PROJECTHousing Finance Reform Incubator
Doug Bibby and Bob DeWitt: Rebuilding Housing Finance on a Strong Foundation

May 18, 2016

September marks eight years since the federal government placed Fannie Mae and Freddie Mac in conservatorship. It was an aggressive and controversial move predicated by fear that the magnitude of the economic catastrophe would grow if the two mortgage giants fully collapsed.

The conservatorship used taxpayer money to shore up these part-public, part-private entities, which accounted for roughly two-thirds of both single-family and multifamily mortgage markets. Desperate times called for drastic measures.

But it was designed to be a temporary solution, an interim fix to prevent economic Armageddon while a more lasting prescription for the nation’s housing finance system could be determined. Since then, we’ve worked with lawmakers, regulators, and administration officials on a broad range of solutions that could ensure liquidity, stability, and affordability in the housing market—especially for multifamily, which has been a growth engine for the housing market during the economic recovery.

Without reliable financing sources for multifamily properties, our industry cannot serve the 38 million people who currently live in apartments, much less provide new housing options for the estimated 4.4 million additional renter households that are expected to form in the next decade (JCHS 2015).

We are not advocating for the status quo or a return to the past.  However, it is important to recognize the structures that work in practice, as they can provide core principles for lawmakers and stakeholders as they craft a long-term solution for today’s challenged housing finance system.

Financing That Performs

There’s broad consensus that the next iteration of the housing finance system must protect taxpayers, emphasize the private markets, support a broad variety of housing options, and remain liquid throughout ebbs and flows of an economic cycle.

But what’s been surprising as we’ve struggled through the fits and starts of housing finance reform is how few people recognize that a proven model already exists that meets those objectives: Fannie and Freddie’s multifamily programs.

Largely overshadowed by the significant losses coming from their single-family portfolios, Fannie and Freddie’s multifamily programs performed remarkably well during and after the housing crash. Loan performance remained strong, with delinquency and default rates at less than 1 percent—a mere fraction of the defaults that plagued single-family at the bottom of the cycle.

Moreover, the government-sponsored enterprises’ (GSEs’) multifamily businesses have continued to be profitable on balance, with the GSEs’ combined multifamily comprehensive income reaching $30 billion from 2008 through the second quarter of 2015 (Division of Housing Mission and Goals 2015).

These positive performance metrics are because of the GSE multifamily programs’ adherence to prudent underwriting standards, sound credit policy, effective third-party assessment procedures, conservative loan portfolio management, and, most importantly, risk-sharing and retention strategies that place private capital ahead of taxpayers.

Each GSE utilizes its own risk-sharing models that protect it from losses. These models worked effectively through the economic downturn.

Fannie Mae employs a delegated originator and servicer model (the Delegated Underwriting and Servicing program, or DUS), where risk is shared between Fannie Mae and the DUS lender.  Each loan purchased is securitized, and the resulting mortgage-backed security sold to investors carries a full guarantee of Fannie Mae in the event of default.  Their two risk-sharing models protect Fannie Mae in the event of default. These models are as follows:

  • Pari Passu: Fannie Mae and the lender share losses on a pro rata basis, with one-third borne by the lender and two-thirds borne by Fannie Mae.

  • Standard: The lender bears a share of losses, calculated using a tiered loss-sharing formula (generally involving a first-loss position and a cap at 20 percent of original loan amount) based on established risk factors, such as loan-to-value and debt-service coverage ratios.

Freddie Mac employs Program Plus, a prior approval business model wherein it underwrites each loan purchased from its network of sellers, creates a multiloan, multiclass security, and sells that security to investors.  The repayment of the senior-most security is guaranteed by Freddie Mac, while the bottom 10 percent to 15 percent of first-loss securities are sold to qualified investors, protecting Freddie Mac from all but the most extreme losses associated with a loan default.

Filling the Gaps in the Private Market

The GSEs’ multifamily programs address a market failure in the housing finance system that results in an abundance of capital for high-end properties in top-tier markets but largely ignores middle market and affordable housing needs in urban cores and leaves secondary and tertiary markets underserved. 

The GSEs ensured that multifamily capital was available in all markets at all times so the apartment industry could serve the broad range of America’s housing needs from coast to coast and everywhere in between. A reformed system must continue to fill this important public policy need.

We share the collective desire to have a marketplace where private capital dominates, and that’s been the case in our markets, save for periods of market dislocation. The apartment industry relies on many private capital sources to meet its financing needs, including banks, life insurance companies, the commercial mortgage-backed securities market, and, to a lesser extent, pension funds and private mortgage companies.

