Efforts to bring Fannie Mae and Freddie Mac out of federal conservatorship continue, but what impact will reform of the government-sponsored enterprises (GSEs) have on commercial mortgage brokers and their clients?
The biggest changes will occur in the secondary mortgage market, but that doesn’t mean that front-line mortgage brokers won’t feel the effects at all. Rather, any changes made to Fannie and Freddie are likely to ripple across the housing-finance industry as a whole. This will impact multifamily and mixed-use commercial properties with GSE-backed loans.
During the previous financial crisis in 2008, the federal government bailed out the GSEs and placed them in conservatorship under the Federal Housing Finance Agency (FHFA). Since then, numerous plans have been floated by Congress, federal administrators, mortgage trade organizations and private investors in the GSEs to reimagine America’s system of housing finance.
All of the competing reform proposals were shelved during the Obama administration after failing to gain traction. Last year, however, FHFA director Mark Calabria announced plans to recapitalize and eventually release the agencies via public stock offerings that would likely occur sometime over the next two or three years. Such a move would represent a massive change in housing finance and also likely impact the low- to moderate-income multifamily rental market in which the GSEs are big players.
Many people associate the GSEs with the 30-year fixed-rate loan for single-family homes, but Fannie and Freddie also have been the two largest financiers of apartments over the past decade. They do this by purchasing multifamily mortgage from lenders.
The GSEs have been particularly important in the affordable-rental space, enabling projects that wouldn’t otherwise pencil out due to lower rents to get reasonably priced financing, or by offering long-term, fixed-rate loans to preserve existing affordable-housing stock. This is especially true with Fannie Mae’s affordable-housing preservation program, which is designed for properties with Section 8 housing-assistance program contracts and other preexisting affordable-housing complexes with expiring federal incentives.
The GSEs also play a role in mixed-use multifamily developments in which a portion of the space is dedicated to commercial purposes. Fannie Mae, for example, allows property owners to either rent up to 35% of the space or derive up to 20% of the property’s income from commercial tenants.
Any change made to the status of the GSEs will likely impact their multifamily business. If Fannie and Freddie are ultimately recapitalized and released from their conservatorships, they will likely face more competition from the private sector and their role in their marketplace may change.
For commercial mortgage brokers, a heavy capital burden on the GSEs likely means that the cost of doing business with the agencies will go up.
A key part of GSE reform this year has been the formation of a new capital rule. FHFA proposed this capital rule in May 2020 and the comment period ended this past August. Under the FHFA proposal, the agencies would be required to hold a minimum of $244 billion in combined capital, according to projections based on their September 2019 balance-sheet data, as well conform to other capital buffers imposed by banking regulations.
Opponents argue that the proposed rule requires Fannie Mae and Freddie Mac to hold so much capital that it will cause mortgage rates and fees to increase, thus making housing less affordable. The rule is expected to be finalized before the end of this year and there is a chance that the final rule won’t require the GSEs to hold as much capital as initially proposed.
For commercial mortgage brokers, a heavy capital burden on the GSEs likely means that the cost of doing business with the agencies will go up. This will have a ripple effect and landlords will probably end up passing on the added costs to their tenants. Mortgage brokers also may start charging higher fees to make up for the increased costs associated with GSE-backed multifamily mortgages.
Another way that mortgage brokers are likely to feel the impact of GSE reform is through increased competition. One of the FHFA’s goals has been to increase competition in the housing-finance industry by making it easier for other lenders to compete with the GSEs in the secondary finance market. From an investor’s standpoint, having more competition for loans would make it more difficult for the agencies to earn money. Some argue, however, that no other lender can do what Fannie and Freddie do, meaning that any attempts to increase competition in this space are likely to come to nothing.
From a commercial mortgage broker’s perspective, introducing more competition into this sector will likely change the rules associated with commercial-property loans. The GSEs’ multifamily programs might not change much in the beginning, but mortgage brokers should pay close attention to them because change is likely at some point. Specifically, there could be a change to how much space a multifamily owner can rent to commercial tenants. This would be the biggest potential impact of GSE reform on commercial mortgage brokers: They and their borrowers may find themselves with more (or less) space to rent out.
There’s no denying that GSE reform will have sweeping changes throughout the housing-finance industry, which will impact how landlords can rent property to commercial tenants. But there is still a chance that all the efforts made to release Fannie Mae and Freddie Mac from conservatorship will be in vain.
Americans will go to the polls in November and they might choose a new president. If Joe Biden is elected, the federal policy is likely to change. Although Biden has yet to express his opinion on GSE reform, a Biden administration may favor a policy that allows Congress to take the lead.
A new administration also could block the FHFA’s effort to quickly recapitalize and release the GSEs as private companies. Calabria will likely try to get as much done as possible before the November elections, but the entire process won’t be complete before the next presidential inauguration in January 2021. ●