Policymakers and the GSEs: Risks to Watch

While the Obama Administration has not revealed any inclinations toward the direction it might take with revision of the government-sponsored entities, professors, pundits and others have proposed some possible directions.

As of late February, the Obama Administration had not revealed any inclinations toward the direction it might take with revision of the government-sponsored entities. But a number of possibilities have been proposed by professors, pundits and others, providing plenty of fodder for consideration.

The greatest risks to the multi-family portion stem from a varying extent of understanding among policymakers regarding the historical success of the program and how it relates to the current situation.

David Cardwell, vice president of capital markets and technology for the National Multi Housing Council, harbors some doubts that Congress will authorize Fannie Mae and Freddie Mac to continue covering moderate-income as well as low-income housing. Narrowing the scope of coverage, Cardwell argued, would shut out too many would-be renters, thereby raising the cost of capital and therefore housing.  Cardwell is also worried that the slow economic recovery and continued high unemployment will result in further residential delinquencies, defaults and foreclosures this year, potentially overshadowing longer-term strong performance and influencing Congressional impressions of the GSEs’ success. 

On the other hand, Henry Liu, partner in the real estate practice at Morgan, Lewis & Bockius L.L.P., believes that Fannie and Freddie’s long and mostly positive track record will convince Congress to keep the multi-family portion of their businesses intact, but with the possibility that they may be separated or even split off from the single-family businesses. “They’re really the only competitive apartment lender in the market right now,” he observed. “You take out that market and there’s not much left that’s really viable for a lot of developers.”

Ed Padilla, CEO of NorthMarq Capital L.L.C., also believes the policymakers should focus on Fannie and Freddie’s strong history: “There (was) absolutely nothing wrong for a decade.”

For more on GSE reform, search for “Bumpy Rides,” the Legal & Regulatory story from the March 2010 issue of CPE.