In discussions about the future of Fannie and Freddie, we tend to emphasize their outsized role in the single-family sector. We often forget that they have an even bigger footprint in multifamily. A recent Kroll BondRatings report, FHFA Slowdown May Spur Multifamily Resurgence in Conduit CMBS, shows just how big it is. Chart 1 shows Multifamily Loans as a Percentage of the New Issuance Market by Year. Fannie, Freddie and Ginnie had a 15 to 47 percent market share at points during the eight years from 2000 through 2007. It jumped to 85 to as high as 100% (!!!) at points during the following five years.Kroll notes that the private sector (CMBS Conduits) has begun to increase market share dramatically, although this is measured from a very small base.
Kroll concludes that
it is evident that private lending sources will experience continued growth in multifamily lending as the GSEs reduce their commitment to the space. Conduits are well positioned to participate in this growth, provided the spread environment doesn’t impede conduit lenders’ ability to offer attractive financing rates. Multifamily fundamentals will also inevitably play a role in overall financing volumes, and while it isn’t clear the sector’s outsized performance will continue, housing and demographic trends suggest the sector will remain relatively strong over the next couple of years. While the question of whether and when conduits will surpass GSE originations remains to be seen, we anticipate that the percentage of multifamily product in CMBS will trend upward throughout next year. When 2015 rolls around we may even see the proportion of multifamily in CMBS approach or exceed levels last seen in the mid 2000’s, when it represented, on average, 18% of the CMBS universe, with some recent deals in the conduit universe starting to trend closer to 20%. (4)
What is clear to me is that we should not forget about the relatively small multifamily housing finance sector as we think about the appropriate role for Fannie and Freddie in the single-family sector. They are completely different sectors. The one is akin to a wholesale business and the other is akin to a retail business, each with very different underwriting.
We should be open to very different policy outcomes for the two sectors. The policy reasons that might support a large government role in the single-family sector do not necessarily carry over to the multifamily sector. As I have noted elsewhere (and here) in the context of the multifamily sector, a market failure or liquidity crisis is the typical rationale that justifies government intervention in a particular market. It is incumbent on those who argue for a very active role for the government in the multifamily sector to clearly explain the market failure that government policy intends to address.