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Biden Administration Bides Time Before Putting Imprint on Multifamily Lending

Joe Bides Time Before Putting Imprint on Multifamily Lending
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The multifamily lending operations of Fannie Mae and Freddie Mac face no immediate changes as a result of the change in presidential administration.

There had been some buzz that newly elected President Joe Biden might attempt to replace Federal Housing Finance Agency (FHFA) Director Mark Calabria, a Donald Trump appointee who has aggressively attempted to privatize the agencies since being appointed in 2019, but Biden has made no move in that direction.

Calabria’s term runs through 2024, but the U.S. Supreme Court is considering a case, Collins v. Mnuchin, that will determine (among other things) whether a president has the authority to replace an agency head without cause. If the court rules that the president has the authority to do so, Calabria would likely be quickly replaced because he is not ideologically aligned with the president and Treasury Secretary Janet Yellen.

Some analysts thought Biden would try to remove Calabria pre-emptively, as the new president has done with some other Trump appointees, but now it seems likely that Biden will wait until the court rules. A decision will come before the court’s term ends in June.

“I don’t think the administration has telegraphed its long-term GSE plan, but the overarching goal is to preserve affordability and Congressional Democrats have been wary of tinkering too much in the GSE space,” said one industry GSE analyst. “I think a good bet is a continuation of the status quo with the possibility that a Biden appointee could unwind some of the tweaks (such as multifamily caps and refinance fees) that Calabria has put in.”

Calabria’s policies have moved the GSEs toward privatization and weakened their dominant competitive position in multifamily lending. He ended the federal government’s cash sweep of Fannie’s and Freddie’s profits, with the goal of strengthening their capital position so they could stand on their own and raise private capital. He also put a permanent ceiling on the agencies’ multifamily lending volume, locked in requirements to focus on affordable housing, and required them to set aside more regulatory capital on loans, which increases their cost of capital and reduces their pricing advantage.

Fannie and Freddie have $70 billion origination limits in 2021, down from $80 billion in 2020, and fully half of their volume must focus on properties with an affordable component, up from 37.5% before. Combined with the requirement to set aside more regulatory capital, which diminishes the agencies’ pricing advantage, that will leave more business open to other types of lenders such as banks and CMBS.

Calabria has said that his goal was not to reduce the GSEs competitiveness but to reduce risk to taxpayers in the event of another downturn and to maintain a 40-45% market share of multifamily lending. He said that he reduced allocations in 2021 because the agencies themselves forecast less demand for multifamily mortgages in 2021. “Ultimately it serves the market better when there is a lot of competition,” he said, while speaking at a webinar in January sponsored by the CRE Finance Council, a Washington D.C. based trade group.

Calabria said that the country isn’t building enough affordable housing and the focus on lending to affordable projects is in keeping with the agencies’ mission. “Their mission should be helping deals to get done that wouldn’t be done otherwise,” he said.

The FHFA also recently required the GSEs to develop a “living will,” or an operational plan to unwind that would come into play in the event of a “material financial distress or failure.” The will involves requiring the agencies to identify key business lines that would be necessary to maintain the housing finance system and other business lines that could be sold off in the event of a failure.

Creating such a plan fits into the idea that the GSEs could be unwound. The proposals are in a public comment period and the agencies are drafting plans, although it could take a year or more to finish the plan, which could be changed by subsequent overseers. The living will requirement has come under criticism from some on the housing finance industry as impractical and a back-door way to accomplish privatization.

“Unless the living will rule proposal is revised to make it a clearly defined and more conventional regulatory rule, grounded in the reality that … government support does exist and needs to be considered even inside a receivership, the proposal will not be accepted as credible or appropriate, either broadly in the industry or by future GSE directors,” former Freddie Mac chief executive officer Don Layton wrote in a report published last month by the Harvard Joint Center for Housing Studies. “I would therefore expect it to be replaced most likely through an entire rewrite by a Biden-appointed FHFA director, who will probably show up during 2021.”

About the author

Paul Fiorilla

Paul Fiorilla has more than 25 years of experience as a researcher and writer in the commercial real estate markets. He previously served as a vice president of research at Prudential Real Estate Investors in Madison, N.J., where he oversaw publishing of outlooks and thought leadership research. Before that, he covered real estate capital markets and CMBS at Commercial Mortgage Alert.

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