Whither Fannie Mae?
Tom Acitelli Sept. 15, 2009, 3:33 p.m.
Editor’s note: The Lead Indicator is a new weekly column in the Commercial Observer by economist Sam Chandan of the Wharton School. This is the first column.
In New York City and across the country, multifamily and commercial real estate investment activity has plummeted since the onset of the credit crisis. The absence of an independently functioning securitization market and banks’ unremitting tightening of lending standards have robbed investors of low-cost credit’s vital spark. In their stead, a paucity of credit has sundered buyers’ and sellers’ gauges of value.
The bid-offer spread that can narrow almost instantly in a liquid securities market has resisted closing in the less efficient arena of commercial real estate. Real Capital Analytics reports that, amid this environment of patient buyers and willful sellers, transaction volumes have fallen to their lowest levels in 18 years and are rising only gradually from the trough earlier this year. In the face of the market’s cooling, delinquencies and defaults have necessarily grown in number and severity.
While private capital flows to commercial real estate have ebbed, the resulting strains on apartment investors have been tempered by the intercession of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.
Known commonly for their shared role in facilitating single-family homeownership, both Fannie Mae and Freddie Mac are also crucial sources of liquidity for the multifamily market. Through programs including Fannie Mae’s Delegated Underwriting and Servicing, private lenders are able to make mortgages in risk-sharing partnership with the larger enterprises.
As of the second quarter, Fannie Mae’s multifamily book of business was $177 billion, up 12 percent from a year earlier. The serious delinquency rate for Fannie Mae’s multifamily loans was just 0.5 percent; Freddie Mac reported a multifamily delinquency rate of just 0.2 percent. As other sources of credit have vanished, these quasi-governmental institutions have evolved into the keystones of apartment mortgage financing. Together, the GSEs accounted for 34 percent of multifamily activity in 2006. In 2008, that share had grown to 84 percent.
Notwithstanding their importance, Fannie Mae’s and Freddie Mac’s continued participation in the multifamily market is not assured. Rather, the old consensus around the fundamental role of the GSEs in the nation’s mortgage markets has been upended by the housing crisis.
In the minds of many policy makers and politicians, both firms are culpable, at least in part, for the inflation of the housing bubble and its painful aftermath.
But it is at the intersection of policy and politics that the future of these institutions will be determined, as both now operate under the full purview of the government. The Department of the Treasury and the Federal Housing Finance Agency (FHFA) announced last September that Fannie Mae and Freddie Mac were being placed under the conservatorship of the FHFA. The FHFA’s assumption of operational control of the GSEs followed a protracted period of stress in secondary mortgage markets and a government review of both institutions’ prospective financial health.
In explaining the decision to assume control, former Treasury Secretary Henry Paulson and the former director of FHFA, James Lockhart, cited the impact of deteriorating mortgage performance on the GSEs’ earnings, capital and capacities to meet their policy goals, as well as threats to broader economic and financial market stability stemming from the potential for additional losses at the two firms.
These losses have been prodigious. On account of their net worth deficits, both Fannie Mae and Freddie Mac have received billions of dollars in funds from Treasury to avoid receivership.
The future of the GSEs is unclear. For the time being, they are playing a vital policy role in stabilizing single-family and multifamily housing markets. Administrators have offered assurances that the multifamily lines of business remain integral to Fannie Mae’s and Freddie Mac’s missions.
In a July 30 address before the National Press Club, Mr. Lockhart said that the GSEs must “continue to buy and guarantee single-family and multifamily mortgages in a safe and sound manner. … The Enterprises are working to stabilize the multifamily market by keeping it liquid, supporting affordable rental housing, and keeping to clear and consistent credit principles.” But he added that “the old hybrid model of private, for-profit ownership underwritten by an implicit government guarantee” was no longer tenable.
Any substantive effort to alter the relationship of the GSEs to its regulator and guarantor implies that fundamental reform is in the offing.
The White House has indicated that it will address the issue of Fannie Mae’s and Freddie Mac’s future structure with the next fiscal year budget proposal to Congress in February 2010. In the meantime, what shape the GSEs will take and what their role in the multifamily market will be are unknowns.
The U.S. Government Accountability Office issued its options assessments on Sept. 10. One option presented in the report “would abolish the enterprises in their current form and disperse mortgage lending and risk management throughout the private sector.” While uncertainties abound in the current environment, we can be sure that an abrupt withdrawal of the GSEs from the multifamily market will constitute a destabilizing shock to liquidity.
Sam Chandan, Ph.D., is president and chief economist of Real Estate Econometrics and an adjunct professor of real estate at the Wharton School.