The Mortgage Bankers Association (MBA) weighed in on the future of the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac with a new white paper that examines the future of multifamily rental housing finance.  The paper was developed by MBA's GSE Multifamily Task Force, a group of industry experts from MBA's commercial/multifamily finance membership and focuses on issues raised by the Federal Housing Finance Agency's (FHFA's) February 2012 strategic plan.  

The paper, "Ensuring Liquidity and Stability: The Future of Multifamily Housing Finance and the Government-Sponsored Enterprises," builds on a 2009 report by MBA's Council on Ensuring Mortgage Liquidity,  and includes policy recommendations and lays out a framework for a government role in multifamily finance intended to attract greater private capital with government-backed insurance to ensure liquidity in all market conditions. The program would be funded through risk-based premiums paid by the entities that securitize the loans.  

MBA describes the current state of the GSEs in government conservatorship as both unique and unsustainable in the long-term.  The "implicit" federal government guarantee historically enjoyed by the GSE changed when they entered into conservatorship in 2008 to an explicit one through a funding agreement with the U.S. Treasury.  "We do not believe that it is in the long-term interests of the housing finance system or American taxpayers for the status quo to continue indefinitely without policy resolution. At the same time, the policy development process should guard against causing harm to the multifamily market or disadvantaging multifamily rental housing relative to owner-occupied housing, as both are integral to our communities and a vibrant U.S. economy."

MBA's paper makes five recommendations for the future of multi-family housing and the GSE role.

First, the nation's housing policies should reflect the importance of multifamily rental housing, the range of capital sources that support this market and the need for liquidity and stability in all market cycles. Fifteen million households (one in seven) rent homes in multifamily properties, a number that is expected to grow.   It is an important component of affordable housing with 93 percent of multifamily rental apartments currently affordable to households earning the median local income or less.  

The roles of the GSEs and FHA in financing multifamily mortgages have been substantial, but other market participants - including life insurance companies, banks and other lenders - have maintained a strong presence as well. Credit performance has been strong during the recent market downturn and, with government support the GSEs have served a countercyclical role that provided liquidity when private capital sources largely exited the market.

Second, private capital should be the primary source of financing for multifamily housing, but a limited government-backed insurance program would ensure that the market has access to liquidity in all economic cycles.   MBA likens this role to FDIC's risk insurance; it would provide support at the mortgage-backed security level with a Ginnie Mae-like wrap, rather than at the entity level which is the case today. .  The paper calls the role of private capital vital in two respects: "The deployment of private capital through market participants that have historically supported multifamily finance, such as portfolio lenders and CMBS investors, and the investment of private capital in entities that would be permitted to issue government-backed securities."

A carefully-crafted government role would ensure that private capital assume a significant risk position and allow for different forms of credit enhancement.  The risk insurance fund would be structured in a manner that allows robust competition with other sources of private capital and create a level playing field. For example, in addition to its required return on capital, government-related mortgage pricing could take into account allocations to required risk-based capital for the entity, payments into a federal insurance fund, costs associated with the regulatory regime, and market conditions, all of which would be monitored and calibrated by a federal regulator.

Third, entities eligible to issue government-backed securities should be mono-line, funded by private capital, focused on securitization, serve the workforce rental market, and regulated in a manner that protects taxpayers and ensures robust competition among capital sources.   The private capital of entities eligible to issue government-backed securities, and these would not   be limited to potential successor entities to the GSEs, would assume a significant risk position. This entity-level buffer would place private capital at risk ahead of the government- backed securities, aligning its interests with that of the federal government.   They would pay an appropriate guarantee fee that adequately compensates the government and taxpayers for the risk in the guarantee.

Risk-based premiums would be deposited into a federal insurance fund, to be drawn upon only if and when the entity becomes insolvent. The pricing of the premiums would be structured in a manner that allows robust competition. Importantly, the issuing entities would need to attract private capital and maintain financial viability.

The current corporate-level government guarantee of the GSEs, including that on their corporate debt, would be eliminated by Congress as soon as practicable in a manner that minimizes market disruption."

Fourth, stewardship of existing GSE assets and resources on behalf of taxpayers should be a core consideration for any policymaker action.  The talent and expertise at the GSEs, their existing books of business, their market executions and any profits generated by their multifamily businesses are valuable to U.S. taxpayers and should be deployed in a manner that supports the future state of multifamily housing finance. Preserving and dedicating such resources would support an orderly transition - over a five to ten year period - to a new mortgage finance system and optimize potential returns to taxpayers.

Finally, the long-term liquidity and stability of the multifamily finance system in all market cycles should be the core driver of whether the GSEs' multifamily businesses should operate on a standalone basis.  This should not be determined in a vacuum nor based solely on the financial viability of multifamily standalone enterprises without government guarantees but should be determined by whether a standalone scenario would reflect the importance of multifamily rental housing and the need for liquidity and stability in all market cycles.