On Sept. 5th, the Treasury Department released a comprehensive plan to reform Fannie Mae and Freddie Mac. Specifically, the 50-page document outlined administrative and legislative steps that need to be taken to define a more limited role for the federal government in the housing finance system, enhance taxpayer protections against future bailouts and promote competition in the housing finance system.
NREI discussed the proposed reforms and implications for multifamily financing with Willy Walker, CEO of Walker & Dunlop, a provider of commercial real estate financing services. In 2018, Walker & Dunlop ranked as the #2 Fannie Mae DUS lender, the #4 Freddie Mac multifamily approved seller and the #3 Multifamily HUD lender in the country.
NREI note: The FHFA announced on Sept. 13th, after the interview with Walker was conducted, a revised cap structure on the multifamily businesses of Fannie Mae and Freddie Mac. The new multifamily loan purchase caps will be $100 billion for each enterprise, a combined total of $200 billion to support the multifamily market for the five-quarter period from the fourth quarter of 2019 through the fourth quarter of 2020. The new caps apply to all multifamily business with no exclusions. Effectively, that means that “green loans” to finance energy and water efficiency improvements will no longer be excluded from the caps and will be considered conventional business.
This Q&A has been edited for style and clarity.
NREI: Talk about GSE reforms has been ongoing for a number of years. Do you think reforms are needed, or how extensive are reforms that are needed?
Willy Walker: No. I don’t think that the called for reforms are needed. Do I believe that it is a political reality today? Yes. And do I believe that Fannie and Freddie need to be recapitalize? Yes.
If you look at the Wall Street Journal article on Sept. 8th that focused on Fannie and Freddie, it was a very good summary of how Fannie and Freddie have changed their businesses materially since the financial crisis. Most significantly, where they used to originate loans and hold them in portfolio, they are now securitizing all of their loans. Where they only had risk sharing on their loans in the multifamily business pre-crisis, today they have risk sharing on a significant amount of their single-family lending. As it relates to the types of loans that they’re doing on the multifamily side, it has always been the very best collateral. And on the single-family side, they have been very disciplined in the type of lending they are doing.
As former Freddie Mac CEO Don Layton wrote in an article a couple of weeks ago, the reform efforts are really done, if you will. Nonetheless, Congress hasn’t done anything to actually pass legislation or de-risk the government or the taxpayer. As a result, this effort to get Fannie and Freddie out of conservatorship is warranted, but I wouldn’t call it Fannie and Freddie reform, I would call it Fannie and Freddie recapitalization.
In (Federal Housing Finance Agency) Director Calabria’s opening remarks [recently] in front of the Senate Banking Committee, he talked about how there is a crisis in the housing finance industry, and then proceeded to talk about how under-capitalized Fannie and Freddie are. With great respect to Director Calabria and his understanding of these issues, there isn’t a crisis in the housing financing industry today. The undercapitalization of Fannie and Freddie is due to the fact that the federal government has taken $300 billion of profits from Fannie and Freddie over the last seven years and returned that to the government coffers rather than leaving capital at Fannie and Freddie to adequately capitalize the enterprises.
NREI: What do you think are some of the big takeaways or key elements in the proposed reforms that were presented by the Treasury Department?
Willy Walker: They talk throughout the white paper of wanting to have private capital in a first loss position. The only business that Fannie and Freddie do that has first loss risk being taken by private capital is their multifamily businesses, which accounts for about 10 percent of their businesses. So, one of the things that is questionable in my mind, is why are they focused on multifamily business’ market share at a time when multifamily has private capital in front of government capital, and that is 10 percent of their business? Whereas single-family has no private capital in front of government capital, and that is 90 percent of their businesses.
Following along with that, they question the market share of Fannie and Freddie and the caps that were placed on Fannie and Freddie’s multifamily businesses. First, from a market share standpoint, it looks like in 2019, the overall multifamily financing market per the Mortgage Banker Association’s estimate (released in September) will be $359 billion. Fannie and Freddie have been auto-regulating themselves to end the year each at about $75 billion in lending or a combined $150 billion.
If the projection from the Mortgage Bankers Association of $359 billion is accurate, that will give them 41.7 percent market share in 2019. There has been talk in the white paper that in recent times, Fannie and Freddie’s market share in multifamily has gotten as high as 50 percent. So, one question that I have is that if Fannie and Freddie will be at 41.7 percent, isn’t that directionally where regulators want them to go without taking any further action on their lending limits or the exclusions to their lending limits?
The second piece to that is the mix of business that is affordable versus market rate. In the white paper, it calls for a refocus on affordable housing in the multifamily operations of Fannie and Freddie. There is no doubt that for Fannie and Freddie to do the type of lending that they do on affordable properties, that they also need to be able to lend on market rate properties. As a very significant partner to HUD, which is all focused on affordable lending, I would only say that the robustness of Fannie and Freddie’s lending operations and being able to focus on the entire market, and not just the affordable market, makes the people, processes and technology that underpins the agencies’ multifamily lending far, far more sophisticated than what we get at the Department of Housing and Urban Development. That is not a slight to HUD, that is just a fact, and it is due to the fact that Fannie and Freddie are able to A) lend in the volumes that they lend in and B) that they are able to lend across the spectrums of both affordable and market rate properties that allows them to make the investments in technology and maintain the sophistication of operations that they have today. So, I get very concerned about the narrowing of the focus of the GSEs just on affordable housing.
