The Treasury Department and the Department of Housing and Urban Development last Friday released their proposals for the future structure of housing finance in the United States. In a clear indication of the administration’s intent to address the structural deficiencies that facilitated the current crisis in housing, Treasury has proposed the ultimate elimination of Fannie Mae and Freddie Mac.
Conceding that U.S. housing markets have not yet recaptured a requisite degree of health–no changes to Fannie Mae and Freddie Mac are imminent–the administration has nonetheless demonstrated its resolve to bring the conservatorship of the government-sponsored enterprises to an end. The proposals themselves suggest that policy makers are on the cusp of a radical rethinking of housing market structures, including the role of government and quasi-governmental agencies in supporting mainstream multifamily finance.
Overall, the proposal suggests a public commitment to affordable rental options but little in the way of the historically broad support for middle-income rental markets. Instead, the public role is circumscribed, characterized as being “limited to robust oversight and consumer protection, targeted assistance for low- and moderate-income homeowners and renters and carefully designed support for market stability and crisis response.”
Without being more specific, Treasury signals that the government-sponsored enterprises’ multifamily role will reach its conclusion. In the meantime, however, the data suggest that the enterprises are maintaining their leadership positions in the rental sector, growing their balance sheets and their related securitizations.
The Long Road Out of Conservatorship
Two and a half years have passed since Fannie Mae and Freddie Mac were brought under the conservatorship of the Federal Housing Finance Administration (FHFA). In September 2008, the sheer weight of the government-sponsored enterprises’ financial losses threatened the stability of the two institutions, as well as any modicum of their functioning in U.S. mortgage markets and the financial system.
Fearing that a collapse of one or both institutions might damage the economy and financial system beyond the government’s capacity to repair, the Treasury Department undertook one of the government’s most far-reaching interventions of the crisis. Policy makers may have anticipated that the government’s operational role in the housing markets would run its course by late 2010. Instead, the unprecedented and protracted weakness of the national housing market has entrenched the government’s role in buttressing residential mortgage finance.
Over the course of conservatorship, the enterprises’ Preferred Stock Purchase Agreements with the Treasury have proven the essential mechanism for stabilizing the Fannie and Freddie. Through this channel, the FHFA has facilitated an extraordinary public investment in the enterprises, offsetting losses that otherwise have threatened the institutions with receivership.
Given the near-certainty of additional public investment, the FHFA released an analysis late last year quantifying the enterprises’ cumulative draws under different scenarios for the housing market. Through 2013, the FHFA estimates that draws might range from $221 billion to $363 billion over the period from the onset of conservatorship through the end of the analysis period. Required dividend payments on the preferred investments account for $80 billion or more of this total.
Residential Mortgage Concerns Drive Proposals
In a statement issued last Friday, the chairman of the Mortgage Bankers Association, Michael Berman, wrote in support of the proposal’s general thesis, saying that “we continue to believe that this is the most prudent approach, one that places the primary risk on private investors and ensures sufficient liquidity during times of economic stress in order to provide affordable mortgage finance in all types of mortgage markets.”
But in a separate statement, Jeff Day, chairman of the Commercial Real Estate Finance Council GSE Task Force, spoke directly to the position of the rental market, offering that “with a pronounced need for rental housing, reforms in the multifamily sector should focus on providing a stable, countercyclical and affordable source of capital for both affordable and market-rate rental multifamily housing. This should be done in a way that minimizes taxpayer exposure and does not create a bias toward or against homeownership.”
The proposals do include some indication of the government’s objectives and potential dimensions of flexibility. In particular, the proposal offers a public role in “promoting a housing market that provides liquidity and capital to support affordable rental options. … Private credit markets have generally underserved multifamily rental properties that offer affordable rents, preferring to invest in high-end developments. … As we wind down Fannie Mae and Freddie Mac, it will be critical to find ways to maintain funding to this segment.”
What that way will be is far from apparent at this juncture.
Sam Chandan, Ph.D., is global chief economist of Real Capital Analytics and an adjunct professor at the Wharton School.