However, even during healthy times, the private market has been unwilling or unable to meet the totality of the rental housing industry’s capital needs. For example, banks are limited by capital requirements and have rarely been a source of long-term financing. Life insurance companies typically make up less than 10 percent of the market, lend primarily to newer and high-end properties, and enter and exit the multifamily market based on their investment needs. And a stricter regulatory environment post–financial crisis will likely keep the private-label commercial mortgage-backed securities market from returning to previous volumes.

These private market constraints are why government-backed capital sources like Fannie, Freddie, and the Federal Housing Administration have a place in the market today. Moreover, there is no evidence to suggest that the situation will be much different going forward.

Financing for All Economic Cycles

Aside from being a key source of long-term multifamily mortgage financing that supports underserved geographic markets and an array of apartment products, the GSEs’ multifamily programs ensured liquidity in the multifamily market throughout the economy’s ebbs and flows.

In times of economic growth, private capital becomes active in the multifamily market alongside the GSEs and the Federal Housing Administration. That’s what we’re seeing today as the economic recovery continues. However, there’s a historical pattern of private capital pulling back or exiting the market entirely when the economy slows and then reentering the market after these periods of disruption.

We saw this during the 1997–98 Russian financial crisis, the post-9/11 recession of 2001, and again in 2008, when private capital sources left the housing finance market in droves while Fannie, Freddie, the Federal Housing Administration, and Ginnie Mae remained active, accounting for the bulk of the multifamily mortgage market (figure 1).

In fact, between 2008 and 2010, the GSEs supplied $123 billion in mortgage capital to the apartment industry, making up 59 percent of the total multifamily mortgage production. As private capital reentered the market, the GSEs’ share dropped to 36 percent by the end of 2015.1 But without that critical backstop, thousands of otherwise performing multifamily mortgages would have gone into default because there were no private capital sources willing to refinance maturing loans. This could have disrupted millions of renter households. 

Different Asset Classes Require Different Solutions

It is tempting to believe a single solution will solve all that ails our housing finance system. Unfortunately, that is not the case because multifamily finance and single-family finance systems operate differently. 

Not only are multifamily loans not as easily commoditized, but the multifamily financing process, mortgage instruments, legal framework, loan terms and requirements, origination, secondary market investors, underlying assets, business expertise, and systems for multifamily are separate and unique from single-family home mortgage activities. 

Housing finance reform must take different approaches for multifamily and single-family to recognize each sector’s needs and public policy goals.

As we show renewed urgency to devise a stronger housing finance system, we acknowledge the proven elements in the current system that supported liquidity in the multifamily market, served public policy goals, and protected taxpayers from unnecessary risk.

We offer these seven principles to help shape reform efforts.

  1. Provide Access to an Explicit Government-Guaranteed Backstop. Given the market failure of the private sector to meet the apartment industry’s broad capital needs, an explicit federal “backstop” guarantee for multifamily-backed mortgage securities should be available in all markets at all times.

  2. Provide Broad Liquidity Support, Not Just “Stop-Gap” or Emergency Financing. Any federal credit facility should be available to the entire apartment sector and not be restricted to specific housing types or renter populations. Moreover, it would be impossible to turn on and off a government-backed facility without seriously jeopardizing capital flows.

  3. Protect Taxpayers. Retain the GSEs’ multifamily first-loss risk-sharing models, which put private capital ahead of taxpayers.

  4. Restrict Federal Credit Support to the Security Level. The benefit of any federal guarantee should only accrue to the investors of multifamily mortgage-backed securities; it should not apply to the underlying multifamily mortgages or the entities issuing the securities.

  5. Support Private Capital Participation and Protect Taxpayers through Effective Guarantee Structure and Pricing. Borrowers should pay for the guarantee through an appropriately priced credit enhancement fee that insures taxpayers against future losses.  The fee should not be low enough to crowd out private capital.

  6. Empower a Strong Regulator. The regulator must have independence and deep multifamily experience.

  7. Retain Limited Portfolio Lending Without a Federal Guarantee. This will allow for loan aggregation, pilot programs, and targeted transactions.

The Vexing Affordability Challenge

As housing finance reform efforts gain momentum, we anticipate that housing and rental affordability will increasingly be part of the discussion.

Housing development and operation costs are rising while income growth has stalled; inflation-adjusted median renter household income today remains virtually unchanged since 1981.2 More people are spending greater percentages of their incomes on housing. At the same time, growing rental demand continues to outpace supply, even as the apartment industry has ramped up construction activity.

