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Uncertainty Hangs Over GSE Reform

While Congress seeks to dismantle Fannie and Freddie, investors ponder the role of debt in housing.

If the noise emanating from Capitol Hill over the housing finance system were an indicator of legislative progress, one might believe reform is imminent. The House of Representatives has conducted no less than six hearings on the government-sponsored enterprises (GSEs) of Fannie Mae and Freddie Mac in the past six months.

In April, a key House subcommittee passed eight Republican-sponsored GSE bills. In May, House Republicans introduced seven more. The measures would effectively eliminate Fannie and Freddie in a piecemeal fashion, without creating anything to replace them.

Although the bills largely target the single-family businesses of the GSEs, they could have unintended consequences for multifamily if enacted.

Another House GOP bill would completely privatize the housing finance system. A bipartisan bill would replace Fannie and Freddie with entities chartered to issue mortgage bonds backed by an explicit government guarantee; another would merge Fannie and Freddie into a nonprofit government-held corporation. Almost all of the measures face an uphill battle in the Senate. Reform won't occur until after the 2012 elections.

The multifamily challenge

The apartment industry must convince lawmakers that the GSEs' multifamily programs were not part of the meltdown and are not broken. Fannie and Freddie's multifamily loan default rates are less than 1% — a tenth of those in the single-family sector. And the programs have generated $2 billion in profit since the federal government takeover in 2008.

An education campaign by the National Multi Housing Council and its partner, the National Apartment Association, helps. In 2008, many lawmakers were unaware that the GSEs had multifamily programs. Now, both Democrats and Republicans have stated the importance of making sure single-family reforms do not interrupt liquidity to the rental sector.

The percentage of households that own houses fell to 66.9% in 2010 from 69.2% in 2004. In a rational world, the success of the multifamily sector would prevent it from becoming a victim of single-family's historic excesses.

But Congress is far from rational. We risk being harmed by a single-family, one-size-fits-all solution. We also face the risk that inaction will lead to death by attrition and a brain drain at the GSEs.

Who can fill the void?

Banks, life insurers and conduits are beginning to increase their lending to multifamily. But even in a healthy economy, the private market can't meet all of our sector's capital needs: about $90 billion in mortgage originations per year.

Private capital is good at financing higher-end assets in top-tier markets, less so at supporting complex deals, workforce housing, or second-tier markets.

Even if private capital steps in, debt costs will increase without a government credit support. This will increase housing costs when the nation already faces a serious workforce housing shortage. And there will always be a need for a government backstop during market distress.

Rising demand for rental housing makes the case for an ongoing government backstop. As politicians see demographics and economics creating a surge in rental demand, they will have little appetite for the volatility a GSE vacuum would create in rental markets.

The foreclosure crisis has created nearly 3 million new renters so far. Half of all new households in this decade — up to 7 million — could be renters.

At a recent NMHC meeting, Doug Holtz-Eakin, former director of the Congressional Budget Office, said it is “inconceivable” that the federal government would stop subsidizing shelter. But “shelter is shelter,” he says, and subsidies should not be tied to whether someone rents or owns.

This is real progress from the days of the “ownership society.” Unfortunately, however, the outcome for multifamily finance is still largely unknown.

For now, the only known factor is that there is bipartisan agreement to eliminate the GSEs.

Cindy Chetti is senior vice president of government affairs for NMHC. She can be reached at [email protected].

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