Fannie and Freddie: To Be or Not to Be?

In its third-quarter filing, Fannie Mae has stated that “we expect to have a net worth deficit in future periods, and therefore will be required to obtain additional funding from Treasury pursuant to the senior preferred stock purchase agreement. As a result, we are dependent on the continued support of Treasury in order to continue operating our business. Our ability to access funds from Treasury under the senior preferred stock purchase agreement is critical to keeping us solvent …”

While reasonable people can disagree about the long-term need and raison d’être for Fannie Mae and Freddie Mac, the functioning of the residential mortgage market depends—at least for the time being—on their continued presence and active participation.

 

THERE IS NO DOUBT that Fannie Mae’s most recent quarterly loss comes at a difficult crossroads for the GSEs and for policy makers. As I described in my column of Sept. 15, the White House has indicated it will address the issue of Fannie Mae and Freddie Mac’s future structure with the next fiscal year’s budget proposal to Congress in February 2010. While Fannie and Freddie are serving vital policy roles in stabilizing single-family and multifamily housing markets—today’s sub–5-percent conforming mortgage rate would undoubtedly rise if the GSEs were suddenly shuttered—they are at an existential juncture.

Fannie Mae’s current filing speaks to this in highlighting that “there is significant uncertainty regarding the future of our business, including whether we will continue to exist, and we expect this uncertainty to continue.”
The possibility that being will give way to nothingness for Fannie Mae and Freddie Mac is problematic for the multifamily investment market. While unlikely, a negative shock to multifamily liquidity resulting from abrupt or heedless policy making will almost certainly undermine pricing and investment trends in the apartment market.

In that scenario, the large numbers of potential multifamily lenders who are now crowded out of the market by low-cost government funds will be able to re-enter but will not fill the shoes of the GSEs. The retrenchment of these lenders from other commercial real estate sectors will exacerbate the dearth of liquidity in the areas they now serve.

To avoid these potentialities, while also conceding that Fannie Mae and Freddie Mac must see their economic magnitude and significance diminished, a policy of gradualism—one that ultimately allows the private market to subsume those functions that can be met without government guarantees—is called for in shaping their new, more focused role.

chandan@reeconometrics.com

Sam Chandan, Ph.D., is president and chief economist of Real Estate Econometrics and an adjunct professor of real estate at Wharton.

Fannie and Freddie: To Be or Not to Be?