardwell.

Several senators, Republican and Democrat, pointed out that Fannie and Freddie multifamily sections did not suffer high losses from delinquencies even in the financial crisis.

Once reform became law, the two divisions would submit capitalization plans to the federal regulator, which would then organize the sale of the two companies. The regulator would then create rules to allow new private companies to compete with the privatized multifamily divisions of Fannie and Freddie

Differences in the proposals for GSEs center around how much the government should ask of the new, privatized Fanne Mae and Freddie Mac multifamily divisions.

Enterprise Community testified that they should by required to make significant investments in housing that is affordable to low-income people. NMHC argued that requirements on the new entities should be kept to a minimum—they might make it difficult to bring private investment to the companies. “We think that investors are not going to invest in a mono-line company with all these requirements,” says Cardwell.


It’s likely that the Senate Banking Committee will eventually pass a reform bill with strong bi-partisan support. “They tend to present bills that they know will achieve a unanimous or close to unanimous vote in committee,” says Cardwell. It’s still possible that the broader Senate will pass a reform bill before the end of the year—but not tremendously likely. “That would be a huge Christmas present.”

Even if that happens, there no guarantee that the much more fractious House of Representatives will take up GSE reform before the mid-term elections freeze action in Congress. “I still think we’ll have to wait until 2015,” says Cardwell. However, the work being done now is meant to form the foundation of reform of the GSEs, whenever it happens.

This article was republished with permission from National Real Estate Investor.


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