It is tempting to believe that more can be done to address affordability through housing finance reform, namely through imposing limitations on federal guarantees or other mandated benchmarks. We caution policymakers not to overreach, as such well-intended moves, if overly prescriptive, could have adverse consequences. 

Housing finance reform cannot address all affordability concerns, as there are factors beyond the reach of the finance system that contribute to housing expense and limit new supply. Aggressive labor, environmental, and building code requirements and regulations can hamper new apartment production while local policies governing entitlements, zoning rules, impact fees, and mandates such as inclusionary zoning or rent control add to rising housing costs.

While there’s a clear need for more public-private partnerships to drive creative solutions to the nation’s affordability challenges, housing finance reform efforts’ primary focus should remain on ensuring liquidity in the multifamily market. Multifamily housing remains inherently affordable housing. Fannie and Freddie report that approximately 85 percent of their multifamily loans serve households earning 100 percent of area median income or less.

Providing financing options that support the long-term ownership and operation of multifamily properties while developing loan products that meet underserved markets is the most effective way a housing finance system can meet our nation’s housing affordability challenges.  

The Stakes Are High

Communities are more dynamic and stronger economically when there is a healthy mix of both for-sale and rental housing options across a variety of price points. While homeownership remains a financial goal for many Americans, demand for rental housing, including apartments, is growing significantly.   

To provide additional rental housing that fulfills various family, lifestyle, and economic needs, it’s crucial that a reformed housing finance system provides reliable long-term financing for multifamily properties, filling in gaps in private capital lending and maintaining liquidity during economic fluctuations.

Many of the conservative operating principles governing Fannie and Freddie’s multifamily businesses offer a solid framework for housing finance reform efforts, especially because they promote risk sharing that puts private capital before the taxpayer.

While challenges exist for development, preservation, and affordability, ensuring constant mortgage market liquidity is the foundation for future solutions. A housing finance system in flux jeopardizes the ability of a growing population of people—including young professionals just starting out, empty nesters looking to downsize, workers wanting to live near their jobs, married couples without children, and families building better lives—to live in homes that are right for them, within their budgets, and without the burden of the debt that comes with a mortgage.


  1. National Multifamily Housing Council analysis of Fannie Mae and Freddie Mac 10-Ks (2006–15), data from the Mortgage Bankers Association, and Division of Housing Mission and Goals (2015).

  2. National Multifamily Housing Council tabulations of Current Population Survey Annual Social and Economic Supplement, US Census Bureau.


Division of Housing Mission and Goals. 2015. Quarterly Performance Report of the Housing GSEs: Second Quarter 2015. Washington, DC: Federal Housing Finance Agency.

JCHS (Joint Center for Housing Studies of Harvard University). 2015. “Rental Housing Demand.” In America’s Rental Housing: Expanding Options for Diverse and Growing Demand, edited by JCHS, 8–13. Cambridge, MA: JCHS.

Douglas M. Bibby is president of the National Multifamily Housing Council (NMHC), a national organization of more than 1,100 member firms involved in the multifamily housing industry. NMHC represents the industry on Capitol Hill and before the regulatory agencies, promotes research and information exchange, and advocates for rental housing across many issues. Before joining NMHC, Bibby spent 16 years as a senior officer of Fannie Mae, where he served on the company’s management committee. He was part of the top management team that is credited with the remarkable turnaround at Fannie Mae in the book Good to Great. 

Robert E. DeWitt is president and CEO of GID, where he oversees corporate strategy development, new client and equity partner sourcing and procurement, property acquisitions and dispositions, client relations, and overall management of the company. He is chairman of the board of directors of the National Multifamily Housing Council. He is a member of the Pension Real Estate Association and the Multifamily Silver Council of the Urban Land Institute, and he is past chairman of the Multifamily Gold Council. DeWitt graduated cum laude with a BA from Middlebury College and received an MBA from the Amos Tuck School of Business at Dartmouth College.

