The Fannie Mae-Freddie Mac “escape plan” has been heralded by many politicians as the only answer to the nation’s current housing woes. However, in the process of dismantling the government-controlled GSEs, the U.S. Treasury Department could end up removing one of the market’s most beneficial and successful insurers of multifamily property from the market. Affordable housing advocates like the National Multi Housing Council (NMHC) are responding to last Friday’s exit scenarios from the Obama administration with concern and dismay, expressing a desire for the administration to “exercise caution when outlining reforms that could impact the GSE’s ability to insure multifamily loans”[1].
The NMHC points out that Fannie and Freddies’ multifamily loan programs have a default rate of less than one percent. In fact, “they actually produce net revenue for the U.S. government [and] pose no risk to the taxpayer,” the council stated. Critics of the GSEs, however, believe that while there is no multifamily loan problem now, allowing the GSEs to continue to insure loans “at rates which are not in line with real market prices” creates an “uncommon risk” for taxpayers in any scenario.
In 2010, Fannie and Freddie made more than 60 percent of all multifamily loans in that year, while in 2009 the GSEs did more than 80 percent of this type of lending[2]. Tom Musil, a finance professor at the University of St. Thomas in St. Paul, Minnesota, fears that the “underserved markets” in multifamily housing could suffer, with rental and affordable housing ending up overlooked.
Do you think that Fannie Mae and Freddie Mac should be allowed to continue to dominate multifamily housing? How should this problem be resolved if the GSEs are ultimately removed from the equation completely?
Thank you for reading the Bryan Ellis Real Estate Letter!
Your comments and questions are welcomed below.
[1] http://www.housingwire.com/2011/02/14/rental-advocates-hope-fannie-freddie-multifamily-financing-holds-up
[2] http://finance-commerce.com/2011/02/fannie-freddie-reforms-could-threaten-rental-market/
I am one who believes that what should be will eventually be. If it’s true that multi family properties have a default rate of under 1%, then the free market will supply a solution. The main reason GSEs dominate the market is the same reason they dominate every market they want; pricing. If they step aside, rates will increase but the product will be there.