PROJECTHousing Finance Reform Incubator

Ethan Handelman and Shekar Narasimhan: Do No Harm: GSE Multifamily Works

May 10, 2016

The pillars of the housing finance system failed in the 2008 crash, but Fannie Mae and Freddie Mac’s multifamily finance businesses did not. Policymakers too often overlook multifamily in discussions about housing finance reform, but multifamily provides housing for people at all income levels, especially lower-income households. Multifamily also has distinct needs for finance that can fit within many housing finance reform plans if we address it specifically, rather than tack it on as a placeholder page in a 200-page bill.

Permanent conservatorship was never the goal back when the crisis first hit, but rather a temporary solution until private capital could return to housing finance. Whether we end up with a public utility for securitization, a system of multiple chartered issuers, or some other form of deploying a government guarantee under regulatory oversight, the system can be compatible with multifamily mortgage finance using private capital to finance much-needed housing (Burke 2013; MFWG 2011; Parrott et al. 2016).

How Multifamily is Different

The multifamily businesses of Fannie Mae and Freddie Mac have put private risk-bearing capital ahead of government in two ways: one involves credible counterparty contingent risk sharing, and the other uses direct primary risk sharing by sophisticated B-piece buyers. Fannie Mae’s Delegated Underwriting and Servicing model is 29 years old, and Freddie Mac’s K-series securitization model is nine years old. The strength of these models, the effectiveness of their lending partners, and their culture of underwriting discipline are part of why their default rate has been much lower than many other mortgage segments. Multifamily underwriting is not immune to the animal spirits that at times lead to crises, as evidenced by Freddie Mac’s underwriting failures in the early 1990s and the poor investment choices many institutions made leading up to the savings and loan bailout in the 1980s. But the track record of the current multifamily businesses warrants their preservation in a new housing finance system.

In both economic upswings and downswings, there is strong underlying demand for multifamily partly because of the need for affordable rental housing, as the more than 24 percent of renters paying more than half of their income for housing can attest.1 Changing demographics, rising interest in walkable urban neighborhoods, constrained access to mortgage credit, and expanding transit options also suggest that demand for multifamily housing will continue to grow (Goodman, Pendall, and Zhu 2015; Joint Center for Housing Studies 2015). Meeting this demand requires reliable access to credit throughout business cycles for creating and preserving multifamily housing (Handelman, Smith, and Trehubenko 2010).

What Multifamily Needs

To support the multifamily sector’s ability to shelter people nationwide, the housing finance system needs a few features. Some of these are particular to multifamily, and others will be familiar to those following the mostly single-family debate.

  1. Stability and liquidity in the secondary market to purchase loans in all parts of the economic cycle, which requires government backing against the catastrophic risk of system-wide failure buffered by private capital bearing credit and operating risks. Most participants in the housing finance reform debate recognize that a government wrap is essential. They also agree that the government’s role should be explicit, priced, and limited.2

  2. Space for today’s two proven, competitive models. Fannie Mae uses its Delegated Underwriting and Servicing model to purchase loans from carefully overseen private originators who share risk with Fannie as it securitizes mortgages, usually loan by loan. Freddie Mac uses conduit securitization to share risk with private counterparties via pooled securitization.

  3. Ability to attract and retain talent. Multifamily finance is complex and specialized, and the long conservatorship has taken a toll on Fannie Mae and Freddie Mac’s ability to fully staff a business model that requires a relentless focus on monitoring and closing deals efficiently.

  4. Explicit support for affordable housing. There is a public interest in ensuring that the secondary market serves all housing needs by enabling private market forces to reach as far as feasibly possible. Market participants benefiting from a government-backed secondary market will also have an obligation to support efforts to fill in the gaps where markets are failing or not reaching today.3

These are features to produce outcomes—not structures—because they can occur in several reform scenarios.

How to Fit Multifamily into Housing Finance Reform

Before trying to hammer the square peg of multifamily into a round hole in your single-family finance model of choice, remember that multifamily can be separate. As long as there is a mechanism to obtain an explicit, limited guarantee against catastrophic risk, Fannie Mae and Freddie Mac could spin off their multifamily businesses into separate entities that could continue supplying liquidity to multifamily housing finance. Indeed, one of us proposed this to the Senate Banking Committee to bipartisan approval (Narasimhan 2013).

As a simple example, we could use the existing Fannie Mae and Freddie Mac models to purchase multifamily housing loans or loan pools but apply a separate guarantee. Ginnie Mae could wrap the issuer’s securities underwritten and insured by independent multifamily entities using the Fannie Mae or Freddie Mac model. The multifamily entities would pay a fee for the guarantee and bear risk ahead of the government, likely along with other private capital sources.

Separate multifamily issuers could work alongside a single government-owned issuer of mortgage-backed securities—as proposed by Parrott and colleagues (2016)—or a cooperative providing the same function. They could also operate in a system where several entities could purchase a government wrap, as proposed in various forms by the Center for American Progress’s Mortgage Finance Working Group, the Mortgage Bankers Association, and others (Burke 2013; MFWG 2011).

If the secondary market system were privatized, private capital should take the first-loss position in front of a government guarantee against catastrophic risk. Private-sector conduits operating in such an environment should look to the two proven models for multifamily finance if they plan to use a government wrap.

