Even as the single family finance system has collapsed, the multifamily rental mortgage market has remained fairly stable with low delinquency and foreclosure rates. While noting the multifamily (i.e. residential buildings with more than 4 units) market’s relative strength, a new policy brief from the Joint Center for Housing Studies at Harvard University emphasizes the fragility of this market in the current environment.
The paper notes that the strength of the rental market itself is uncertain, with a potentially increased supply dampening rents at the higher end of the market in some places, even as demand increases at the lower end as homeownership declines and the recession deepens. Even in recent years before the crisis, markets produced very little low income rental housing, and it remains in short supply. With few mechanisms for delivering supply at the lower end coupled with the collapse of the Low Income Housing Tax Credit market, the uncertainty around the GSEs’ mission and involvement in multifamily markets exacerbate this uncertainty.
The paper cites the role of Fannie Mae and Freddie Mac as having been central to the historical stability of the multifamily mortgage market. It also finds that the GSEs have been playing a larger role in recent years. Multifamily mortgage debt accounts for 35% of all debt held in the combined portfolios of Fannie Mae and Freddie Mac, and these institutions hold 19% of all multifamily debt. An additional 17% is held by mortgage pools guaranteed by these two GSEs or their cousin Ginnie Mae, which securitizes FHA and other mortgages with a government guarantee.
The paper concludes that historically these institutions have acted as a “crucial liquidity backstop” for the multifamily market, providing needed credit to buyers of multifamily buildings when conditions become tight. In the current market, alternative sources for multifamily finance such as pension funds, insurers, and commercial banks have all but disappeared from the market. Now, however, uncertainty about the future of Fannie Mae and Freddie Mac, which were brought into government conservatorship as a result of the crash in the single family market, is cause for concern. With the conservator planning reductions in their mortgages holding, the brief concludes these institutions will be hard pressed to play their backstop role. If no alternative source of financing emerges, there is the strong possibility of instability in multifamily housing finance in the not-too-distant future, particularly since these buildings are often financed with loans that have terms as short as five years.
In the way of a conclusion, the brief reviews the principles being suggested to guide the reform of the current housing finance system. These include:
- Start with a clear mission of the public purpose that federal agencies each play.
- Demand appropriate public returns for government assumed risk.
- Establish adequate reserve requirements for federal mortgage finance institutions.
- Establish strong regulators.
In short, the brief urges policy makers to consider the multifamily market in their response to the current crisis and the problems of the GSEs, but also to look beyond the current crisis and seek the long-term improvement of the multifamily finance system to serve the public purpose.
The brief, Meeting Multifamily Housing Finance Needs During and After the Credit Crisis, was sponsored by the National Multihousing Council and can be found at www.jchs.harvard.edu/research/multifamily_finance_needs.html.