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CRE Finance World, Autumn 2012

Privatizing Fannie and Freddie’s Multifamily Business Much of the commentary on the topic of the GSEs’ guaranty fees One common view is that shutting either the single-family or (G-Fees), particularly from conservative sources such as the multifamily programs cold turkey would be too disruptive to the American Enterprise Institute, argues that the government is market. Whatever is done with regard to GSE reform, it is likely structurally incapable of pricing risk at an appropriate level. to occur over five to 10 years. But recent experience with credit guarantee insurance may suggest A threshold issue with regard to privatization is whether there is, that not only can the federal government not appropriately price apart from the ability to access the federal guaranty, any value credit insurance, maybe nobody can. Going into the financial to the GSE multifamily platform, from a systems, personnel, crisis there were a number of non-government “monoline” credit loan-processing, securitization or other point of view. Presumably, guarantors, including Ambac Assurance, MBIA, Financial Security the tentative answer to the above-posed question is “yes” — it Assurance, Syncora, Financial Guaranty Insurance Company, as well is likely that there is some value to a platform which currently as others. Today, almost all of these companies are in receivership processes approximately 60% of the multifamily loan market. or conservatorship, and for essentially the same reason as Fannie The difficulty is assessing how much the platform is worth. and Freddie: the risk on single-family mortgages was mispriced. In fairness, though, the single-family origination business may have There is also the question of whether the platform is something suffered from a considerable level of fraud, which is a notoriously that can be sold (if it can be sold at all) as a single unit comprised difficult risk to evaluate and price. of both GSEs’ multifamily operations, on a Fannie and a Freddie basis separately, or in multiple vertical or horizontal pieces? The likely response from conservatives to this observation would probably be “so what?” Put another way, even if nobody can correctly If one assumes that the nation is better served by more rather than price credit insurance, that doesn’t suggests that it is wise to allow fewer private lenders in the multifamily space, and if one assumes the government to do it. Indeed, since nobody can do it, would that that the GSEs’ multifamily platform is a valuable asset, then it not suggest that it is best left to private market, in which different might make sense to figure out how to allow multiple future players credit guarantors can develop their own risk models, and then let to purchase or otherwise access parts of the platform. the market test them each out? This brings us back to the guaranty feature. If even conservative Clearly, it is a challenge to assess credit risk appropriately, and that commentators acknowledge that a multi-year wind-down period is perhaps nobody can really do it correctly over the long run. But, it inevitable, then how would the guaranty feature be utilized during is not implausible to assume that government involvement in the that period? process may bring an additional set of considerations (particularly political considerations) to the process which, it is difficult to imagine, One model for privatizing the GSE multifamily business is to simply would improve the setting of a guaranty fee at a financially appropriate wind down or eliminate the guaranty. The FHFA could announce a level. Consequently, to the extent that any future model of privatizing sunset date for the guaranty feature (for newly issued guarantees the multifamily business relies in whole or in part on those future of course), ever-decreasing guaranty volumes (e.g., 20% fewer entities issuing or purchasing a federal guaranty, the investors in guarantees each year for five years), or ever-increasing G-Fees those privatized entities (as well as the taxpayers) will need to (pricing the guaranty out of the market). However, privatizing the assess carefully the risk pricing models to be employed. GSE multifamily business by merely shutting down the guaranty leaves the government with a valuable and potentially monetizable Potential Models For Privatization but stranded asset: the multifamily platform. The FHFA and GSEs are required by the end of this year to do a report on the viability of the multifamily business without government If the FHFA had only a single objective, which was to monetize the guarantees and supported by private capital. Before looking at specific upfront proceeds from the sale of the multifamily platform, what models for privatizing the multifamily business, we can speculate structure would best achieve that goal? The answer is probably about some of the factors likely to arise in the upcoming discussion. this: sell the multifamily platform as a whole to a single buyer, and then allow that single buyer the sole right to issue or access from A publication of Autumn issue 2012 sponsored by CRE Finance World Autumn 2012 15


CRE Finance World, Autumn 2012
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