GSE Multifamily Housing Finance Reform

Background

Comprehensive reform of Fannie Mae and Freddie Mac (the GSEs) remains the final piece of unfinished business from the financial crisis. Policymakers still need to establish a new system that sustainably fulfills the critical secondary mortgage market functions historically performed by the GSEs, but must do so with a more appropriate balance of public/private capital and risk. Because the GSEs currently play an important role in multifamily housing finance, any reform effort will have far-reaching impacts. Multifamily rental housing is a critical part of the U.S. housing market and is vital to our communities. More than one in three American households rents their home, and about 18 million households live in multifamily rental housing (i.e., developments with five or more units). This broad market includes workforce rental housing, seniors housing, student housing, rental properties that primarily serve low- and moderate-income families, and market rate rental housing. Importantly, multifamily rental housing provides affordable housing; rents on over 90 percent of multifamily rental apartments are affordable to households earning area median incomes or less.

MBA Policy Principles

Recognizing the unique attributes of the multifamily market and the important roles that the GSEs historically have played in multifamily mortgage financing, MBA recommends that Congress and other policy makers apply the following principles as they shape the vision of a post-GSE secondary mortgage market:

(1) Any reform efforts should consider and address potential impacts on multifamily housing finance

While much of the attention around GSE reform efforts focuses on the secondary market for single-family mortgages, it is critical to also thoughtfully consider and address impacts on multifamily mortgage financing. There are many non-GSE capital sources that finance the multifamily housing market, including Federal Housing Administration's (FHA) multifamily programs, commercial banks, life insurance companies, commercial mortgage-backed securities (CMBS) issuers, REITs, pension funds, and others. However, the GSEs have historically played an extremely important role. For example, while all sources play an integral role in supporting the multifamily market, when most private capital sources exited the multifamily finance market during the economic downturn, the GSEs (and FHA), with their government backing, continued to provide liquidity during this period of unprecedented market disruption. Any reform effort should result in a system that can perform a similar function.

(2) Our nation's multifamily housing finance system should rely on private capital

Private capital should be the primary source of financing for multifamily rental housing. MBA supports reforming the housing finance market to allow equal and direct access to GSE multifamily finance programs regardless of the size or business model of the private capital source. Government policies and reform legislation should maintain this focus on primarily private capital sources and their access to the secondary market.

(3) End-State marketplace should have multiple, competitive privately owned guarantors

MBA supports an end-state comprised of multiple private guarantors. These guarantors should be organized as privately owned utilities with a regulated rate of return. They should have a public purpose of providing sustainable credit availability to the conventional mortgage market. Guarantors would also be responsible for executing on an affordable housing strategy to ensure broad access to credit, preserve and develop affordable housing options, and address underserved markets.

(4) Past experience shows that the federal government is the only entity that can ensure the availability of liquidity in all market cycles

Explicit guarantees of timely principal and interest payments, provided by the federal government, are critical to maintaining liquidity in the market in the event of a crisis. MBA supports an explicit government guarantee on the multifamily mortgage-backed securities issued by any successors to the GSEs, however, this guarantee should not extend to those entities themselves or their debt.

(5) Taxpayers and the mortgage finance system itself should be protected through a strong regulatory framework and multiple layers of private capital

Taxpayers should be protected through multiple layers of private capital, including minimum underwriting criteria that include requirements such as equity in the multifamily property; risk-sharing; strong regulatory capital requirements for any successors to the GSEs; and an actuarially sound Mortgage Insurance Fund capitalized by risk-based premiums paid by participating firms. Government support should come into play only in the event of systemic crisis or other event, when all layers of private capital have been exhausted.

(6) Policy makers should leverage and preserve the value of existing resources during the transition to an overhauled housing finance system

Given the significant roles the GSEs play in the multifamily market, their infrastructures, capacities and resources should be managed to avoid disrupting capital flows, ensure an orderly transition to a new housing finance system, and preserve their value. As a part of that, MBA supports the preservation of existing multifamily financing executions, as well as the development of new options. Prudent management of existing multifamily mortgage portfolios is important due to its quality and positive cash flow, so any transition to a new end-state should refrain from actions that could disrupt capital flow or jeopardize the strength of the GSEs' platforms in multifamily finance. As policymakers turn to draft legislation about the future of the government's role in multifamily housing finance, it is vital they ensure that capital continues to be available to support this essential source of housing. For more information, please see MBA's white paper, Creating a Sustainable, More Vibrant Secondary Mortgage Market, at: https://www.mba.org/assets/Documents/Policy/17305_MBA_GSE_Reform_Paper.pdf.

Updated April 2017