Tag Archives: Fannie Mae

GSEs Are Giants of Multifamily Sector Too

Posted on by

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.

Reiss on Government’s Role in Housing Finance

Posted on by

The Urban Land Institute New York Blog posted Housing Finance Leaders Gather to Discuss the Future of Freddie and Fannie about a recent panel on the housing finance market. It begins,

Housing finance industry leaders came together last week to debate the future role of government-sponsored lending giants, Fannie Mae and Freddie Mac. Both entities were placed under the conservatorship of the Federal Housing Finance Agency (FHFA) during the financial crisis from which they have yet to emerge.

Panelists included David Brickman, Head of Multifamily for Freddie Mac, Robert Bostrom, Co-Chair of the Financial Compliance and Regulatory Practice at Greenberg Traurig, Mike McRoberts, Managing Director at Prudential Mortgage Capital Company, David Reiss, Professor of Law at Brooklyn Law School, and Alan H. Weiner, Group Head at Wells Fargo Multifamily Capital.

The debate centered around the proper role for the mortgage giants and to what extent government-backed entities should intervene in capital markets.

A market failure or liquidity crisis is the only reasonable basis for government intervention in the housing market, according to Reiss. “However, it is not possible for the government to create liquidity only in moments of crisis, so there is a need to have a permanent platform that is capable of originating liquidity at all times,” said Brickman. Fannie Mae, which was created during the Great Depression and Freddie Mac, which was created during the Savings and Loan crisis, were both responses to past market failures.

Fannie and Freddie in Play?

Posted on by

Bill Ackman’s Pershing Square Capital Management LP has joined Bruce Berkowitz’s Fairholme Capital Management LLC in seeking to privatize Fannie Mae and Freddie Mac.  News reports indicate that Pershing Square owns about ten percent of the common shares of each company. While it is unclear to me how they could parlay their holdings into control of the two companies, they are certainly changing the conversation about them. It is worth taking a closer look at the Fairholme proposal, which is pretty detailed.  The proposal, according to Fairholme,

  • Brings approximately $52 billion of private capital to support credit risk on more than $1 trillion of new mortgages without market disruption;
  • Demonstrates reform is possible, even without a Federal guarantee, by having investors commit to bear risk now;
  • Allows for the liquidation of Fannie and Freddie, ending their Federal charters and special status, without losing the value of operating assets critical to the mortgage market;
  • Reduces systemic risk by separating new underwriting from the legacy investment books of Fannie and Freddie;
  • Preserves Government options for affordable housing initiatives and counter-cyclical liquidity – but using tools other than Fannie and Freddie; and
  • Ends the unsustainable Federal conservatorship. (Press Release, 1)

Fairholme states that “The centerpiece of the proposal is the establishment of two new, State-regulated private insurance companies to purchase, recapitalize, and operate the insurance businesses of Fannie and Freddie.” (Press Release, 1)

Fairholme predominantly owns preferred shares and Pershing predominantly owns common shares, so we are certain to see different visions for the capital structure of the two companies once Pershing presents a more concrete proposal. But it is clear that the conversation about Fannie and Freddie is shifting and that the federal government is facing some pressure to at least respond to these proposals.

Reiss on Fannie and Freddie Buyout

Posted on by

Law360 quoted me in Fairholme Changes The Game For Fannie And Freddie (behind a paywall).  It reads in part,

Fairholme Capital Management LLC’s plan to buy Fannie Mae’s and Freddie Mac’s insurance businesses will likely turn out to be more symbolic gesture than successful deal, experts say, but the hedge fund’s bold move could increase interest in privatization of the entities and potentially encourage other bidders to join the fray.

*     *     *

Some experts believe this emphasis on the ownership stakes of Fairholme and other hedge funds will be a major turnoff for the White House, the Federal Housing Finance Agency and the Treasury.

“It’s a very good idea, but the question is, will it keep the government and taxpayers off the hook? And will it bring in sufficient private capital to provide a vibrant residential mortgage market?” said David Reiss, a real estate finance professor at Brooklyn Law School. “Of course they’re looking to maximize their return, so the question has to be, what’s the angle that they’re playing?”

The angle, experts and analysts say, is likely connected to claims Fairholme and other hedge funds have made recently against the federal government, accusing it of devaluing their shares of Fannie and Freddie in order to reap all the GSEs’ mounting profits.

