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Need for Government Guarantee in GSEs’ Multifamily Business

Without a government guarantee, ""Fannie Mae's"":http://www.fanniemae.com/portal/index.html and ""Freddie Mac's"":http://www.freddiemac.com/ multifamily businesses would be less viable and ""have little inherent value,"" according to the ""Federal Housing Finance Agency (FHFA),"":http://www.fhfa.gov/ the entities' conservator.


As the FHFA works toward its goal of winding down the GSEs' presence in the market, the conservator required each GSE to determine whether its multifamily business could operate without a government guarantee.

Both GSEs suggest without a government guarantee, their multifamily units would not be able to support affordable housing programs.

Fannie Mae said its multifamily business ""could be a viable stand-alone entity operating without a government guarantee--at least in the short run"" and given certain ""optimistic assumptions"" about the market.

However, ""even a mild downturn with increased credit losses and higher funding costs could weaken NewCo's capital position sufficiently to raise concerns about its ability to continue to operate,"" Fannie Mae stated in its ""report."":http://www.fhfa.gov/webfiles/25160/FNMMF2012ScorecardResponse.pdf

Additionally, taking a government guarantee out of the multifamily market ""would have serious negative consequences"" for lenders, borrowers, and renters, especially those relying on or participating in affordable housing programs, according to Fannie Mae.


Freddie Mac's ""report"":http://www.fhfa.gov/webfiles/25161/FREReport_MF_MarketAnalysis.pdf found similar results regarding its multifamily business. Without a government guarantee, Freddie's multifamily unit would be smaller, and its ""support for certain kinds of affordable housing would be diminished,"" according to the GSE.

""Our findings suggest a negative impact on the market,"" Freddie Mac stated in its report, ""in which there likely would be a funding gap between market needs for multifamily debt financing and available resources.""

Because the GSEs interact with the multifamily market in a much different way than the single-family market, ""FHFA determined that the goal of contracting Fannie Mae and Freddie Mac's overall market footprint should be approached differently with respect to their multifamily business,"" FHFA stated in a ""press release"":http://www.fhfa.gov/webfiles/25162/PRMF050313final.pdf Friday.

Not only are the GSEs' footprints in the multifamily market much smaller, but also multifamily loans are larger and most involve risk-sharing with private capital.

Were the GSEs to sell their multifamily businesses, the GSEs concluded the companies would function as ""monocline niche specialty finance companies with a focus on non-prime lending and secondary and tertiary market transactions.""

Their costs would be higher, which would impact their ability to contribute to affordable housing in the multifamily sector.

*_Correction: This article previously stated that FHFA concluded that the companies would function as ""monocline niche specialty finance companies with a focus on non-prime lending and secondary and tertiary market transactions."" That information was attributed incorrectly. The conclusion came from Fannie Mae and Freddie Mac._*


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