What About Fannie and Freddie?

This week members of PTAA were in Washington for the National Apartment Association’s Capitol Conference and on our last day there we were urged to meet with our members of Congress to discuss several issues, including housing finance reform. For the last few years NAA has urged its members to urge their members of Congress to not throw the multifamily baby out with the mortgage bathwater. Since the government had bailed out the mortgage industry when its near-collapse helped plunge the country into the Great Recession, Congress has been trying to figure out what to do with the Government-Sponsored Enterprises (Fannie Mae and Freddie Mac) and the smart people at NAA and the National Multifamily Housing Council (NMHC) had been pointing out that while housing finance reform is necessary, the multifamily sector had not had the problems that the residential home mortgage had. From the briefing papers provided at Cap Con:

The bursting of the housing bubble exposed serious flaws in our nation’s housing finance system. Yet, those shortcomings were confined to the residential home mortgage sector. The Government-Sponsored Enterprises’ (GSEs) (i.e., Fannie Mae and Freddie Mac) very successful multifamily programs were not part of the meltdown and have actually generated over $14 billion in net profits to the government since the two firms were placed into conservatorship.

More than just performing well, the GSEs’ multifamily programs serve a critical public policy role. Unfortunately, even during normal economic times, private capital cannot fully meet the industry’s financing demands. The GSEs ensure that multifamily capital is available in all markets at all times, so the apartment industry can address the broad range of America’s housing needs from coast to coast and everywhere in between. 

NMHC/NAA urge lawmakers to recognize the unique needs of the multifamily industry. We believe the goals of a reformed housing finance system should be to:

  1. Maintain an explicit federal guarantee for multifamily-backed mortgage securities available in all markets at all times;
  2. Ensure that the multifamily sector is treated in a way that recognizes the inherent differences of the multifamily business; and
  3. Retain the successful components of the existing multifamily programs in whatever succeeds them.

Relevant to those points made during the briefing session provided by NAA/NMHC staff members before we headed to the Hill they mentioned that leaders in the Senate Banking Committee had just announced a plan that the apartment industry could get behind, but let’s just say it was a little difficult for us in the audience to grasp. Too bad we didn’t have a chance to read this Wall Street Journal article that laid out the issue pretty well:

The plan, by Senate Banking Committee leaders Tim Johnson (D., S.D) and Mike Crapo (R., Idaho), calls for replacing Fannie and Freddie with a new system of federally insured mortgage securities in which private insurers would be required to take initial losses before any government guarantee would be triggered.

The agreement, which faces a long road to approval, represents the most concrete step so far to resolve the last major piece of unfinished business from the 2008 financial collapse.

“It would be a huge step forward,” said Phillip Swagel, who was an assistant secretary for economic policy under Treasury Secretary Henry Paulson, who oversaw the government’s seizure of the firms in 2008.

Yes, this is a complicated issue but at its core it’s pretty simple:

  1. There’s a lot of demand for apartments right now and not nearly enough are being constructed to keep up with it.
  2. Without adequate financing there isn’t going to be enough construction to catch up with that demand, and with low inventory comes high rent.
  3. It’s imperative that Congress not further constrict the housing market by instituting housing finance reform that cripples a sector, multifamily housing, that didn’t contribute to the economic problems caused by the residential housing finance sector.
  4. The early signs are that the Senate Banking Committee is moving in the right direction, but there’s a LONG way to go before they get committee approval, not to mention the full Senate and then the House.

In other words we have a pretty good idea what we’ll be talking about to our members of Congress when they’re back home in their districts and this time next year when we return to the Capitol.