Fairholme and Perry Capital LLC both sued the government over its management of Fannie and Freddie this summer.

In July, Perry Capital accused the Treasury of wrongfully altering stock purchasing agreements with Fannie and Freddie, which allegedly allowed it to illegally speed up the liquidation of the companies and reap more than $200 billion over the next decade.

Two days later, Fairholme and insurance holding company W.R. Berkley Corp. sued the federal government, alleging it had acted unconstitutionally when it altered its bailout deal for the GSEs to keep the companies’ profits for itself.

Fairholme’s proposal assumes that their shares have the value they claim they have in their lawsuit, Reiss said. If the deal were to move forward, valuation of Fairholme’s stake could be a major sticking point.

*     *     *

“It begins the conversation as to whether you can have effectively a buyout of the federal government from Fannie and Freddie, which is a healthy thing, I think,” Reiss said.

Reiss on Future of Frannie at Urban Land Institute

Posted on by

I will be on an Urban Land Institute panel on November 21st, The Future of Fannie Mae and Freddie Mac.  The panel

will seek to shed some more light on the road ahead for the GSEs and their impact on commercial real estate lending and residential mortgage securitization. Specifically, the panel will address questions such as:

• What will the GSEs’ roles be in the multi-family and single-family markets in the future?

• Will the GSEs remain in conservatorship? If not, what level of government support, if any, will they receive going forward?

The event will feature individuals speaking on behalf of the lending, investment, academic, and GSE communities.

The moderator is Katharine Briggs, a Managing Director at BlackRock. She is a member of BlackRock’s Financial Markets Advisory Group within BlackRock Solutions. Ms. Briggs is a member of the Commercial Real Estate Advisory Team within BlackRock Solutions’ Financial Market Advisory Group. Mrs. Briggs specializes in US and European commercial real estate and related analytics. Ms. Briggs was formerly the Vice President of Corporate Finance with Summit Properties, a multifamily developer and publicly traded REIT owning 60 communities valued at over $2 billion. At Summit, she was responsible for all capital markets activities, investor relations, financial forecasting and tax planning.

The other panelists are:

Robert E. Bostrom, Co-Chair of the Financial Regulatory and Compliance Practice at Greenberg Traurig. His legal career spans more than 30 years, where he has worked and advised at the highest levels of leadership in the banking sector, in private legal practice and inside a government sponsored enterprise (GSE). As general counsel of Freddie Mac, Bob played a pivotal role during the financial crisis and recovery directing Freddie Mac’s legal strategy through the conservatorship, investigations, enforcement actions and litigation. Bob has advised clients on financial institutions regulation, examination, compliance and supervision matters. He is experienced helping clients navigate the implementation of the Dodd-Frank Act, especially the Consumer Financial Protection Bureau.

David Brickman, the Senior Vice President, Multifamily,, at Freddie Mac.  He was named senior vice president of Multifamily in June 2011. As head of Multifamily, Mr.
Brickman is responsible for customer relations, product development, marketing, sales, loan purchase, asset management, capital markets, and securitization for the company’s multifamily business, which includes the flow mortgage, structured and affordable mortgage, CMBS and low-income housing tax credit portfolios. The total multifamily portfolio was $180 billion as of March 31, 2013. He is a member of the company’s senior operating committee and reports directly to CEO Don Layton.

Mike McRoberts, a Managing Director at Prudential Mortgage Capital Company.  He is responsible for growing and enhancing Prudential’s leadership position in multifamily lending as head of the company’s market rate Fannie Mae and Freddie Mac portfolio teams and agency production team. Prior to joining Prudential, Mike was a vice president and national head of sales and production for Freddie Mac, where he was responsible for the agency’s conventional multifamily business, structured transactions and senior’s housing teams, the national Freddie Mac Program Plus network and Freddie’s four regional production offices. Earlier, he was
national head of underwriting and credit and managing director of Freddie Mac’s southeast region.

