Tag Archives: Federal Housing Finance Agency

State of the Union’s Rental Housing

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The Joint Center for Housing Studies of Harvard University released its report, America’s Rental Housing: Evolving Markets and Needs. The report notes that

Rental housing has always provided a broad choice of homes for people at all phases of life. The recent economic turmoil underscored the many advantages of renting and raised the barriers to homeownership, sparking a surge in demand that has buoyed rental markets across the country. But significant erosion in renter incomes over the past decade has pushed the number of households paying excessive shares of income for housing to record levels. Assistance efforts have failed to keep pace with this escalating need, undermining the nation’s longstanding goal of ensuring decent and affordable housing for all. (1)

The report provides an excellent overview of the current state of the rental housing stock and households. Of particular interest to readers of this blog is how the report addresses the federal government’s role in the housing finance system. The report notes that

During the downturn, most credit sources dried up as property performance deteriorated and the risk of delinquencies mounted. Much as in the owner-occupied market, though, lending activity continued through government-backed channels, with Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) playing an important countercyclical role.

But as the health of the multifamily market improved, private lending revived. According to the Mortgage Bankers Association, banks and thrifts greatly expanded their multifamily lending in 2012, nearly matching the volume for Fannie and Freddie. Given fundamentally sound market conditions, multifamily lending activity should continue to increase. The experience of the last several years, however, clearly testifies to the importance of a government presence in a market that provides homes for millions of Americans, particularly during periods of economic stress. (5)

 The report, to my mind, reflects a complacence about the federal role in housing finance:

Although some have called for winding down Fannie’s and Freddie’s multifamily activities and putting an end to federal backstops beyond FHA, most propose replacing the implicit guarantees of Fannie Mae and Freddie Mac with explicit guarantees for which the federal government would charge a fee. Proposals for a federal backstop differ, however, in whether they require a cap on the average per unit loan size or include an affordability requirement to ensure that credit is available to multifamily properties with lower rents or subsidies. While the details are clearly significant, what is most important is that reform efforts do not lose sight of the critical federal role in ensuring the availability of multifamily financing to help maintain rental affordability, as well as in supporting the market more broadly during economic downturns. (8)

The report gives very little attention to what the federal housing finance system should look like going forward, other than implying that change should be incremental:

To foster further increases in private participation, the Federal Housing Finance Agency (FHFA—the regulator and conservator of the GSEs) has signaled its intent to set a ceiling on the amount of multifamily lending that the GSEs can back in 2013. While the caps are fairly high—$30 billion for Fannie Mae and $26 billion for Freddie Mac—FHFA intends to further reduce GSE lending volumes over the next several years either by lowering these limits or by such actions as restricting loan products, requiring stricter underwriting, or increasing loan pricing. With lending by depository institutions and life insurance companies increasing, the market may well be able to adjust to these restrictions. The bigger question, however, is how the financial reforms now under debate will redefine the government’s role in backstopping the multifamily market. Recent experience clearly demonstrates the importance of federal support for multifamily lending when financial crises drive private lenders out of the market. (27)

I would have preferred to see a positive vision from the Center for how the federal government should go about ensuring liquidity in the market during future crises and how it should support an increase in the affordable housing stock. Perhaps that is asking too much of such a broad report, although the fact that Fannie and Freddie are members of the Center’s Policy Advisory Board which provided funding for the report may have played a role as well. [I might add that I found it odd that the members of the Policy Advisory Board were not listed in the report.]

I do not want to end on a negative note about such a helpful report. I would note that it takes seriously some controversial ideas about increasing the supply of affordable housing.  The report advocates for the reduction of regulatory constraints on affordable rental housing construction. I interpret this as a version of the Glaeser and Gyourko critique of the impact of restrictive local land use regimes on housing affordability. As progressives like NYC’s new Mayor know, restrictive zoning and affordable housing construction are at cross purposes from each other.

Reiss in Reuters on Mortgage Investing

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Reuters quoted me in Mortgage Bonds Reward Yield-Sensitive Investors, which addresses the future of Fannie and Freddie. It reads in part,

Investors who buy mortgage-backed securities from Fannie Mae and Freddie Mac and hold those bonds until they mature will get their full investment back; there is no “principal risk.”

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Washington has spent years debating what to do with Fannie Mae and Freddie Mac in the future, and quick change is unlikely.

Even if Fannie and Freddie are privatized, older bonds would be safe, suggests David Reiss, a law professor of real estate finance at Brooklyn Law School.

“The government would not change the rules of the game for securities purchased with the guarantee. Pre-privatization (securities) would retain the guarantees, and future securities would have a different type of guarantee,” he said.

Individual Liability for RMBS Misrepresentations

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Judge Cote (SDNY) issued an Opinion and Order in Federal Housing Finance Agency v. HSBC North America Holdings Inc, et al., 11-cv-06201 (Dec. 10, 2013).  The opinion relates to the potential liability of individuals who signed various documents containing alleged misrepresentations that were filed with the Securities and Exchange Commission. These misrepresentations, if true, may violate the Securities Act of 1933. Individuals who signed off on the alleged misrepresentations could be liable as “control persons” or other key individuals under the Act. The alleged misrepresentations were contained in offering materials for RMBS purchased by Fannie Mae and Freddie Mac.

