A Fannie Freddie Referendum


It’s the conversation not many real estate investors are having, so I’ll bring it up. Will there be a referendum on Fannie Mae and Freddie Mac in the coming months?

Fannie and Freddie play an important role in maintaining competitive interest rates and supporting a fluid lending marketplace. They are investors in 66% of new mortgage loans. Additionally, 90% of new mortgages have some sort of government guarantee. As a multifamily investment professional in Phoenix, I can attest to the fact that Fannie and Freddie agency debt is largely responsible for driving cap rate compression in our current market.

Despite its prominence, Fannie and Freddie have been operating in the red for some time. US taxpayers have already covered over $135 billion in mortgage loses from the two government-sponsored enterprises (GSEs) since 2008 and projections forecast even further loses.

With the midterm elections now over, and Republicans in charge of the House, I’m inclined to believe that Fannie and Freddie will face a referendum in 2011 that results in a major overhaul to the two GSEs. Republicans have long been proponents of blowing up the two lending giants. However, it’s congressman Barney Frank’s recent comments, a long time ardent supporter of Fannie and Freddie that suggests real change in on the horizon.

Now, it’s entirely possible that any talk of major reform is nothing more than typical political pandering. But it’s hard to look at the past few years and believe that the GSEs will come out unscathed. Some are championing for the immediate end to all GSE guarantees – that’s not going to happen. The economy is too delicate and reliant on the GSE guarantees to withstand a cold turkey withdrawal. Remember how the economy collapsed after Lehman Brothers failed? The aftermath of a sudden end of government mortgage loan guarantees would produce a similar event. Still, others, such as PIMCO co-founder Bill Gross; believe we need more government guarantees right now.

Regardless of your position, most can agree that long-term structural changes to Fannie and Freddie are desperately needed. And I think 2011 is when this begins to be addressed. How this plays out, nobody knows. We can only hope that it has a minimal impact on our business – although, that’s probably wishful thinking.

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  1. Currently in the Phoenix multifamily market, there is a lot of capital chasing very little deliverable product. This has created a “scarcity premium” in the market. This combined with extremely favorable financing has led to cap compression.

    • What do you mean by very little deliverable product? Do you mean rents are down and renters are scarce? or do you mean there are not many multifamily properties in the market? (Or do you mean something entirely else?)


      • By very little deliverable product, I mean that between 2004-2008, almost every apartment building traded hands. Compared to today’s market pricing, they sold at very high prices. Most buildings are now worth less than the debt. Banks have been slow to foreclose or except short sales on apartments, so very few apartments are deliverable at today’s prices.

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