A photo of Laurie Goodman. Dark hair, glasses, bright smile.
"It is time for an open-minded look at the housing finance system and what role, if any, today’s government-sponsored enterprises might play in the future."
Tim Howard
"When invented narrative is replaced with verifiable fact, Fannie and Freddie cease to be a 'failed business model' that must be wound down and replaced; they instead become valuable resources that must be built upon and improved."
A photo of Jim Millstein. White hair, slight smile, suit and tie.
"To address the conflict between their affordability mission and shareholder returns, the mortgage guaranty businesses should be subjected to utility-like regulation, with strict activity, leverage, and return on equity limitations."
A photo of Alex Pollock. Slight smile, suit and tie.
"At the 10% Moment, Congress should declare the senior preferred stock fully retired, as in financial substance it will have been. Simultaneously, Congress should formally designate Fannie and Freddie as systematically important financial institutions.
A photo of Mark Zandi. Slight smile, suit, brown hair.
"A group of us has put forward a reform proposal that addresses the system's structural problems and keeps what works."
A photo of James Carr. Severe smile, suit, dark hair.
"The basic pillars of America’s housing finance system were enacted 80 years ago. Since then, major reconfigurations in our economy, demographic composition, and household locational preferences demand a bolder vision for housing finance in the 21st century."
A photo of Andrew Davidson. Slgiht smile, greying hair, glasses.
"A realistic approach to GSE reform is to strip the GSEs down to the functions that promote standardization, liquidity, and access to credit, and adopt the best governance structures for those functions. This can be achieved in four steps: streamline, share risk, wrap, and mutualize."
A photo of Mark Calabria. Slight smile, suit, dark hair, glasses.
“Mortgages, under any system, have to rest on someone’s balance sheet. Like water running downhill, the risk has flowed to the most leveraged sectors of our financial system. This is a recipe for instability.”
A photo of Patricia Mosser. Dark hair, glasses, bright smile.
“The characteristics of mutuals that may be seen as disadvantages for some types of financial companies are in fact advantages for our financial market utility proposal because they align the utility’s incentives with other actors in the securitization chain.”
A photo of Marc Morial. Big smile, suit, dark hair.
“In the aftermath of the Great Recession, the tragic loss of wealth, and the bailout of the big banks, our national government must continue to play a central role in the housing market to right previous wrongs, ensure access to all qualified borrowers, and keep the housing finance system afloat ...
A photo of Laurie Goodman. Dark hair, glasses, bright smile.
"Between now and 2030, this country will face an unprecedented surge in rental housing demand. Already, rents are skyrocketing out of the reach for many families, especially in places with job opportunities. New multifamily housing construction is at its highest level since the 1986 Tax Refo...
A photo of three individuals. All three are smiling, have suits, ties, and dark hair.
"There will be nuanced demands coming from the high concentration of household formation in African American, Asian, and Hispanic communities. Ginnie Mae 2.0 looks to be the safest way to build a sustainable platform to bring proven market stability to meet the needs of a materially changing demo...
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“The most critical need for multifamily is simply that policymakers pay attention to it early and plan ahead.
A photo of two individuals. Both are smiling, have suits, ties, and glasses.
We propose a spinoff of the multifamily business units of the GSEs and the formation of other new guarantors to increase access to affordable multifamily financing.
A photo of two individuals. Both are smiling, have suits, and ties.
"Consensus exists that a reformed housing finance system must protect taxpayers, emphasize the private markets, support a broad variety of housing options and remain liquid throughout an economic cycle. Surprisingly, few recognize that a proven model already exists that meets those objectives-and...
A photo of Jim Millstein outside. Dark hair, big smile, suit and tie, glasses.
"Mortgage finance reform discussions have failed to generate consensus assuring the widest possible access to sustainable mortgage credit at the lowest practical cost. We can resolve this impasse if we integrate all federal supports for mortgage finance into one cohesive whole."
A photo of Pinto. White hair, glasses, slight smile, suit.
"Today’s government-centric housing finance system is an “economics free zone” indifferent to supply and demand. Composed of an alphabet soup of agencies, this system has fostered a massive liberalization of mortgage terms and provided countless trillions of dollars in lending. Yet housing has be...
A photo of Taylor. White hair, suit.
"Much of the conversation on Capitol Hill and among policy thinkers has pushed affordability and access to the back burner. We need to bring it to the forefront of the conversation. The shape and quality of housing finance reform will have repercussions in every neighborhood and community and for...
Mike Calhoun and Sarah Wolff
"Average price estimates obscure significant variation. To assess access and affordability, we need to look closely at differential prices, not just overall prices or prices for low–credit risk profiles."
Rodrigo Lopez and Debra Still
"We believe that all housing needs, from the most directly-subsidized, affordable rental housing to the prime jumbo single-family lending market, lie along a single continuum. This housing continuum can be best served only by addressing single-family and multifamily, rental and homeownership, gov...
Janet Murguía
"By 2020 half of all first-time homebuyers will be Latino. Without affordable access to credit for these prospective buyers, the housing market will decline, with harmful consequences on the larger economy."
Jim Parrott
"Coming out of the crisis, there was thus almost universal agreement that we should reduce our reliance on this duopoly and shift more risk into a competitive private market."
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Research Areas Housing finance
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