The Impact Of Freddie Mac And Fannie Mae Reform On Multifamily Lending

Congress may actually pass legislation this spring to break up mortgage giants Fannie Mae and Freddie Mac. “We have a chance to bring this across the finish line,” …

Congress may actually pass legislation this spring to break up mortgage giants Fannie Mae and Freddie Mac.

“We have a chance to bring this across the finish line,” Shaun Donovan, Secretary of the U.S. Department of Housing and Urban Development, told the audience at an event hosted by the Bipartisan Policy Center and the New York University Robert F. Wagner Graduate School of Public Service on April 22 in New York City.

Even if Congressional dysfunction stops progress again, Senate negotiations on Fannie Mae and Freddie Mac have finally produced a clear, bipartisan consensus on what housing finance reform should look like, in particular for multifamily housing. The Senate Banking Committee is now considering a bill that would preserve the liquidity that Fannie Mae and Freddie Mac currently provide to the multifamily housing business.

That proposal now has enough sponsors and co-sponsors to pass the Banking Committee. Reform advocates are still working to get a few more votes for the bill before sending it to markup. They hope that if the bill passes with a strong majority from the Banking Committee, Senate leaders might be compelled to bring the bill for a vote before the full Senate. If the bill passes the Senate, the House of Representative might consider it.

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The further the proposal gets in Congress, the more it will define the terms of the discussion of how Fannie Mae and Freddie Mac will be reformed—even if the reform effort stalls out this spring. “It’s important to get consensus around as many parts of the bill as possible,” says David Cardwell, vice president of capital markets with the National Multi Housing Council.

The Johnson-Crapo bill proposes replacing Fannie Mae and Freddie Mac, government-sponsored enterprises (GSEs) responsible for securitizing single-family and multifamily home loans, with a new and independent federal agency called the Federal Mortgage Insurance Corp. (FMIC).

This proposal has been under discussion by the Banking Committee for about a year. Recently, the proposal has begun to address the multifamily housing business more explicitly. “It’s much more baked,” says Cardwell. Fannie Mae and Freddie Mac’s multifamily platforms would be kept alive as new subsidiaries spun off from the two mortgage giants. The bill also proposes creating a multifamily office within the FMIC that would insure mortgage-backed securities issued by these subsidiaries or new private multifamily bonds issuers. Student and seniors housing finance would continue to be eligible activities for the new, limited government guarantee.

“The bill preserves the liquidity provided by the GSEs,” says Cardwell. “Everyone is generally pleased with it,” says David Cardwell. “The response from member of Congress and the members of the industry has been positive.”

The final impact for multifamily borrowers might be slightly higher interest rates for multifamily loans provided under the new FMIC loans that would replace the Fannie Mae and Freddie Mac program loans.

"The impact would be moderate,” says Tad Philipp, director of commercial real estate research for Moody’s Investors Service. “U.S. government backing for multifamily debt that had been implicit and free would become explicit and bear a guarantee fee. While GSE-backed multifamily debt often had pricing advantages relative to private market debt, loan spreads on FMIC-backed debt would more closely align with those of private market originators.”

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


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