Empowering Freddie Mac and Fannie Mae to Solve the Affordable Housing Crisis

Posted on Jan 14 2019 - 12:11pm by Lance Edwards
Availability of capital drives the creation and sustainment of rental housing, but driving significant dollars into affordable housing generally requires some element of government support or incentive.

 

By Eduardo Padilla (NREI Online Article —  A solution to the affordable housing crisis in the U.S. continues to evade disparate groups battling this growing problem. Whether its chronic homelessness or workforce housing, the core elements begin with a supply and demand imbalance impacted by capital availability and negative social perception of “low-income” rental housing. Over 35 percent of Americans live in rental housing and that percentage continues to grow. According to Freddie Mac, nearly 30 percent of renters—that is more than 11 million households—spend at least 50 percent of their income on housing. Affordable rental housing is key in the effort to solving this crisis, and Freddie Mac and Fannie Mae (commonly referred to as the GSEs), play a key role in this battle.

Availability of capital drives the creation and sustainment of rental housing, but driving significant dollars into affordable housing generally requires some element of government support or incentive. The most prolific suppliers of capital in the affordable rental market—Freddie and Fannie—deliver capital through mortgage programs that have come at no net-cost to the U.S. taxpayer for over two decades. Even in the midst of The Great Recession, the multifamily divisions of Freddie and Fannie were profitable. Since the end of the Great Recession, Fannie and Freddie have, on a cumulative basis, provided total dividends of $279.7 billion to the U.S. Treasury compared to the approximate $180 billion provided from the U.S. Treasury. If these agencies had been allowed to retain these profits, the risk to taxpayers would have been effectively eliminated.

Even with virtually 100 percent of their profits paid to the Treasury Department, the agencies have dramatically reduced their risk exposure by changing the fundamental way they execute transactions. They now transfer most of the credit risk to the private capital markets. In addition, with many years of experience and a record of accomplishment, the multifamily divisions have proven their keen ability to underwrite risk. Freddie Mac’s delinquency rate is currently 0.01%.

Freddie Mac’s Multifamily Targeted Affordable program for 2017 and year-to-date 2018 contributed $12.7 billion in financing for affordable housing. In addition, they have also introduced a new mezzanine-financing product for affordable housing that will effectively reduce the equity required in rental property development and acquisition. Fannie Mae’s affordable lending programs exceed $8 billion for 2017 and year-to-date 2018, so the GSEs have combined for over $20 billion since 2017.

Other key mechanisms for driving down the cost of housing are Section 8 direct rental subsidies and the federally supported low income housing tax credit program. While these programs are essential to the creation of affordable housing, Freddie and Fannie exceed the total capital amounts provided by these other programs.

GSEs lending for a broad quality spectrum of rental properties at very competitive rates leads to sustained value in a marketplace that is often dominated by older, moderate rental-rate properties. We must fight to retain naturally occurring affordable housing. Mortgage capital with attractive terms will be key to the achievement of this essential goal.

If Freddie Mac and Fannie Mae were allowed to capitalize their balance sheets from their own profit and add another layer of extremely low-cost capital, affordable rental housing for lower income Americans could be dramatically improved. They have proven that a large volume can be balanced with low risk, and low-cost execution. This no time to restrict the agencies or seek out far-fetched criticisms where none is deserved—Freddie Mac and Fannie Mae should be encouraged to do more.

Eduardo “Ed” Padilla has been CEO of NorthMarq Capital since 2000.

Learn more at www.northmarq.com.