Another important piece is green lending. FHFA changed its green standards in 2017, as well as 2018, to overweight savings that are generated by electricity and less so from water. They saw that water was being paid for by the landlord. Therefore, savings that were being derived from a green loan that drove water savings were going into the back pocket of the landlords. Whereas energy savings that were metered on a unit by unit basis would accrue to the renters.
Per Freddie Mac’s study of their green lending in 2018, the average renter in an apartment building with a Freddie Mac green loan on it saved $170 in 2018 due to utility cost savings. Fannie Mae’s number is $220 per year per renter for properties with a Fannie Mae green loan on it. The Fed recently said that 46 percent of the American public, if faced with a $400 unexpected expense, needs to sell something or borrow the money. So, $170 or $220 is a material amount of money that is going to those renters, and that type of money transfer into the back pockets of middle Americans is something that is great government policy, and it is something that private capital could never do.
NREI: My impression was that the reforms were aimed at reigning in market rate multifamily lending. Was that the case?
Willy Walker: I concur with what you’re saying. The white paper says that Fannie and Freddie’s footprint has gotten too big, they have too much market share and we want more private capital. However, if their desire is to have more private capital in the market, they already have private capital in the multifamily business taking the first loss position in every multifamily mortgage that is originated by Fannie Mae or Freddie Mac. So, rather than capping the amount of business they can do, why don’t they invite more capital into the risk sharing position?
[Fannie and Freddie] have the best mortgage origination, mortgage underwriting and mortgage securitization platform in the world. So, if the federal government wants more private capital, and you already have private capital in every single multifamily mortgage that is originated by Fannie Mae or Freddie Mac, why wouldn’t you sit down at the table with a Walker & Dunlop and say, “You take the first 5 percent risk on every single loan you originate for Fannie Mae. Would you take the first 10?” Why wouldn’t they sit down with the B-piece buyers on the Freddie Mac K series securitizations who take the top 15 percent loss, and say to them: “You want to take the top 20?” The plumbing is there for them to continue to provide the most efficient capital to the market possible, and at the lowest cost.
At a time when we have a housing affordability crisis in America, why would they do anything to increase the cost of capital? Because as we all know, that is going to be born at some point by renters. That doesn’t create liquidity. That doesn’t create new supply. That doesn’t put any downward pressure on rent growth at a time when rents are growing faster than incomes. So, it is very counter-intuitive to me that they are saying, “We need to bring in more private capital, and as such, we are going to restrict Fannie and Freddie’s footprint.”
NREI: You sound skeptical on these reforms. Do you think this is basic political maneuvering, and where do you think this is headed?
Willy Walker: I have had plenty of people say to me, this is all just window dressing. There is not going to be anything done legislatively. There is no will on Capitol Hill to really do anything with the GSEs. I listened to the hearings (last week) and there were several senators who said: “We have a real opportunity. This is the last piece of unfinished business of the great financial crisis. We need to do something here.”
I have not seen that there is the political will on either side of the aisle to do anything, and quite honestly, the only things that seem to get done on Capitol Hill these days are at crisis level, and this is far from a crisis level. It would be great if something happens, and they get on track to ending the conservatorship and bringing private capital back to Fannie Mae and Freddie Mac, and their stock prices are reflective of people having some hope that this reform effort actually catches some wind and can get done. I’m a little skeptical that that actually happens.
The bigger concern is that there is a new regulator at FHFA, and Director Calabria has been very focused on the footprint of the GSEs and the single-family, as well as their multifamily businesses. As the regulator, he has quite a bit of discretion over what he puts into the 2020, 2021 and 2022 scorecards. So the question mark that I have after reading the Treasury Department’s white paper—after it talked significantly about first loss position and it talked about the footprint of Fannie and Freddie—is what do with the FHFA scorecards for 2021, 2021 and 2022 for how Fannie and Freddie operate both in the single-family business, as well as the multifamily business.
I have heard numerous times from the FHFA that they do not want to make major market movements, and they do not want to impact the flow of capital. And we’re heading into an election year next year. So, my gut would tell me that what comes out in the scorecard is not Draconian or dramatic. But to be straightforward, they haven’t shown their cards. So, those of us in the industry are waiting to find out what they are going to put out in their scorecard. We’re hopeful that what they put out, if they want to make changes, is gradual, non-market moving and allows those of us who are big market participants to be able to react and put into place any adjustments that we need to for both our businesses and the overall market.
NREI: So, the multifamily industry is more focused on the near-term implications versus any legislative changes that might be years down the road?
Willy Walker: Yes, without a doubt. As much as the white paper is extremely good at outlining what are things that need legislative reform versus administrative reform, really, I don’t think anyone thinks the legislative reforms are coming anytime soon. Therefore, you can push those to the side and focus on administrative reforms. In some of those administrative reforms, there’s a lot of “We’re going to study… or we’re going to think about this, this and this.” The real question is, what’s your thinking as it relates to the scorecard under which the agencies operate under on an annual basis?
