The future of the multifamily industry post-GSE conservatorship

Abstract

On September 6, 2008, at the start of what would amount to the greatest financial crisis since the Great Depression, the U.S. Government took two publicly traded Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, and placed them into conservatorship. Operating losses by these entities had created strong market concerns about their ability to function, threatening to adversely affect the US housing finance market. Over the last two decades, the GSEs have played a major role in the multifamily industry, routinely accounting for approximately 30% of annual multifamily financing; at the height of the financial crisis in 2009, GSEs accounted for 86% of all new multifamily loans. Although GSEs account for a substantial portion of multifamily financing, very little research has been conducted in order to examine the future of the multifamily industry post-GSE conservatorship. In part, the reason for minimal research and a lack of media attention on this issue is that GSEs play a far greater role in terms of total dollars in the single-family residential market. This thesis helps to fill this void by closely examining the GSEs role in the multifamily market and surmising the impact to the multifamily sector post-GSE conservatorship. In order to examine this issue, this thesis focuses on the history and role of GSEs in the multifamily market; examines the guidelines, structure and securitization process of GSE multifamily loans; examines current multifamily market conditions and trends; provides a performance comparison of GSE securitized loans to other multifamily loans; and examines proposed GSE legislation. This thesis then synthesizes and prognosticates the current and potential future multifamily market conditions utilizing the 4-Quadrant model and the role the government should play in the multifamily finance market post-GSE conservatorship. This thesis concludes and surmises that reduced government involvement in the multifamily finance market will affect the multifamily industry, causing increased borrowing costs, decreased property values, and increased property value volatility. The extent to which the multifamily industry is affected depends upon the outcome of the GSE conservatorship, although it appears that increased multifamily demand due to favorable demographic trends may help to negate the impact of decreased GSE involvement in the multifamily industry for the foreseeable future.