Observers: Fannie, Freddie Takeover Was Necessary

The federal government’s takeover of Fannie Mae and Freddie Mac is a necessary step to stabilize the U.S. housing market, according to industry experts who are still examining the ramifications of the announcement. The takeover will go a long way toward solving what Stuart Saft, partner in the law firm of Dewey & LeBoeuf called a “catch 22” that has been bedeviling a critical part of the economy, housing. Real estate, being an illiquid asset, needs a steady stream of capital inflows. The credit freeze-up has meant that home prices have fallen, thus causing lenders to be much more cautious on their home lending, thus starving the sector of capital. The takeover should help the securitization market get back on track, not only in the multi-family sector, but in other commercial real estate sectors as well, Saft told CPN. But, he doesn’t expect that market to quickly reach the securitization levels reached in 2006, for example. Brian Harris, Moody’s senior vice president tells Multi-Housing News (MHN), “The fact that they can ensure availability of financing is the most significant impact, and a positive one at that, that the takeover will have on multi-family.” In a statement, Dottie Cunningham, CEO of the Commercial Mortgage Securities Association, praised the move. “Treasury and FHFA’s [Federal Housing Finance Agency] collective effort to bolster investor and market confidence in mortgage-backed securities are critical steps toward stabilizing the U.S. housing market,” she said. “Indeed, CMSA and its membership remain hopeful that that Treasury’s plan to purchase MBS from Fannie and Freddie will provide liquidity and promote stability throughout the capital market spectrum.” The takeover presents a “good news, bad news” dichotomy, Paul Fried (pictured), principal of AFC Realty Capital, told CPN. “My reaction is ‘What a disappointment,’” Fried said. “It’s another bailout of a financial institution. Twenty years after the FDIC and the RTC, we’re back there again.” Fried does see a silver lining, however. “We may have a bottom benchmark, and the markets may begin to repair themselves,” he said. Fried also said the takeover may dispel some myths about the relative safety of multi-family investments in comparison to other sectors, saying that multi-family investment has always been regarded as a “safe harbor” investment, due in large part to the implicit guarantee that the U.S. government would not let Fannie or Freddie fail. “It shows that investors were making riskier investments than they should have been making,” he said. Saft said that talk of eventually making the GSEs smaller is a positive. He said he proposed creating a third GSE to the Treasury Department “to take the pressure off Fannie and Freddie.” He said the creation of five or six GSEs would create competition in the marketplace, comparing it to the breakup of AT&T in 1982. Saft said increased government oversight of the GSEs is a given, and Fried seconds that. “A big set of guardrails will be put in place,” he said. Fried does see a silver lining, however. “We may have a bottom benchmark, and the markets may begin to repair themselves,” Fried said. On a related note, Jerry Howard, CEO of the National Association of Home Builders (NAHB) told MHN, “In the short-term this is good; the markets, national and international have reacted favorably to this move, interest rates are down and this move seems like it might turn things around for the economy. But in the long-term this could negatively affect multi-family. The portfolio of Fannie Mae and Freddie Mac is expected to shrink with this move and it cannot be predicted where multi-family will land up in the process.” Howard says that there will be changes in the role and make-up of the two companies and in the process some sector could be ignored. “This could create a vacuum and we don’t know if there is anything else to fill it,” he says. Fried adds that the takeover may dispel some myths about the relative safety of multi-family investments in comparison to other sectors, saying that multi-family investment has always been regarded as a “safe harbor” investment, due in large part to the implicit guarantee that the U.S. government would not let Fannie or Freddie fail. “It shows that investors were making riskier investments than they should have been making,” he says. Saft says that talk of eventually making the GSEs smaller is a positive. He said he proposed creating a third GSE to the Treasury Department “to take the pressure off Fannie and Freddie.” He said the creation of five or six GSEs would create competition in the marketplace, comparing it to the breakup of AT&T in 1982. He says increased government oversight of the GSEs is a given, and Fried seconds that. “A big set of guardrails will be put in place,” he said.Whatever the case, Howard advises borrowers to get back into the market now. “The interest rates are down so its time. Spreads have come down already and they will come down more, eventually settling at the rate at which prior to the crisis,” he says.“In the short-term this is good; the markets, national and international have reacted favorably to this move, interest rates are down and this move seems like it might turn things around for the economy. But in the long-term this could negatively affect multifamily. The portfolio of Fannie Mae and Freddie Mac is expected to shrink with this move and it cannot be predicted where multi-family will land up in the process.” Howard says that there will be changes in the role and make-up of the two companies and in the process some sector could be ignored. “This could create a vacuum and we don’t know if there is anything else to fill it,” he says.