Each of the government sponsored enterprises (GSEs) has released a report analyzing the viability of their multifamily operations under a scenario divorcing them from the parent company and stripping away the existing government guarantee. The reports were requested by the Federal Housing Finance Agency (FHFA) as part of its goal to contract the overall market footprint of the GSEs and generate potential value for taxpayers.
FHFA said that the multifamily businesses of the two GSEs are fundamentally different from their single-family businesses. The loans are larger, collateralized by income producing properties of five or more units, and are a much smaller component of the total mortgage market. Moreover most of the two entities' multi-family loans involve some type of risk sharing with private capital which is not true of the single-family business line and the loans survived the housing crisis much better than the single family portfolio. Fannie Mae and Freddie Mac also do not dominate the multi-family market as they do the single-family counterpart.
Given these differences FHFA determined that the reduction of market footprint should be approached much differently for the multi-family part of the businesses than the single-family. In their analysis the GSEs were instructed to include the likely viability of their multi-family business models operating on a stand-alone basis after attracting private capital and adjusting pricing if necessary.
Freddie Mac said its average multifamily loan was $17 million and its earnings from that segment since 2010 have approached $4 billion from both securitization and net interest income. The value is driven in part by economies of scale not available to other multifamily financiers and access to government guarantees.
Absent those guarantees Freddie Mac said its business would look and operate differently than it does today. It would no longer be a line of business within the company but would be a private, monoline firm operating on a stand-alone basis, attracting private capital from equity and debt investors, and complying with all applicable regulations in areas such as capital levels and taxation. It would operate more like a true conduit, have a smaller footprint, charge higher rates, and produce less net income than today.
Fannie Mae analyzed the behavior of an imaginary new company operating as a stand-alone without government sponsorship. It concluded that "NewCo could potentially raise start-up equity capital in the private markets as a stand-alone, unregulated specialty finance company, but our analysis suggests that the resulting company would be very different from Multifamily as it exists today and that its long-term survival would be uncertain."
In the aggregate the reports concluded that there is little inherent value in the current multifamily businesses without the government guarantee and that the sale of these businesses would return little or no value to the U.S. Treasury or to taxpayers. The businesses would likely be monoline specialty finance companies with a focus on non-prime lending and secondary and tertiary market transactions. Their cost of funds and lending rates would rely on the private securitization market or the participation of equity investors to be viable.
FHFA said that the magnitude of the market impacts cited in the reports deserve further study and also highlight a fundamental tension that policymakers will have to consider. Without a government guarantee a fully private company may not provide the same level and scope of services, at least at current prices. Without a government guarantee there may also be additional volatility in funding availability under certain economic conditions. Both GSEs also raised the issue of what would happen to affordable housing. Freddie Mac said that only the availability of government support made it possible for that part of its own business to "break even."
FHFA has put in place a 10 percent volume reduction in the GSEs' new multifamily business for 2013. The agency said it would evaluate how this process worked through this year and will consider options to continue a path of gradual contraction while waiting for Congress to resolve the issue of GSE conservatorships.
