As private capital scrambles back to the perch in the housing market, your friendly neighborhood GSE is about to change its lending patterns to multifamily property. And it won’t result in more GSE capital in the market.
The Federal Housing Finance Agency (FHFA) outlined 2013 goals for Fannie Mae and Freddie Mac earlier this month that aim to lower the exposure the GSEs have to the national housing finance system. While most of the direct regulations are aimed at the single-family financing system, the multifamily sector needs to look closely at provisions in the regulation that affect multifamily.
When the FHFA says it intends to “contract the [GSE]s dominant presence in the marketplace while simplifying and shrinking certain operations (by lines of business) – 50 percent weight” it specifically means aims to reduce the unpaid balance amount of new multifamily business relative to 2012 by at least 10 percent.
This will be accomplished by “tightening underwriting, adjusting pricing and limiting product offerings, while not increasing the proportion of the Enterprises’ retained risk. (Reductions between 0 and 10 percent will receive partial credit.)”
The National Multi Housing Council is among the protestors over this regulation and its “arbitrary caps” and potential “restrictions in product lines”. But the moves are essential to the restoration of balance to the financing markets, says FHFA Acting Director Edward J. Demarco. In remarks to the National Association for Business Economics Policy Conference, Demarco said:
Unlike the single-family credit guarantee business, the Enterprises have a smaller market share and there are other providers of credit in the multifamily market. The Enterprises’ market share of new multifamily originations did increase during the financial downturn, but in 2012 it returned to a more normal position.
Another difference from the single-family business is that each Enterprise’s multifamily business has weathered the housing crisis and generated positive cash flow. In contrast to their common approach to their single-family businesses, Fannie Mae and Freddie Mac do not take the same approach to their multifamily businesses. Each approach also already embeds some type of risk sharing. For a significant portion of its business, Fannie Mae shares multifamily credit risk with loan originators through its delegated underwriting program. For a significant and increasing portion of its business, Freddie Mac shares multifamily credit risk with investors by issuing classes of securities backed by multifamily mortgages where the investor bears the credit risk. Given that the multifamily market’s reliance on the Enterprises has moved to more normal range, to move forward with the contract goal we are setting a target of a 10 percent reduction in multifamily business volume from 2012 levels. We expect that this reduction will be achieved through some combination of increased pricing, more limited product offerings, and tighter overall underwriting standards.
Bottom line: as the markets continue to normalize, watch for the measured retreat of the GSEs from the markets that drew them in so deeply and so dangerously. And watch as multifamily too feels the weight of the changes.