While 54.85 percent of rental units are in buildings that have four units or less, 45.15 percent of rental units are in multifamily buildings. Thus, housing finance reform should also address units in buildings that have five units or more. The Housing Commission suggests establishing “a new catastrophic guarantee for multifamily finance predicated on the same principles as proposed for single-family finance” (p. 72). More specifically, the Housing Commission suggests the following points: • The Public Guarantor should be charged with and authorized to provide catastrophic risk insurance for multifamily commercial mortgage-backed securities (CMBS) in return for an explicit and actuarially sound premium charged to issuers, which is designed to cover losses (after private risk-sharers absorb predominant losses) as well as the operating expenses of the Public Guarantor; • Private firms should be the originators, servicers, credit enhancers, and issuers of multifamily mortgages and CMBS with the government backstop of MBS limited to an explicit catastrophic guarantee. The issuer/servicers and credit enhancers should be monoline entities to ensure that the capital they have is protected against other uses; and • The interests of the Public Guarantor and its private-sector counterparties should be aligned as much as possible. (p. 72)72
Recently, the Federal Housing Finance Agency (FHFA), the regulator of Fannie Mae and Freddie Mac, requested both enterprises to analyze the viability of their multifamily business absent a government guarantee. Both reports conclude that without this government guarantee, “the multifamily business of Fannie Mae and Freddie Mac have little inherent value. The reports further concludes that the sale of these businesses would return little or no value to the U.S. Treasury and to taxpayers.” (n.p.)73 The assessment that “the multifamily business of Fannie Mae and Freddie have no inherent value” seems to be at odds with the facts. The government guarantee provides liquidity to the U.S. rental market that will lead to an increased number of rental units, an increased number of rental units that are better maintained, and rents that are either more stable or potentially even lower. Also, the government guarantee would provide a countercyclical role, keeping money flowing in the rental housing finance market during times when investors hold back. In 2007, for example, just prior to the economic crises, the GSEs provided the infrastructure for less than 30 percent of multifamily loan originations, while by 2009, in the midst of the economic crises, they provided assistance for 85 percent of these originations. Furthermore, the multifamily business has been both low-risk and profitable for the GSEs, including the taxpayer. 74 Interestingly, the FHFA very recently suggested reducing the amount of the unpaid principal balance relative to 2012 “by at least 10 percent by tightening underwriting, adjusting pricing and limiting product offerings, while not increasing the proportions of the Enterprises’ retained risk.” (p. 2)75 The current discussions on multifamily housing finance reform occur during a time frame when nominal and real rents have increased while household incomes for most households have lagged 72 Housing Commission (2013). 73 Federal Housing Finance Agency (2013, May 3). FHFA Releases Fannie and Freddie Reports on Viability of Their Multifamily Businesses without Government Guarantees. Washington, DC: Federal Housing Finance Agency. http://www.fhfa.gov/webfiles/25162/PRMF050313final.pdf 74 A. Jakabovics and J. Griffith (2013, May 8). America’s Renters Need a Government Guarantee. American Banker. http://www.americanbanker. com/bankthink/americas-renters-need-a-government-guarantee-1058931-1.html?zkPrintable=true 75 Federal Housing Finance Agency (2013). Conservatorship Strategic Plan: Performance Goals for 2013. Washington, DC: Federal Housing Finance Agency. http://www.fhfa.gov/webfiles/25023/2013EnterpriseScorecard3413.pdf
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