Finance & Commerce reported on Friday that S&P will downgrade Fannie Mae and Freddie Mac credit if no agreement is reached to raise the borrowing limit for the US government. With Fannie and Freddie owning or guaranteeing nearly half of all mortgages, and taxpayers having spent $150 billion to bail out these government-sponsored enterprises, it’s critical that proper steps are taken to minimize the impact on the economy and housing market when these agencies are eventually phased out.
Opinions vary greatly among those in real estate as to whether privatization of the secondary mortgage market is a realistic goal. Eduardo Padilla, CEO of Northmarq Capital, cautions:
“The private sector does not have the capacity to replace the $324 billion portfolio of fixed-rate mortgage capital for multi-family rental properties held or sponsored by the GSEs and related agencies.”
Padilla emphasizes that while many are focused of the effect of these changes on single-family home buyers, multi-family property investors rely on the stability of the financing products offered by GSE’s, especially when the market is turbulent. “A critical component of every apartment investment is consistently available fixed-rate mortgages.” Padilla attributes Fannie & Freddie’s less than 1 percent multi-family rental delinquency rate (compared to a 15.7% delinquency rate in the CMBS market for the same property type) to the standards and management of the professionals who run the GSE’s, many of whom have recently stepped down.
Dr. Tom Musil of the University of St. Thomas is especially concerned about the implications for affordable and senior housing. In a letter to the Minnesota Real Estate Journal, Dr. Musil explained:
“Fannie and Freddie have played a valuable role in providing mortgage funding for investment and development of the nation’s 17 million multifamily rental housing units. Fannie and Freddie’s performance in rental and senior housing finance has been substantially superior to their private sector counterparts. If we look at the most recent period when the housing market collapsed and private sector lenders turned away from investment in multifamily rental mortgages, Fannie and Freddie remained active.”
Single-family lending regulations have also been changing continuously. This past week the maximum single-family home mortgage amount backed through GSE’s was reduced from $729,750 to $625,500, which may effectively increase the cost of jumbo home loans. However, considering that mortgage rates for conventional loans are near historic lows, around 4.5% for a 30-year fixed-rate loan, some economists doubt that these changes and the eventual elimination of GSE’s will have a significant impact on the overall housing market.
While phasing out Fannie and Freddie seems inevitable, the question that remains is how to properly accomplish this task. Some lawmakers have proposed to establish a replacement entity for the GSE’s that would buy mortgages, package them, and sell bonds to investors, while still being guaranteed by the government. Others believe that a rapid dissolution of GSE’s will revive the secondary mortgage market and have no long-term implications. The common goal shared by proponents on both sides is to ensure that capital continues to flow so that the already fragile housing market is not adversely affected.
According to the National Association of Realtors, the Housing Finance Reform Act of 2011, introduced in May, would take a comprehensive approach to reforming/dissolving Fannie Mae and Freddie Mac. The strategy would place at least 5 private firms in charge of prime mortgages and the bonds would continue to have a federal guarantee.
Ron Phipps, President of NAR, stated that “NAR opposes the piecemeal approach of recent proposals that would quickly constrain or shut down existing secondary mortgage market facilities before identifying a viable replacement that would allow securitization to function under all market conditions. We believe that a fully private system is not a viable or sustainable alternative to the existing housing finance system and will severely restrict mortgage capital, raise costs for qualified, creditworthy homebuyers, and place taxpayers at greater risk as too-big-to-fail government-backed financial institutions dominate the market.”