Should Fannie Mae and Freddie Mac fade into history? Will they be missed, or will the private sector step up and fill the void? At the Multifamily Executive Conference in September, a CEO Power Panel addressed these questions and the “what ifs” that surround the potential demise of these government-sponsored enterprises (GSE).
A little background to set the stage: after suffering in the crisis of 2008, Fannie and Freddie were restructured, stabilized, and placed under the conservatorship of the Federal Housing Finance Agency (FHFA). Now, going into 2014, the FHFA has outlined different strategies that are being considered to change the way the entities function. With essentially everything on the table for discussion, it becomes more than just an academic exercise to consider the repercussions; it is vital to the health of the housing industry for all parties to consider potential scenarios, and how their businesses fit into the picture.
The panelists were asked what they thought would happen if Fannie and Freddie were to go away. Ed Pettinella, CEO of Home Properties, believes if the GSEs were to completely disappear from the capital equation that the private sector would become more involved. “If GSEs get out of the room and they allow major banks and life insurance companies to come in and bid, I think you’re going to see them scoop up a lot of the business,” he said. Speaking about the multifamily industry, he noted that it historically has been financially stable, which is attractive to lenders.
“If you look at the multifamily performances, public or private companies, the track record is impeccable in terms of nobody defaulting. They like what we do because we’re a stable business. In recessionary times they like to know that we hold in there—we don’t default. The other thing, for the public companies, is that we’re all rated, so if Wall Street is there, whether it’s convertible debt or equity, the windows are fairly wide open on almost any capital market tool that you want to look at right now. We are going to have to operate just like everybody else going forward, I believe, but I think we have the credit rating and the market stabilization built in, so we’ll perform very well and get attractive value rates.”
Tom Bozzuto, CEO and chairman of The Bozzuto Group, agrees with the idea that capital would be available, especially to larger companies in major markets. However, he questions the potential impact of the change in lending practices on smaller markets, where it may be more difficult to find lenders with competitive rates.
“If you begin to create a list of jurisdictions and regions in the country that would be capital-starved, it would be a very long list. I think the perspective that we can allow the government guarantee to get out…would be horrible for those who rent, and it would be horrible for the apartment industry.”
Bozzuto's concerns reflect the other side of the debate, which is that the private sector may be reluctant to accept the higher risk associated with certain mortgages that lack the government guarantees of Fannie Mae and Freddie Mac.
Bill Bayless, CEO of American Campus Communities, echoes the concern that smaller markets may be faced with a lack of access to capital. He says his business works a little differently because the major markets in student housing often are in rural areas. His examples were SEC college towns like Auburn and Tuscaloosa, Ala., and Gainesville, Fla., which “aren’t exactly major metropolitan markets.” But when it comes to the student housing business, those are core markets. He agrees that, “there is a lot of money on the sidelines waiting” through life insurance companies and banks, but he would like to see the GSEs continue to provide liquidity to the industry.
Steering the discussion back to the original question of what it would it mean for the business if the GSEs were to go away, Pettinella agreed that nobody really wants that to happen, but the prospect cannot be ignored.
“I’m trying to be realistic. I’m trying to be strategic and think about where it’s going to go. I want to touch on your point about the secondary and tertiary markets. We are high-growth, high-barrier. The man sitting next to me right here is in secondary, tertiary markets—high-growth. Let’s say the GSEs are out of the multifamily component. They’re going to break down our portfolios and they’re going to find no defaults and great cash flow, and those properties, regardless of whether it’s high-barrier or low-barrier, will perform as well. He should be afforded the same type of rate that I would. Once government gets out of the way, there are people that will evaluate good paper the proper way. The marketplace will work and I don’t think it’s going to be as devastating.”
After debate that briefly touched on both sides of the issue, Tom Toomey, CEO of UDR, changed the perspective of the discussion. Instead of looking at the pros and cons from the point of view of a single company or a specific market, he challenged that the national housing market should be considered in a more global setting. He says we’re missing the point, which is who has the best housing on the planet?
“From top to bottom, single-family, multifamily—it’s the United States. What has enabled that has been the uniformity brought by the GSEs to capital flows and availability across all markets. You go across America and we have an amazing quality of housing compared to anywhere else you go. And the government intervention, if it’s just the pricing paper that gives us that ability to have that strong of a housing market from top to bottom, why are we not standing up and saying, 'Wait a minute! This threatens our children’s ability to have quality housing down the road!' I mean, the truth should really be about the stability of our housing, and that argument is not being made.”
Toomey’s point goes back to the original intent of Fannie Mae, created in 1938, which was to bolster the housing market following the Great Depression by providing liquidity and affordable mortgage options for all Americans. A timely question is whether Fannie Mae and Freddie Mac, which was founded in 1970, are still necessary. They were drawn into the mortgage frenzy that resulted in the crash of 2008, which has dramatically changed the lending landscape.
Eric Bolton, CEO of MAA, admits that he thinks some things happened in the past, and that "abuse took place, and other things sort of messed up the plan. I think we need to go back and fix some things, but the fundamental mission and what it represents in terms of living standards for this country—we absolutely need that. I think the notion that any time in the near future that they’re not going to be there—I just don’t think that’s realistic. I think the implications that would have across this country are just enormous.”
Supporting Bolton’s argument, Rick Graf, president of Pinnacle, advocates the need for the industry “to stand up and say not just no, but hell no, because this is not good for our business, this is not good for our country, and not just our kids, but our grandkids.” Understanding that the change process could take years, and he calls for the industry to be involved and to have a common voice. “Are there vehicles that will fill the vacuum and fill the void in the short run? I think there are,” Graf says. “But the question is what are the long-term implications and their significance?”
Details of what the future holds for Fannie Mae and Freddie Mac are still murky, but what is clear is that there will be change. They may be redefined and repurposed, or they may be sunsetted. The conference panelists have varying opinions on the short- and long-term implications if the GSEs were to cease to exist, but they agree that the industry needs to be a part of the process and safeguard the integrity of the housing market nationwide.