March 26, 2019

Preparing for Housing Finance Reform Hearings: A Multifamily Data Update

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Today and tomorrow the Senate Committee on Banking, Housing, and Urban Affairs will hold hearings to discuss the outline Chairman Mike Crapo (R-ID) has developed for legislation on housing finance reform. This blog looks both at the proposal and data about the current multifamily housing mortgage market, including for affordable housing.  

That outline, released early last month, would convert Fannie Mae and Freddie Mac (collectively, the government sponsored enterprises, or GSEs) into private guarantors of mortgage-backed securities (MBS) that would then be sold through a platform operated by Ginnie Mae. The new MBS would carry an explicit full-faith and credit guarantee from the federal government that would be paid for by the GSEs and by any other guarantors who enter the market later. 

Unfortunately, as previously noted, the proposal would replace guarantors’ specific commitments to support affordable housing and underserved markets with a new Market Access Fund that would likely be used primarily for downpayment assistance and interest-rate buydowns for homeowners. This would be a significant departure from the GSEs’ current affordable housing goals and duty to serve obligations and from reform legislation that passed out of the Banking Committee on a bipartisan basis in 2014.

While the hearing will likely primarily focus on the single-family mortgage market, maintaining reliable sources of long-term, fixed-rate debt for multifamily properties is crucial to allow owners and developers of those homes to keep costs low and rents affordable. We have long argued that any reform to the housing finance system must preserve the GSEs’ multifamily businesses while ensuring that those businesses continue to focus on affordable rental housing. Sen. Crapo’s outline stipulates they would be sold off from their parent corporations and operated as independent guarantors. However, it offers no indication of whether the risk-sharing structures currently found in GSE multifamily securities would change (currently, Fannie Mae splits losses equally with the lender, while Freddie Mac sells off the top 15 percent of losses to investors before guaranteeing the rest) or whether access to the Ginnie Mae backstop for multifamily would be priced differently from single-family MBS, given the very different risk profile of the two business models.

The following data helps frame upcoming discussions of the role of the GSEs in the multifamily mortgage market and their support for affordable rental housing in particular. 

Figure 1 Multifamily Debt Outstanding

Source: Fannie Mae, Multifamily Mortgage Business Information

As Figure 1 shows, the total amount of multifamily mortgage debt outstanding has nearly doubled since 2006, standing at nearly $1.4 trillion at the end of the third quarter of 2018. Note, however, that much of the growth has taken place in the past five years, as new multifamily construction picked up after several very weak years coming out of the Great Recession. 

Between 2009 and 2016, the GSEs combined for roughly a one-third share of outstanding debt (between 31 and 35 percent). In the past two years, however, their share has approached 39 percent. Much of this relative growth can be attributed to Freddie Mac: between 2013 and 2018, its outstanding debt doubled, while Fannie’s debt grew by a little more than half. 

Figure 2, below, demonstrates the annual share of origination activity of various channels. Note that while the GSEs’ share has grown recently, their role in the market has ebbed and flowed over time, peaking at 59 percent at the height of the Great Recession and dipping to a low of 28 percent in 2013. 

Figure 2 Annual Multifamily Originations


The argument for keeping the GSEs’ multifamily businesses intact (but potentially under new ownership or a new corporate structure) rather than winding them down only to stand up new guarantors to fulfil the same function under a reformed housing finance system stems partly from their performance during the housing crisis; at no point did 60-day delinquency rates rise above 0.7 percent in any year, a fact attributable in part to prudent underwriting and risk-sharing with private investors. 

Figure 3 Multifamily Serious Delinquency Rates

Source: Fannie Mae, Multifamily Mortgage Business Information

Finally, a focus on affordability must remain paramount in any reformed housing finance system, but delivering necessary capital to support affordable rental homes is critical. To ensure the GSEs deliver on that stated mission, they have performance obligations in the form of affordable housing goals set by the Federal Housing Finance Agency for both single- and multifamily activities. The GSEs have met their statutory requirements for the low-income and very low-income multifamily goals every year since 2010, when the current goals regime was implemented. The figures are set by benchmark rather than as a share of overall market activity, which explains how the GSEs have been meeting their obligations even as the share of units affordable to families below 80 percent of area median incomes has declined as a percentage of total units financed. (Preliminary data for 2017 shows that almost half the GSEs’ lending went to units affordable only to renters earning above 80 percent of area median income.) The Housing and Economic Recovery Act of 2008 allows FHFA to set the affordable housing goals by either unit counts or loan volumes; reform might allow a future regulator to use both a unit count and percentage of volume to ensure that capital continues to flow to support rental units affordable to low- and very low-income renters. 

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