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The End of GSE’s: How will mortgage markets be affected?

Finance & Commerce reported on Friday that S&P will downgrade Fannie Mae and Freddie Mac credit if no agreementgse 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.

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