Fannie and Freddie Phase Out ‘Shocking,’ Real Estate Experts Say


Despite their surprisingly rapid recovery five years after being placed into government conservatorship, Fannie Mae (FNMA) and Freddie Mac (FMCC) will be dissolved, if bi-partisan legislation announced today by the Senate banking committee eventually passes.

Under the bill, private capital would have to take the first 10 percent of all mortgage losses, effectively removing much of the firm federal backing that mortgage-backed securities repackaged by Fannie and Freddie have enjoyed.

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Fannie Mae Headquarters
Fannie Mae Headquarters

The change represents a significant scale back of the government’s role in real estate finance.

In place of the government-sponsored enterprises, a Federal Mortgage Insurance Corp.–an entity similar to the Federal Deposit Insurance Corp.–will be formed. It is intended to ensure that financing remain available to all qualified borrowers. The FMIC will generate funds through user fees of 10 basis points per transaction, instead of using tax dollars.

“Government control of Fannie and Freddie with no private capital to protect taxpayers against losses is unacceptable,” Idaho Senator Mike Crapo said in a press release Tuesday morning.

The goal of the bill, more detail on which will be available later this week, is to eliminate Fannie and Freddie entirely, the statement said. The reform will “move us toward a stronger housing system that provides a balance between providing broad access to mortgages,” and avoiding future bailouts, according to Mr. Crapo.

The announcement was a surprise, even for close observers of real estate finance and policy, said Martin Schuh, vice president of regulatory policy at the commercial real estate finance council, a trade group. He was present at a briefing by the banking committee this morning in Washington D.C.

“This one caught everyone off guard,” he said. However, “the five years is pretty aggressive,” as a timeframe to wind down the multi-billion dollar enterprises, he warned.

His group was pleased that the bill will aim to treat Fannie and Freddie’s multifamily business as distinct from their single-family financing arms and will likely sell it off. “They specifically said they want to spin off [the multifamily] platforms… I see [the multifamily component] being attractive to investors tomorrow,” Mr. Schuh said.

Not everyone was quite so effusive.

“Today is a bad day,” Robert Ivanhoe, head of the real estate practice at Greenberg Traurig, told Mortgage Observer via email. “I am sure many people in the real estate industry are concerned about the winding down of the largest source of liquidity for multifamily apartment properties, by far, and how they will be financed in the future.” He predicted the change would destabilize the multifamily sector.

The bill does have bipartisan support. The unfortunately named Crapo teamed up with Democrat and banking committee chair Tim Johnson to craft the proposed legislation. But numerous sources said they do not expect the bill to make it through the House in its current form.

“I don’t think it survives much past this congress,” said Mr. Schuh. “But the important thing is that this is where all the future discussions will start.”

Recently published calculations from the Office of Management and Budget said the GSEs were on course to return $179 billion in profits to taxpayers in the next decade, if allowed to continue operating in conservatorship, making the attack on the agencies today even more surprising.

“There is near unanimous agreement that our current housing finance system is not sustainable in the long-term and reform is necessary to help strengthen and stabilize the economy,” Senator Johnson said in the joint statement. But industry experts told Mortgage Observer that GSE reform was “presumed dead.”

Rick Lazio, former U. S. representative and real estate attorney with Jones Walker, agreed that the bill was a good starting point but would likely not make it into law intact. But he disagreed that the bill was a boon to the multifamily lending climate.

“Multifamily lenders overwhelmingly like the programs as they exist now,” he said. “They never lost a dime even through the worst of the downturn.”

Now, they will lose their federal guarantees, for the most part, even though their business was not what caused Fannie and Freddie to fall back on the government’s coffers.

The new rules would allow private label securities to be issued — with the goal of improving liquidity — but those will have lighter government backing, which kicks in only after the private originator has taken the required 10 percent loss. The securities would be sold via a unified platform and buyers would pay “risk-adjusted” prices for them, Mr. Lazio said.

“There will continue to be a federal role in multifamily lending,” Mr. Lazio said, but “there will be a limited guarantee.”

A representative for Fannie Mae said that due to the terms of their conservatorship, they could not comment on pending legislation.