State of Multifamily Financing

Although multifamily housing finance is not the source of the current credit crisis, it has been disrupted by it. Even though multifamily rental loan performance has held up well, many private sources of multifamily finance have exited the market. Fannie Mae and Freddie Mac, and to a lesser degree the Federal Housing Administration (FHA), have stepped in to make up much of the gap. Thus, the apartment and multifamily development markets are now being heavily supported by federal sources.


With uncertainty about what the reform of Fannie Mae and Freddie Mac will bring, mandatory reductions in their portfolios scheduled for 2010, and questions about the capability of FHA to handle greatly expanded loan volumes, these essential federal supports are at risk. There is a narrow window of opportunity to take steps to ensure the federal government continues to be a liquidity backstop for multifamily property markets before institutional reforms or scheduled portfolio reductions occur. Beyond these immediate liquidity needs, the likely broader reform of the housing finance system provides an additional opportunity to improve government supports for the multifamily finance system of the future.

Multifamily rental housing is important because it meets the housing needs of a range of different types of households. From those who simply find renting more convenient, to those who cannot qualify for a mortgage loan to own a home, to those unprepared to take on the risks of owning a home, to those who have just moved to an area or plan to move again soon, to those who seek the services that are more economically provided in higher density settings (such as seniors and others with disabilities), rental housing is a crucial option.

Multifamily housing is also important because it is better suited than single-family housing to meeting critical national goals like energy independence, sustainable development, and reductions in greenhouse gases. Multifamily housing will only grow in importance as these policy goals take center stage, as the largest generation of children below the age of 20 in the history of the U.S. reaches adulthood from 2000-2020, as the number of frail seniors begins to skyrocket, and as mortgage credit standards tighten.

Although some multifamily market segments have not been as well-served as others by the multifamily finance system, the system has functioned well for years. In no small measure, this is because government supports have typically stepped in to provide liquidity when purely private sources have exited. Fannie Mae, Freddie Mac, and FHA have all expanded their activity in 2007-08 as purely private sources withdrew or charged untenable interest rates. This is not the first time they have done so. Both in the wake of the currency crisis in 1998 and again after 9/11 and the 2001 recession, Fannie Mae and Freddie Mac stepped up portfolio purchases and guarantees of multifamily debt. This time, in 2007 alone, portfolio purchases surged by fully $29 billion to $56 billion — more than twice as much any previous year.

The system has also functioned well because investors have paid closer attention than single-family investors to their multifamily debt investments. Multifamily loan performance remains quite strong and underwriting standards appear to have remained prudent, unlike in the single-family market. While a severe recession will certainly lead to an erosion in performance, this deterioration will largely reflect economic conditions, not poor underwriting. That said, if as a result of the broader credit crisis existing apartment owners cannot refinance their maturing debt (most multifamily loans are balloon loans of 5, 7, or 10 year terms), default rates could rise. That puts an even greater sense of urgency on preparing plans now to make sure federal sources continue to provide liquidity.

The risks are great. The CMBS market has basically shut down, banks and thrifts are presently not willing to lend for multifamily new construction or rehabilitation, and life insurance companies, pension funds, endowments, and others that have provided permanent financing are standing on the sidelines. Also, with no income tax liability to shelter, Fannie Mae and Freddie Mac have stopped buying low-income housing tax credits. New investors have not yet been found to fill the gap and credit pricing is making most planned projects unworkable. Meanwhile, the public markets for state tax-exempt bonds have been roiled, making it harder to finance the preservation and production of much needed affordable, low-income housing.

One thing is clear: without the federal government as a liquidity backstop for multifamily finance, apartment owners would not be able to buy and sell properties, they would not be able to refinance them when their debt matures, they would not be able to tap equity in their properties to keep them from falling into disrepair, and new construction and rehabilitation could come to a halt even if there is demand for them. States and local governments are not in a position to play this role because they are not seen as the safe haven for investment that the federal government is. And private sources are not stepping in — indeed they are heading for the door.

Federal Reserve Chairman Ben Bernanke in a speech in 2008 concluded that “at least under the most stressed conditions, some form of government backstop may be necessary to ensure continued securitization of mortgages.” There is little disagreement that the size of residential mortgage markets and their importance to Americans demand that the federal government play such as role. There is, though, disagreement over how to achieve this and what other functions are legitimate and important for the federal government to play in support of multifamily markets.

With respect to Fannie Mae and Freddie Mac and their role as liquidity backstops, Chairman Bernanke suggested three alternatives: (1) to fully privatize Fannie Mae and Freddie Mac; (2) to use a covered bond approach (which would take the federal government out of the picture); and (3) to create even closer ties to the government, with or without shareholders.

The risk is that in reforming these institutions or moving forward with planned portfolio reductions, the critical liquidity role of Fannie Mae and Freddie Mac in multifamily finance will be jeopardized. In addition, FHA is now stepping up its activity and is perhaps the only source of lending for new development, though demand has diminished in the face of a broader housing oversupply. But FHA is widely viewed as being too rule bound, inflexible (because it takes an act of Congress to innovate in significant ways to meet new demands), and subject to annual appropriations for staffing and systems. Thus, there is concern that FHA is not prepared to handle a much larger role or could not play such a role effectively.

Excerpt from, “Meeting multifamily housing finance during and after the credit crisis: a policy brief.” by the Joint Center for Housing Studies. Harvard University January 2009. Read the full report.