GSEs Analyze Stand-Alone Value of Multi-family Businesses

Each of the government sponsored enterprises (GSEs) has released a reportrnanalyzing the viability of their multifamily operations under a scenariorndivorcing them from the parent company and stripping away the existing governmentrnguarantee.  The reports were requested byrnthe Federal Housing Finance Agency (FHFA) as part of its goal to contract thernoverall market footprint of the GSEs andrngenerate potential value forrntaxpayers.   </p

FHFA said that the multifamilyrnbusinesses of the two GSEs are fundamentally different from their single-familyrnbusinesses.  The loans are larger,rncollateralized by income producing properties of five or more units, and are arnmuch smaller component of the total mortgage market.  Moreover most of the two entities’rnmulti-family loans involve some type of risk sharing with private capital whichrnis not true of the single-family business line and the loans survived thernhousing crisis much better than the single family portfolio.  Fannie Mae and Freddie Mac also do notrndominate the multi-family market as they do the single-family counterpart.   </p

Given these differences FHFArndetermined that the reduction of market footprint should be approached muchrndifferently for the multi-family part of the businesses than thernsingle-family.  In their analysis thernGSEs were instructed to include the likely viability of their multi-familyrnbusiness models operating on a stand-alone basis after attracting privaterncapital and adjusting pricing if necessary.</p

Freddie Mac said its averagernmultifamily loan was $17 million and its earnings from that segment since 2010rnhave approached $4 billion from both securitization and net interestrnincome.  The value is driven in part byrneconomies of scale not available to other multifamily financiers and access torngovernment guarantees. </p

Absent those guarantees FreddiernMac said its business would look and operate differently than it doesrntoday.  It would no longer be a line ofrnbusiness within the company but would be a private, monoline firm operating onrna stand-alone basis, attracting private capital from equity and debt investors,rnand complying with all applicable regulations in areas such as capital levelsrnand taxation.  It would operate more likerna true conduit, have a smaller footprint, charge higher rates, and produce lessrnnet income than today.  </p

Fannie Mae analyzedrnthe behavior of an imaginary new company operating as a stand-alone withoutrngovernment sponsorship.  It concludedrnthat “NewCo could potentially raise start-up equity capital in the privaternmarkets as a stand-alone, unregulated specialty finance company, but ourrnanalysis suggests that the resulting company would be very different fromrnMultifamily as it exists today and that its long-term survival would bernuncertain.” </p

In the aggregate the reportsrnconcluded that there is little inherent value in the current multifamilyrnbusinesses without the government guarantee and that the sale of these businessesrnwould return little or no value to the U.S. Treasury or to taxpayers.  The businesses would likely be monoline specialtyrnfinance companies with a focus on non-prime lending and secondary and tertiaryrnmarket transactions.  Their cost of fundsrnand lending rates would rely on the private securitization market or thernparticipation of equity investors to be viable. </p

FHFA saidrnthat the magnitude of the market impacts cited in the reports deserve furtherrnstudy and also highlight a fundamental tension that policymakers will have tornconsider.  Without a government guaranteerna fully private company may not provide the same level and scope of services,rnat least at current prices.  Without arngovernment guarantee there may also be additional volatility in fundingrnavailability under certain economic conditions. rnBothrnGSEs also raised the issue of what would happen to affordable housing.  Freddie Mac said that only the availabilityrnof government support made it possible for that part of its own business torn”break even.” </p

FHFA has put in place a 10rnpercent volume reduction in the GSEs’ new multifamily business for 2013.  The agency said it would evaluate how thisrnprocess worked through this year and will consider options to continue a pathrnof gradual contraction while waiting for Congress to resolve the issue of GSErnconservatorships.</p

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