The real estate woes of the past several years were certainly caused by a number of factors, but many commentators have suggested that government support of the mortgage market through entities such as Fannie Mae and Freddie Mac were in part to blame.
So-called “GSEs” (government-supported enterprises), such as Fannie Mae and Freddie Mac operate in both residential and multifamily (apartment and manufactured housing community) lending, providing a ready market for banks and other mortgage lenders to sell loans. Particularly in the single-family lending market, this support is intended to encourage home ownership by making mortgage loans more available, at more uniform interest rates across the country. The downside is that, as part of their purchase of loans, the GSEs provide government-backed guaranties for certain types of loan failures to the investors who ultimately purchase loan pools---which means that American taxpayers arguably foot the bill for non-performing loans, particularly during a an economic downturn.
As non-performing loans piled up over the past few years, Fannie Mae and Freddie Mac were placed into conservatorship, and the federal government was required to inject billions of dollars into both entities, resulting in calls for an end to governmental involvement in the housing market. While some would argue that this was the intended purpose of the GSEs, and that this governmental support provided a backstop against further economic havoc, most observers now agree that some fundamental change is necessary.
The introduction of the Housing Reform and Taxpayer Protection Act of 2013 (also known as the Corker-Warner bill), on June 25 by Senators Bob Corker (R-Tenn.) and Mark Warner (D-Va.) would phase out Fannie Mae and Freddie Mac over a five-year period, especially for single-family residential lending. It is not clear whether multifamily lending, which has been quite profitable for the GSEs, would be privatized or might possibly be retained as a government-supported business operation (though private ownership following liquidation seems most likely).
The bill as proposed would also require lenders to retain at least 10% of the risk associated with the loans they sell, and create a new government-supported corporation known as the Federal Housing Mortgage Corp. to ensure that smaller banks and credit unions would have the ability to participate in the secondary market.
What does this mean for our clients who are residential or multifamily lenders or borrowers, but not necessarily active in the lobbying efforts surrounding this legislation? In the short term, not a great deal. Though the bi-partisan bill is an important part of the larger discussion about the government’s future role in the housing markets, it is a continuation of a long-standing ideological (and political) debate that will take time to resolve. It is likely that the bill will undergo substantial discussion, and possibly significant change, before it becomes law. Even if passed into law substantially as written prior to year-end (and it could take longer), the bill would only set a five-year phase-out plan in motion---including the possibility that Fannie Mae and Freddie Mac’s assets (and lending programs) would be acquired in whole or in part by private parties who might continue aspects of the lending programs currently offered. In addition, as Fannie Mae and Freddie Mac are phased out, new privately-held companies are sure to enter the markets with competing product lines.
Over the longer term, of course, and particularly as the bill (in whatever form) becomes law, residential and multifamily lenders and borrowers alike will want to monitor and react to the changing landscape. While Fannie Mae and Freddie Mac in their present forms will disappear, it is likely that other privately-funded alternatives will take over their lending programs, or otherwise fill the gaps. In addition, if the newly-proposed Federal Housing Mortgage Corp. remains a part of the legislative package, some forms of Fannie Mae and Freddie Mac’s business will continue as usual---but under a new agency.
In short, Fannie Mae and Freddie Mac may eventually “go away,” but they are far from “gone,” notwithstanding some of the financial headlines announcing their demise.
Dickinson Wright attorneys are involved in various aspects of this developing area, and are available to assist you as these changes in law may affect your business. To learn more, click here.