Multifamily secondary market functions could also be part of larger entities, as long as there is enough flexibility to meet the core functions identified above. Having multifamily separate makes regulation easier because it would be easier to observe the financial performance of a business that will necessarily be much smaller and more specialized than its single-family counterpart. The most critical need for multifamily is simply that policymakers pay attention to it early and plan ahead.


  1. Mindy Ault, “Housing Landscape 2016,” National Housing Conference, accessed May 5, 2016,!2016-housing-landscape/s06lv.

  2. A National Housing Conference Task Force representing for-profit, nonprofit, public sector, and private sector housing stakeholders agreed on this as a central principle; see “Housing Finance Principles,” National Housing Conference, last updated January 2014, The Bipartisan Policy Center’s Housing Commission reached a similar conclusion; see “Housing America’s Future: New Directions for National Policy,” Bipartisan Policy Center, last updated February 25, 2013,

  3. The secondary market supports affordable housing with affordable housing goals, the National Housing Trust Fund, the Capital Magnet Fund, and the proposed duty-to-serve regulation. Other mechanisms could complement or replace the current options, but the core principles supporting affordable housing through market mechanisms and subsidies to address market failures remain the same. See Handelman (2013).


Burke, E. J. 2013. Testimony before the US Senate Committee on Banking, Housing, and Urban Affairs, Washington, DC, October 9.

Goodman, Laurie, Rolf Pendall, and Jun Zhu. 2015. Headship and Homeownership: What Does the Future Hold? Washington, DC: Urban Institute.

Handelman, Ethan. 2013. Testimony before the US Senate Committee on Banking, Housing, and Urban Affairs, Washington, DC, November 7.

Handelman, Ethan, David A. Smith, and Todd Trehubenko. 2010. Government-Sponsored Enterprises and Multifamily Housing Finance: Refocusing on Core Functions. Boston: Recap Real Estate Advisors.

Joint Center for Housing Studies. 2015. The State of the Nation’s Housing 2015. Cambridge, MA: Harvard University.

MFWG (Mortgage Finance Working Group). 2011. A Responsible Market for Housing Finance: A Progressive Plan to Reform the US Secondary Market for Residential Mortgages. Washington, DC: Center for American Progress.

Narasimhan, Shekar. 2013. Testimony before the US Senate Committee on Banking, Housing, and Urban Affairs, Washington, DC, October 9.

Parrott, Jim, Lew Ranieri, Gene Sperling, Mark Zandi, and Barry Zigas. 2016. “A More Promising Road to GSE Reform.” New York: Moody’s Analytics.

Ethan Handelman is vice president for policy and advocacy at the National Housing Conference. He directs the policy and advocacy agenda focused on advancing federal housing policy to assist low- and moderate-income people; strengthening the nation's housing finance system; connecting people to opportunity through housing; advocating for housing policy during tax and budgetary reforms; and building stronger communities that coordinate housing, transportation, health, education, technology, and energy policy. He has testified before Congress and speaks and writes regularly on housing issues.  Handelman joined the National Housing Conference in March 2011, after leading the advisory practice at Recap Real Estate Advisors, assisting public- and private-sector clients understand and shape the affordable housing financial and policy environment. He serves on the board of Housing Unlimited, a nonprofit housing provider in Montgomery County, Maryland. Handelman received his BA in political science from the University of Michigan and his MA in international relations from Harvard University. Statements made here are those of the author and are not necessarily policy positions adopted by the National Housing Conference. 

Shekar Narasimhan is managing partner at Beekman Advisors, which provides strategic advisory services to companies and investors involved in real estate, mortgage finance, affordable housing, and related sectors. He is chairman of Papillon Capital and cofounder of the Emergent Institute in Bangalore, India. Narasimhan is also commissioner of the President’s Advisory Commission on Asian Americans and Pacific Islanders and a member of the Board for Housing and Community Development and for the Virginia Housing Development Authority. Narasimhan is former managing director of the Prudential Mortgage Capital Company. Before that, he was chairman and CEO of the WMF Group, a publicly traded, commercial mortgage financial services company that was acquired by Prudential in 2000. Narasimhan is a senior industry fellow at the Joint Center for Housing Studies at Harvard University and is on the Economic Advisory Council at the Center for American Progress. He has served on several national and local boards of housing and related organizations—including several terms on the Mortgage Bankers Association of America (MBA) board of directors—and was the first chair of the MBA’s commercial and multifamily board of governors. Narasimhan received the MBA’s highest honor in 1999, the Fannie Mae Lifetime Achievement Award in 2003, and the Dean H.J. Zoffer Distinguished Service Medal from the University of Pittsburgh in 2010. He holds a BS in chemical engineering from the Indian Institute of Technology Delhi and an MBA from the Katz Graduate School of Businessat the University of Pittsburgh. He holds a Certified Mortgage Banker designation. Shekar Narasimhan and Beekman Advisors have no financial interest in Fannie Mae, Freddie Mac, or the Federal Home Loan Banks. 

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"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."
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"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."
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"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.
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"A group of us has put forward a reform proposal that addresses the system's structural problems and keeps what works."
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“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.”
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“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 ...
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“The most critical need for multifamily is simply that policymakers pay attention to it early and plan ahead.
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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.
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Rodrigo Lopez and Debra Still
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Janet Murguía
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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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