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FHFA multifamily financing plans drawing concerns

The primary concern is that the financing reductions could detrimentally impact the markets in more rural areas and smaller cities, which rely heavily on multifamily property investment but fear it will be neglected by private parties.

Plans by the U.S. Federal Housing Finance Agency to scale back the financing of apartment building loans in 2014 are being met with some resistance.

The FHFA, which regulates the government-sponsored enterprises Fannie Mae and Freddie Mac, has indicated it intends to add to an already implemented 10 percent reduction in financing. The two GSEs currently back approximately 45 percent of the multifamily market, which is especially vital to many smaller and mid-sized cities. The reduction is part of a broader effort to transfer risk from Fannie and Freddie and increase private investment in the housing finance industry, Bloomberg reported.

Squeezing out small-town renters? 
FHFA officials have maintained that a Fannie and Freddie multifamily footprint of more than 35 percent is still substantial enough to buoy the market, and larger than it was before the housing crisis. But there has been considerable pushback from a variety of parties, including developers, lenders and advocates of affordable housing. The primary concern is that the financing reductions could detrimentally impact the markets in more rural areas and smaller cities like Boise, Idaho, or Topeka, Kan., which rely heavily on multifamily property investment but fear it will be neglected by private parties. As a result, the voices calling for the FHFA to cancel its reductions have grown louder, worried that traction gained by the housing industry over the past year could be nullified.

"Without Fannie and Freddie our ability to get deals done in smaller towns would be greatly reduced," said E.J. Burke, chairman of the Mortgage Bankers Association and an executive vice president of Cleveland's KeyBank, in an interview with Bloomberg. "We haven't seen that impact yet, but down the line I'm very concerned if the conservator continues to cut their volumes."

The long-term plan is not a secret, as the FHFA moves to create room for more capital within the housing finance industry by continuing to transfer risk to the private market. That process has been gradually in the works for the better part of 2013, and as both Fannie and Freddie complete the reimbursement of taxpayer debts through consistent quarterly profits that go to the U.S. Treasury, FHFA officials have remained steadfast in their commitment to reduction.

"We will continue to take gradual steps to reduce the enterprises' exposure in this market, while maintaining a market presence," said Edward DeMarco, FHFA acting director, in an October speech during which he also noted that such plans for reductions are contingent upon the absence of any new legislative action within the mortgage finance industry.

GSE profitability 
Since being seized by regulators in 2008 after risky single-family loans and a rash of poor investments nearly rendered them insolvent, Fannie and Freddie have been purchasing mortgages and packaging them into lower-risk securities for which they - with government backing - guarantee principal and interest payments. Both companies' multifamily portfolios have been steadily profitable since the financial crisis, with Fannie Mae having earned $1.4 billion this year in apartment-building business and Freddie Mac having totaled pre-tax earnings of $1.8 billion. 

But the decision to reduce multifamily investment has a strategic business angle to it as well. Fannie and Freddie currently share risk with private investors on the majority of the multifamily properties they back, and the reduction plans coincide with demand for apartment and rental housing that exceeds the rate of new construction. Many of the affordable-housing advocates have expressed concerns regarding the allocation of recent GSE investment in the multifamily sector, noting that as the footprint has been reduced, GSE capital has become increasingly concentrated in higher-rent luxury buildings mostly situated in larger cities.

Judy Kennedy, CEO of the National Association of Affordable Housing Lenders, wrote a letter to the FHFA in October detailing such concerns, specifically suggesting that Fannie Mae and Freddie Mac devote more financing to smaller apartment buildings that typically serve lower-income renters, specifically those located in more rural areas.

"As the enterprises significantly increased their share of the higher-end multifamily market over the past four years, their benefits flowed to 'country club properties' for deep-pocketed lenders," Kennedy wrote.

David Brickman, head of the multifamily operations unit at Freddie Mac, told Bloomberg that 95 percent of the units financed by his company are affordable to renters with incomes below the median for their particular areas. The higher-end deals the company takes on, Brickman said, are designed to help subsidize more renter-friendly projects in other areas.

Both Fannie Mae and Freddie Mac raised their fees to guarantee multifamily securities, in conjunction with the FHFA mandate regarding reduced operations. The interest rate hikes, in particular, have been noted as a contributor to the stalled rate of multifamily lending seen in 2013. The FHFA is scheduled to release a plan before the new year that details the continued shrinkage of multifamily financing programs for both GSEs.