Treasury, HUD Seek to Limit Scope of Nation's Largest Multifamily Lenders
Trump Administration Needs Bipartisan Support to Decrease Government Roles of Freddie Mac, Fannie Mae
The U.S. departments of Treasury and Housing and Urban Development are jump-starting the Trump administration’s efforts to privatize Fannie Mae and Freddie Mac and loosen their dominance over multifamily lending.
Each department is recommending more than 50 legislative and administrative changes designed to limit the federal government's role in the housing finance system while boosting private industry competition. Enacting such plans could be troublesome because of how dominant the two entities are in lending and they have a mandate to boost affordable housing, which is in short supply in the country.
The Treasury Department in particular recommends that Congress implement a framework to limit the size of Fannie Mae, the Federal National Mortgage Association, and Freddie Mac, the Federal Home Loan Mortgage Corp., which together known as government-sponsored enterprises, or GSEs. The number of Fannie Mae and Freddie Mac multifamily mortgage loans packaged and sold off to investors would in effect be reduced.
There has been talk about removing the two entities from government control starting soon after 2008, the height of the financial crisis, when Fannie Mae and Freddie Mac suffered significant losses and were placed into federal conservatorship under supervision of the Fedeal Housing Finance Agency. The Treasury subsequently pumped more than $190 billion into the enterprises, and Fannie Mae and Freddie Mac have grown from owning or guaranteeing 25% of outstanding multifamily debt in early 2008 to almost 40% today, according to Treasury figures. That share could climb, as the GSEs have acquired about 50% of recent multifamily loan originations.
They are the biggest financiers of all housing with at least five units, spanning apartments, student and senior housing and mobile homes. The plan recommends that the Treasury and Federal Housing Finance Agency overseeing Fannie Mae and Freddie Mac should also consider putting some types of limit on the amount of their lending for affordable housing.
Any change to limit support for affordable housing is bound to meet resistance. National Association of Home Builders Chairman Greg Ugalde said it is important that any new structure include an explicit federal backstop for the housing finance system.
"In addition, given the severe shortage of affordable homes, the plan must address the financial and regulatory impediments to housing production," Ugalde said in a statement.
While an important step, the plans are only the beginning, FHFA Director Mark Calabria said in a statement.
"I look forward to working with the administration and Congress to chart a path forward that achieves the following objectives: Creating a competitive mortgage market with a limited government role; ensuring taxpayers never again have to rescue Fannie Mae and Freddie Mac; and paving the way for sustainable and affordable housing for homeowners across America," Calabria said.
Changing Government Structure
In 2008, when the FHFA was given supervision of Fannie Mae and Freddie Mac, it was taken out of the hands of HUD. That department’s plan would give it more control of the FHFA. HUD currently oversees the Federal Housing Administration, which provides mortgage insurance on single-family and multifamily loans made by FHA-approved lenders.
Robert Broeksmit, president and chief executive of the Mortgage Bankers Association, welcomed the plans.
"The reports recognize the need to better coordinate the roles of FHA and the GSEs," he said in a statement. "Such coordination must preserve affordable financing options for a wide range of borrowers and reflect the vital role FHA plays in the larger housing finance system."
Over the past decade, the FHA’s multifamily program has also grown substantially, and its market share also remains far above pre-crisis levels. FHA multifamily production volume peaked in 2013 with $18.4 billion in new originations. In 2018, its multifamily program closed transactions worth $15.2 billion, according to HUD's figures. FHA's asset management portfolio totals nearly $97 billion.
"Through a formalized collaborative approach, FHA and the [FHFA] must work together to ensure that government-supported mortgage programs are not competing and do not crowd private capital out of the marketplace," HUD's plan states.
Since so many of the proposals need congressional legislative action, major changes may not come soon.
Fitch Ratings analysts said the timeline for any votes might be pushed back to the extent that other priorities, such as trade negotiations, and the lack of bipartisan support could challenge Congress' ability to enact meaningful legislation.
Analysts at investment bank Keefe Bruyette & Woods said chances for legislation are remote. Neither department’s report includes specific timelines to implement the recommendations. In an email, the firm said some of the regulatory processes could be lengthy and last beyond the 2020 election. If that happens, a change in the White House could put the implementation of the plans in doubt.