SECONDARY MORTGAGE MARKET FOR MULTIFAMILY AND THE RECENT JOHNSON-CRAPO GSE REFORM PROPOSAL

By Toner, Mike
Proquest LLC

While discussions on government-sponsored entities (GSEs), specifically, Fannie Mae and Freddie Mac, usually focus on their involvement in the single-family secondary mortgage market, their role in the multifamily secondary market may seem overlooked, since multifamily loans have performed relatively well, even throughout the economic downturn. Freddie Mac's delinquency rate was nine basis points as of December 31, 2013, and since 2008, delinquency rates peaked for Fannie Mae at around 80 basis points in the first quarter of 2010.

However, the GSEs involvement in the secondary mortgage market is still significant. In 2013, Freddie Mac provided financing for almost 1,600 properties totaling approximately 388,000 apartment units. In addition, in 2013, Freddie Mac Multifamily funded $25.9 billion in new business volume, along with Fannie Mae providing $28.8 billion in financing to the multifamily market.

IREM adopted a statement of policy in April of 2011 on the secondary mortgage market, in which we recognize the role of the secondary mortgage market in providing stability for the multifamily housing market. Moreover, GSEs have provided liquidity in the multifamily housing market and enabled housing providers to keep up with demand for rental housing.

The need for GSE reform legislation has been a persistent topic of debate since 2008, and recently there have been several proposals in Congress which attempt reform. Chairman of the House Committee on Financial Services Rep. Jeb Hensarling (R-TX) introduced the PATH (Protecting American Taxpayers and Homeowners) Act, which lacks an explicit federal guarantee for the mortgage market.

Also, Sens. Bob Corker (R-TN) and Mark Warner (D-VA) introduced the Housing Finance Reform and Taxpayer Protection Act, which, like the PATH Act, would seek to wind down Fannie Mae and Freddie Mac, and, unlike the PATH Act, would create a federal backstop in the form of the Federal Mortgage Insurance Corporation (FMIC).

Another recent Senate proposal from Sens. Tim Johnson (D-SD) and Mike Crapo (R-ID) builds on the Corker-Warner proposal by addressing the secondary mortgage market for multifamily, and distinguishes it from the single-family market. Johnson-Crapo would establish an Office of Multifamily Housing within the FMIC, and would require Fannie Mae and Freddie Mac to separate their multifamily businesses into subsidiaries within one year, with the intent of these subsidiaries ultimately becoming stand-alone businesses.

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Debate on the Johnson-Crapo bill has been delayed, and there appears to be very little chance of it, or any major GSE reform bill, passing both chambers of Congress anytime soon. There are still dramatically differing visions on what reform should look like, particularly between Rep. Jeb Hensarling's PATH Act, and the Senate proposals, and with midterm elections approaching in November, the political will for a major reform likely is not in the cards anytime soon.

MIKE TONER (MTONERaIREM.ORG) IS GOVERNMENT AFFIARS LIAISON FOR IREM HEADQUARTERS IN CHICAGO.

Copyright:(c) 2014 Institute of Real Estate Management
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