Despite Calls for Limiting Govt. Role, Private Capital Hasn’t Stepped Up To Meet the Broad Liquidity Needs of the Apartment Industry
With a clear mandate from the Obama administration to wind down the operations of Fannie Mae and Freddie Mac eventually, the Federal Housing Finance Administration, which oversees their operations, outlined its plans for meeting that objective. For starters, it hopes to cut the two government sponsored entities’ market share of new multifamily lending by 10%.
What's less clear is if that can be done in the current environment, or even if the eventual objective can be met. Both Fannie Mae and Freddie Mac showed operating performance improvements in 2012. These improvements were primarily driven by the higher-quality business written since 2008, a recovery in housing prices, and a more stable interest rate environment, according to Fitch Ratings.
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Because of the key roles the two play in the U.S. housing market recovery, there is waning motivation for pursuing more wide-reaching GSE reforms in the near future, Fitch also noted.
The FHFA plans to shrink the two GSEs gradually over time, while encouraging private enterprises to pick up the slack. That hasn’t happened sufficiently to that point, Edward J. DeMarco, the acting director of the FHFA, said in a speech to the National Association for Business Economics last week.
Last year, the FHFA increased loan guarantee fees twice for the GSEs, which now brings the average guarantee fee on new mortgages to around 50 basis points, approximately double what guarantee fees were prior to the FHFA taking over conservatorship of Fannie and Freddie.
“A key motivation behind increasing enterprise guarantee fees is to bring their credit risk pricing closer to what would be required by private sector providers,” DeMarco said. “However, the increase in guarantee fees is part of the contract framework; it is not designed primarily to increase the enterprises’ revenue. The idea is that at some point the increases in guarantee fees will encourage private capital back into the market.”
“We are not there yet, but in conversations with market participants, I think we are getting closer,” he added.
Incentivizing private investors to reenter the mortgage market remains an ongoing focus for regulators and politicians. Fitch Ratings, however, says the results so far have been disappointing, as nine out of 10 mortgages still have some form of government backing.
“Uncertainty regarding risk retention and bank capital rules continues to be an important constraint and private appetite for mortgage assets is likely to remain muted,” Fitch noted.
Increasing guarantee fees (g-fees), a trend Fitch said it expects to continue in 2013, is one of the more straightforward ways to attract private capital into the mortgage market. However, the ratings agency said g-fees may need to rise even further to induce private firms to offer a viable alternative.
Understandably, having enjoyed years of enhanced liquidity and limited risk from the GSE arrangement, the multifamily industry isn’t so sure the changes can work either.
Cindy Chetti, senior vice president of government affairs for the National Multi Housing Council (NMHC) and (NAA) Joint Legislative Program, issued a joint response along with the National Apartment Association to the FHFA) plan.
“NMHC/NAA support returning to a more robust private capital market, but we believe that should be achieved through market-driven solutions and not the arbitrary 10% reduction, or more than $6 billion, in multifamily lending volume imposed by the FHFA,” Chetti said. “The need for such a volume cap has not been demonstrated."
Fannie Mae and Freddie Mac have already reduced their share of the multifamily mortgage market from 90% during the peak of the financial crisis to just 45% currently, according to NHMC.
"But there is no evidence that private capital is willing or able to meet the broad liquidity needs of the apartment industry in all markets and at all times,” Chetti said. “Fannie Mae and Freddie Mac have been a critical backstop to ensuring sufficient liquidity and stability for the apartment industry - providing capital in markets and for products that haven't historically attracted private capital. Importantly, the very successful multifamily programs of Fannie Mae and Freddie Mac were not part of the meltdown and have actually generated more than $10 billion in net profits to the government since conservatorship.”
For 2013, the FHFA’s DeMarco said the FHFA has set three priorities for shrinking the two enterprises.
In the single-family credit guarantee business, FHHA has set a target of transacting $30 billion of unpaid principal balance in credit risk sharing for both Fannie Mae and Freddie Mac. Those expects transactions involve expanded mortgage insurance, credit-linked securities and senior/subordinated securities.
In the multifamily business, the FHFA is setting a target of a 10% reduction in multifamily business volume from 2012 levels. It expects this reduction to be achieved through some combination of increased pricing, more limited product offerings, and tighter overall underwriting standards.
In its retained portfolios, the FHFA is setting a target of selling 5% of the less liquid portion of their retained portfolios.
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