Joanne Schehl, Vice President and Deputy General Counsel at Fannie Mae. She is Fannie Mae’s Vice President and Deputy General Counsel for the Multifamily
Mortgage Business. She reports to the Senior Vice President and Deputy General Counsel – Multifamily Mortgage Business. Ms. Schehl leads the team responsible for providing legal support for multifamily infrastructure and operations, lender relationships, operational risk, and regulatory compliance. Ms. Schehl was previously a partner at Arent Fox PLLC, where she was a member of the real estate and finance groups, and served on the firm’s executive committee and as its professional development counsel, founded and led the firm’s strategic technology initiative, and was a leader in the firm’s diversity efforts.

Alan H. Wiener, Group Head, Wells Fargo Multifamily Capital, at Wells Fargo & Company. He is the group head of Wells Fargo Multifamily Capital, based in New York. Wells Fargo Multifamily Capital specializes in government-sponsored enterprise (GSEs) financing through Fannie Mae and Freddie Mac programs and Federal Housing Administration (FHA)-insured financing. Alan’s career has focused on housing and community development in both the public and private
sectors. Prior to joining Wachovia, he was the chairman of American Property Financing Inc., which Wachovia acquired in 2006. Before that, he was executive vice president with Integrated Resources, Inc.

Reiss on Countrywide Verdict

Posted on by

Law360 interviewed me in DOJ’s Countrywide Win Could Force More Bank Settlements (behind a paywall).  The story opens

The U.S. Department of Justice’s victory in a case against Bank of America Corp.’s Countrywide subsidiary over a housing-bubble-era mortgage program shows the power of a 1980s fraud statute, and could further encourage banks to settle future financial crisis cases, attorneys say.

A federal jury in New York on Wednesday unanimously found that Countrywide Financial Corp. and one of its former executives defrauded Fannie Mae and Freddie Mac through a program designed to speed up mortgage issuing in 2007 and 2008.

The court victory was significant in part because of U.S. Attorney Preet Bharara’s use of the Financial Institutions Reform Recovery and Enforcement Act, a law that grew out of the 1980’s savings-and-loan crisis, to bring a case over the 2007-09 financial crisis. With a fairly low standard of proof and a 10-year statute of limitations, a jury’s verdict based on FIRREA bodes well for future government cases, said Brooklyn Law School professor David Reiss.

“This successful use of FIRREA makes it much more likely that financial institutions are going to settle with the government,” he said.

Mortgage Reform Schooling on 30 Year Term

Posted on by

S&P has posted U.S. Mortgage Finance Reform Efforts and the Potential Credit Implications to school us on the current state of affairs in Congress. It provides a useful lesson on three major mortgage reform bills introduced in Congress this year.  They are the Housing Finance Reform and Taxpayer Protection Act of 2013 (Corker-Warner); Protecting American Taxpayers and Homeowners ACT of 2013 (PATH); and the FHA Solvency Act.

Given the current mood in D.C., S&P somewhat optimistically states that there “seems to be a bipartisan commitment to encourage private capital support for the U.S. housing market while winding down Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that hold dominant positions in the mortgage market.” (1) S&P uses this report as an opportunity to “comment on the potential credit implications of these mortgage finance reform efforts on several market sectors.” (1)

In this post, I focus on, and criticize, S&P’s analysis of the appropriate role of the 30 year fixed-rate mortgage. S&P states that

The 30-year fixed-rate mortgage has contributed significantly to housing affordability in the U.S. And while some market players have looked at current rates on jumbo mortgages (those that exceed conforming-loan limits) and suggested that the private market could support mortgage interest rates below 5%, we think this view is distorted. Jumbo mortgage rates carrying the lowest interest rates, for the most part, are limited to a narrow set of borrowers who have FICO credit scores above 750 and equity of roughly 30% in their homes. We don’t believe that these same rates would be available to average prime borrowers, such as those with credit scores of 725 and 25% equity in a property. (3)

While I think that S&P is probably right about the limited usefulness of comparing current jumbo loans to a broad swath of conforming loans, I see no support in their analysis for the assertion that the “30-year fixed-rate mortgage has contributed significantly to housing affordability in the U.S.” First, a 30-year FRM typically carries a higher interest rate than an ARM of any length. Second, a typical American household only stays in a home for about seven years. Thus, a 30-year FRM provides an expensive insurance policy against increases in interest rates that most Americans do not end up needing.

While we may end up providing governmental support for the 30-year FRM because of its longstanding popularity, S&P’s mortgage reform school should be based on facts, not fancy.