It is generally accepted that Fannie Mac, Freddie Mae and the Federal Housing Administration have become the most important sources of multifamily financing. But a new report by the Joint Center for Housing Studies of Harvard University shows just how important the government’s backing of multifamily lending has become since the shutdown of the commercial mortgage-backed securities market during the financial meltdown.
GSE and FHA multifamily loan volume has “soared” by $71 billion since 2008 through yearend 2010, according to the JCHS report, “while other financing sources combined have dropped by $40 billion.”
In 2010, Fannie and Freddie purchased $17.3 billion and $14.1 billion in multifamily loans, respectively. The FHA insured $11.5 billion in multifamily loans last year.
Yet Congress and the Obama administration are committed to winding down the government-sponsored enterprises and reducing their share of the mortgage market.
But the administration’s plan to reform the housing finance system does call for expanding FHA’s role in multifamily lending, according to HUD housing secretary Shaun Donovan.
“As we wind down Fannie Mae and Freddie Mac, it will be critical to find ways to maintain funding for multifamily loans,” Donovan told the Senate Banking Committee.
Donovan noted that the FHA could engage in risk-sharing with private lenders to expand its capacity and reduce its loss exposure.
Despite a depressed single-family market, the report shows multifamily rental markets are already beginning to tighten and rents are starting to rise.
“This is going to put pressure in the existing supply of rental housing,” JCHS managing director Eric Belsky said at a Washington event last week.
And he warned supply problems are going to present affordability issues for low-income as well as middle-income families.
The report—”America’s Rental Housing: Meeting Challenges, Building on Opportunities”—shows that one in four renters or 10.1 million households currently spend more than half of their income on housing and utilities, which means they have less money to spend on food, health care and other necessities.
Half of Americans pay 24% or less of their income for housing.
The report also acknowledges that the federal and state governments are strapped and have limited resources to provide subsidies and tax breaks for the preservation or construction of affordable multifamily housing.
At the same time, it is harder for families seeking to become homeowners to obtain mortgage credit. Belsky noted attitudes toward homeownership have “eroded” during the past few years due to falling prices and massive foreclosures.
“With the way that credit markets have evolved, it is going to constrain people’s ability to become homeowners even if they have the will. Many of them are not going to have the way,” he said.
Joint Center research director Chris Herbert noted that construction of multifamily housing has been at record lows for a few years.
If the GSEs and FHA are downsized, it could raise the cost of multifamily financing and have “significant repercussions for the affordability of rental housing,” Herbert warned.
So far, rising demand for rental housing has been offset by the foreclosures of millions of detached single-family homes.
And the conversion of these owner-occupied homes into renter-occupied homes has played an important role in stabilizing housing markets.
The JCHS report shows that 1.4 million single-family homes became occupied by tenants during the 2008-2009 period, up from 700,000 in the 2006-2007 period.
“That is a tremendous surge in rental housing supply,” the JCHS research director said in his presentation of the report’s findings.
This demand for rental housing has kept single-family vacancy rates fairly stable over the past few years, he noted.
The conversion data come from the HUD American Housing Survey that is published every two years.
Belsky told NMN that he expects the next AHS report will show a continuing surge of conversions to rentals in 2010.
However, these units are unlikely to remain rentals once the housing market recovers.