The issue in the case is a pretty technical one: “the motion requires the Court to decide whether the SEC radically altered Section 11 liability for individuals who sign registration statements in the context of the shelf registration process when the SEC promulgated Rule 430B in 2005.” (5) Less technically, the motion requires that the Court decide the scope of potential liability for individuals for misrepresentations made in documents that they DID NOT sign that were supplemental to documents that they DID sign. The Court found that individuals could be held liable for such misrepresentations as had been the case before Rule430B had been promulgated.

I am not a securities law expert, so I assume that Judge Cote is right in stating that the defendants were arguing for a radical change to  the Securities Act of 1933 liability regime. I am also on the record in support of liability for individuals who are responsible for material aspects of the financial crisis. But I have also expressed concern about incredibly broad liability provisions. As a non-expert in this area, I was surprised that individuals could be held liable for misrepresentations that were made after they signed off on the preliminary documentation for securitizations.

Reiss on Watt Confirmation

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Law360 interviewed me about the Senate confirmation of Mel Watt as the Director of the Federal Housing Finance Agency in Fannie, Freddie’s Footprint Could Grow Under New FHFA Head. The article reads in part,

The U.S. mortgage industry is in for a sea change as Rep. Mel Watt, D-N.C., takes the helm of the Federal Housing Finance Agency, experts say, predicting Watt will seek to expand Fannie Mae and Freddie Mac, veering sharply from his predecessor’s plans but lining up more closely with President Barack Obama’s.

The confirmation came Tuesday in a 57-41 vote after months of delay ended by Senate Democrats’ implementation of the so-called “nuclear option” eliminating the filibuster of presidential nominees. Senate Republicans had expressed concern about the choice of a politician like Watt — as opposed to an academic or economist — to head the agency.

Members of the real estate finance community are also divided about whether Watt’s confirmation will have a positive or negative impact on the industry, but most agree that a major change is ahead.

“I think Watt, as director, could end up having a very big impact both in terms of reversing some changes that have been implemented, and also taking the agency in a very different direction,” said David Reiss, a professor at Brooklyn Law School.

Since 2009, interim FHFA head Ed DeMarco has made an effort to shrink the footprint of the regulator and its government-sponsored enterprises, Fannie and Freddie, in the U.S. residential mortgage market.

DeMarco faced pushback in these efforts from industry groups and lawmakers, causing him to backpedal a bit in November when the FHFA announced that it would hold off on reducing the size of mortgages that Fannie and Freddie can guarantee for at least the first half of next year.

Obama also did not share DeMarco’s ideology, but experts believe Watt’s plans for the GSEs are much more in line with those of the president. He appears cautious about allowing Fannie and Freddie to back away from the market entirely and may in fact favor policies that will increase the GSEs’ role in the mortgage market.

“My guess is that Watt will further enmesh Fannie and Freddie in the operations of the mortgage markets, whereas DeMarco was actually shrinking their footprint,” Reiss said.

*     *     *

The difference between the short-term and long-term impacts of Watt’s expected actions will be significant, experts say.

DeMarco’s moves made short-term waves, but supporters believed the aim was long-term equilibrium and an eventual balance of public and private capital in the mortgage market. Watt may have more potential for positive short-term results, but there will still be a question as to whether this will translate into a stable market for the next generation, Reiss said.

“Often when people are talking about government intervention, they want help for problems now, but they’re also setting up the rules of the game for once the crisis has passed,” he said.

GSEs Are Giants of Multifamily Sector Too

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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

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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.

Qualified Residential Mortgage Comments

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The agencies responsible for the Qualified Residential Mortgage rules that address the issue of credit risk retention for mortgage-backed securities requested that comments on the proposed rulemaking be submitted by yesterday.  And comments there were.  Here is a sampling:

The Urban Institute argues that

In formulating their QRM recommendations, the Agencies have done an admirable job balancing these considerations: on one hand, they wanted QRM loans to have a low default rate; on the other hand, if QRM is too tight, it will impede efforts to bring private capital back into the market and will further restrict credit availability. The right balance would thus appear to be precisely where they have landed with their main proposal: that QRM equal QM. (2)

The Securities Industry and Financial Markets Association effectively agrees with this and argues that

QM should be adopted as the standard for QRM, rather than QM-plus. QM is a meaningful standard for high quality loans. The characteristics of QM-plus, particularly the 70 percent LTV ratio, would exclude most borrowers from these loans. We believe the adoption of QM-plus would reduce the competitiveness of private mortgage originators and delay the transition of the housing finance system away from the GSEs. (vi)

The American Enterprise Institute, on the other hand, argues that

The preferred response, in our opinion, is to implement the Dodd-Frank Act by creating a combination of the QM and a standard for a traditional prime mortgage that Congress intended for the QRM. For this reason, we have filed this comment with the agencies, detailing how it is possible to comply with the clear language and intent of the act and still provide a flexible set of standards for prime mortgages — which have low credit risk even under stress. (4)

My thoughts on the proposed QRM rule can be found here, here, here and here.