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CRE Finance World, Summer 2013

“It is time for Congress to put a plan in place that provides our housing and mortgage markets with liquidity, certainty and plenty of private capital.” A publication of Summer issue 2013 sponsored by CRE Finance World Summer 2013 27 and the lowest mortgage rates in the world to benefit consumers, we must have the financial services firms who work in this market retain risk. The Fannie Mae Delegated Underwriting & Servicing (DUS®) program was created in 1988 and for a quarter century has provided billions of dollars in capital to apartment building owners across the United States under a lending model that requires private capital to invest with Fannie Mae and retain the risk on the loans they originate forever. To be a DUS lender, you must have a license and the financial wherewithal to fund losses. When a DUS lender originates a mortgage, the DUS lender, not Fannie Mae (not the taxpayer!) is on the hook for the initial losses. The DUS lender cannot sell off its risk position — it must maintain the risk for the loans it originates for the life of the loan. And the result? During the downturn, Fannie Mae’s DUS portfolio never exceeded 1% delinquency and never lost the tax payers a dime. Why is the Fannie Mae DUS program, or something very similar to it, not the solution for Fannie Mae and Freddie Mac’s much larger single family mortgage business? While Congress debates the future of the GSE’s, any near-term changes will come from the Federal Housing Finance Agency (FHFA), conservator and regulator of the GSEs. FHFA established 2013 goals for Fannie and Freddie of creating a joint back office operation, bringing private capital to $30 billion of single family loan originations, and shrinking their multifamily commitments by 10%. If joint back office operations end up making the GSEs more efficient, that is a net positive for the agencies and the consumer. Bringing $30 billion of private capital to the GSE’s single family businesses is a step in the right direction, but it is a very small number in a huge market. Finally, it was very surprising to see FHFA decrease multifamily origination volumes by 10% to “bring more private capital” to the multifamily mortgage market. The multifamily businesses of Fannie and Freddie already have huge private capital participation in every loan they originate, and their 60% market share in multifamily is much smaller than their well over 90% market share in single family. And more concerning from a housing policy standpoint, multifamily is where a greater percentage of America’s minority and poor populations live. While only 11% of white households live in apartments, 23% of Hispanic households and 25% of African American households live in apartments. While only 5% of families making more than $75,000 a year live in apartments, 26% of American families making less than $20,000 a year live in apartments. Why would FHFA decide to reduce the availability of capital to the multifamily sector with this type of demographic data in hand? Looking back on the financial crisis, Fannie Mae and Freddie Mac did exactly what they were designed to do. We, the American taxpayers, benefited from our collective strength and financial wherewithal to prop up the banking system and maintain a liquid mortgage market during the deepest financial crisis since the Great Depression. Fannie Mae and Freddie Mac are now making billions, and it will be tempting for Congress to simply continue debating their future and reap the rewards. But we must reform Fannie Mae and Freddie Mac while we can. If U.S. taxpayers are going to provide a guarantee for the nation’s mortgage system, private participants in the market need to invest capital along with the government and private capital must share and retain the risk along with the government. There is an established mortgage securitization model that has existed for 25 years in Fannie Mae DUS, and it is time Congress focused on it as a template for true reform that will align the interests of tax payers, government officials, and private investors. Willy Walker is Chairman & CEO of Walker & Dunlop Inc., Bethesda, Maryland. Founded in 1937, Walker & Dunlop is one of the premier commercial real estate finance companies in the United States. He can be reached at info@walkerdunlop.com. “Real Reform” of the GSEs


CRE Finance World, Summer 2013
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