Fannie Mae and Freddie Mac’s (the government-sponsored enterprises or GSEs) role in financing multifamily housing has been shrinking steadily since the financial crisis—not surprising given the strength of the multifamily market and the presently abundant investment from private capital. But, as discussed in my latest issue brief, this decline has been more severe for lower-income and underserved segments of the multifamily market. My recommendation: FHFA should take steps to prevent the GSEs’ role from shrinking further.
The GSEs’ share of multifamily originations has dipped below normal levels: The GSEs financed approximately 70 percent of all multifamily originations in 2008 and 2009 as private capital pulled back significantly. However, as the multifamily market started to recover and private capital began re-entering after 2009, the GSEs have significantly reduced their market presence. By the end of 2014, the GSEs’ share of total multifamily originations had declined to 30 percent, which is below their 35 percent market share during the early 2000s, a period of relatively stable housing markets.
The declines are even steeper for underserved segments: In response to the Federal Housing Finance Agency (FHFA) 2013 Scorecard, which required each GSE to reduce multifamily volume by 10 percent over the prior year, the GSEs reduced their combined 2013 volume by 13 percent. However, financing for three underserved segments of the multifamily market—small loans, subsidized affordable housing, and manufactured housing community loans—was cut by nearly twice as much, or 24 percent during the same year. Combined GSE volume improved in 2014, rising by 5 percent in response to FHFA’s 2014 Scorecard, which did not require any volume cuts. However, financing for the above three underserved segments was slashed by an additional 15 percent on top of the 2013 cuts. In total, over the two year period from the beginning of 2013 to the end of 2014, GSE financing for the three underserved segments was cut by 36 percent, more than three times the 10 percent decline in overall GSE volume over the same period.
The timing is tough for lower-income renters: The GSEs’ declining role in the multifamily market comes at a time when rents are rising rapidly due to higher demand among millennials and former homeowners. This decline is a more serious concern for lower income and underserved communities because pure private capital – currently the predominant source of multifamily financing – tends to focus on the more profitable mid-to-high end of the market. This leaves renters at the lower end of the market more rent-burdened than those at the mid-to-high end. While the GSEs are more focused on mid-to-lower end of the market than private capital is, the recent steep declines in GSE financing for underserved segments should give policymakers and regulators a pause for thought. Without adequate support for their end of the market, lower-income renters will either be forced to pay even more rent, or continue to live in inadequate housing.
FHFA should take note: Given the current rental environment, shrinking the GSEs’ role further is not only unnecessary, but also detrimental, especially for the underserved segments of the market. As discussed in more detail in the issue brief, FHFA has recently taken some positive steps to alleviate the declines in GSEs’ volume. However, considering the strong upward trajectory of the demand and cost of renting in the coming years, FHFA may need to do more.