MULTIFAMILY HOUSING FINANCE REQUIRES BALANCE OF PRIVATE CAPITAL, GOVERNMENT BACKING

The following article has been taken from MBA Newslink, October 10, 2013.

Sorohan, Mike–Oct. 10, 2013
Mortgage Bankers Association Chairman-Elect E.J. Burke told the Senate Banking Committee that lawmakers and regulators must craft a long-term plan for multifamily housing that ensures a role for both private capital and the federal government.

“We believe that policy makers should focus on ensuring that capital continues to be available in all market cycles,” Burke said. “With this in mind, the policy discussion on the role of private capital and that of the federal government, in our view, is not mutually exclusive in character. We believe that public policy can strike a durable balance that continues to attract and deploy private capital in the multifamily market, while establishing a focused government guarantee that enables liquidity and stability in all cycles–a role that only the government can fulfill. This, in turn, will protect taxpayers and strengthen the financing system for rental housing.”

The hearing, part of a series examining housing finance reform, centered on the role of Fannie Mae and Freddie Mac in the multifamily sector. Committee Chairman Tim Johnson, D-S.D., noted the important role of Fannie Mae and Freddie Mac in the multifamily housing market and cautioned that broad access to credit must continue to be available as GSE reform moves forward.

“Multifamily housing is a key source of housing for the one-third of American who are renters,” Johnson said. “Without an adequate supply of housing, challenges for rental families will only increase.”

The committee’s ranking member, Sen. Mike Crapo, R-Idaho, noted key differences between the multifamily and single-family markets, observing that delinquency rates for GSE multifamily loans was less than 1 percent through successful risk-sharing deals. “This ensures that Fannie Mae and Freddie Mac underwrite loans of only the highest quality,” he said.

But Crapo expressed concerns about the government’s role in housing finance, noting that private lines of capital have dried up over the past few years. “We must do more to encourage the private sector to underwrite more loans, thus shrinking the federal footprint,” he said.

Burke, executive vice president and group head of KeyBank Real Estate Capital, Cleveland, said (http://www.banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=39ba56a2-ffaa-4427-9432-057aac010356) a large and diverse group of capital sources currently provide liquidity for multifamily housing, and that diversification continues to increase. Private capital also bears significant risk in existing GSE multifamily finance platforms. He said government-backed sources have experienced, even through the recent financial crisis, very strong credit performance.

“Importantly, as the recent economic downturn demonstrated, the countercyclical role is one that only the government can fulfill,” Burke said. “With Fannie Mae and Freddie Mac’s conservatorship going on more than five years, policymakers must develop a long-term plan for the future role of the federal government in the mortgage market. This plan must address the GSEs’ unique role in multifamily rental housing. It is clear that the current state of the GSEs should not last indefinitely. However, policy makers should ensure the ongoing stewardship of valuable resources that support the multifamily market and utilize them to transition to a stronger housing finance system.

Burke offered several structural recommendations for a strong multifamily housing finance market going forward:

  • A wholly owned government corporation should function as a catastrophic guarantor, administrator of a risk insurance fund and regulator of secondary market entities. This guarantor would be funded by guarantee fees paid by issuers.
  • The new system should also allow multiple, privately capitalized issuers of government-guaranteed securities in the secondary multifamily mortgage market.
  • The GSEs’ existing multifamily assets and infrastructure should be preserved and carried over to a new system. “Not only are these businesses valuable to U.S. taxpayers, transferring them to new entities would minimize market disruption and allow them to continue to serve the multifamily housing finance market,” Burke said.
  • Proposed approaches should also be reasonable, flexible and balanced with regard to the need to attract private capital. For example, Burke said policy proposals contemplating affordability requirements should take into account that 93 percent of multifamily units have rents affordable to households earning area median incomes or less.

“These goals can be accomplished by building upon the strong foundation that currently exists in multifamily finance–where there is greater and increasing diversification in capital sources for multifamily housing, where private capital bears significant risk in existing multifamily finance platforms, and where government-backed sources have experienced, even through the recent financial crisis, very strong credit performance,” Burke said.

Burke told lawmakers that while the nation’s multifamily housing finance system should rely on private capital, past experience shows that the federal government is the only entity that can ensure the availability of liquidity in all market cycles.

“The recent financial crisis and recession demonstrated that only the federal government can ensure liquidity through all market cycles, and, as demonstrated by the conservatorship of Fannie Mae and Freddie Mac, as well as programs like the Federal Reserve’s asset purchases, the federal government will fill this role when necessary,” Burke said. “Government policies should anticipate and prepare for this role. The government should ensure liquidity for multifamily mortgages through a carefully crafted guarantee on multifamily mortgage-backed securities. The federal government should provide a catastrophic backstop guarantee on mortgage-backed securities. The catastrophic backstop role would be similar to that of the U.S. government in a number of sectors and markets, including federal deposit insurance in the banking system. This government backstop should be available at the mortgage-backed securities level (rather than at the level of the issuer, as it is today with the GSEs) at all times to ensure liquidity in the multifamily finance market.”

 

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