Putting Multifamily in Context
Earlier this year, our regulator, the Federal Housing Finance Agency (FHFA), issued a strategic plan for Freddie Mac and Fannie Mae. In the plan, FHFA envisioned different kinds of work for GSE single-family and multifamily businesses.
Why does multifamily have a separate and distinct role in housing our nation? There are several reasons.
First, with fewer people owning their homes, there is a clear need to support rental housing. Since 2005, the U.S. homeownership rate has declined from 69 to 65 percent, and led to a rapid increase in rental households. Consumers have become more aware of the risks in homeownership – house prices can go down as well as up, for instance – and some are choosing to rent, at least initially. When you factor in retiring Baby Boomers seeking to downsize and the continued influx of immigrants who disproportionately rent, demographic trends add to evidence that America's renter nation will continue to grow.
Second, private capital is beginning to flow back into the multifamily market. During the economic crisis, most forms of private capital staged an exodus from the multifamily market. Recently, the demand for multifamily housing has increased occupancy rates, operating income, and property values, creating an attractive environment for new sources of capital. For instance, at Freddie Mac, since the beginning of 2011, private investors have purchased $18 billion in new multifamily bonds of ours. Life insurance companies, bank conduits, and real estate investment trusts also have demonstrated increased investment activity. Going forward, the increasing availability of debt and equity capital makes possible a broad range of possibilities for the multifamily market, including us.
Third, the business processes and systems for single-family and multifamily are not alike. For example, we refer to a consumer buying a single-family home as a borrower. In multifamily, the borrower of an apartment building loan is an institution, often a property developer or real estate fund. In single-family, lenders use a variety of tools and guidelines, including ours, to underwrite loans for a variety of investors. In multifamily, Freddie Mac employees perform the underwriting of loans that lenders specifically want to sell to us. In single-family, our average loan size is roughly $240,000; in multifamily, it is $17 million. Our servicing and securitization processes are different, too. Because of these and other differences, our work under FHFA is tailored to the dynamics of the multifamily market.
Fourth, GSE multifamily businesses are doing well. While in conservatorship, multifamily has been a consistent source of profitability for both GSEs. In 2011, GSE multifamily businesses produced $1.9 billion in net income, with Freddie Mac accounting for 70 percent of this gain. The trend continued in the first quarter of 2012, with Freddie Mac again producing 70 percent of the $903 million in GSE multifamily net income. Who benefits from these gains? The U.S. taxpayer. Our capability to produce net income, during a time of national economic distress, is testament to the strength of our multifamily business models.
Fifth, multifamily might aid a recovery in single-family housing. For instance, we are currently working with FHFA, the Treasury Department, and our single-family business. Our objective: explore whether multifamily can help reduce the large volume of distressed single-family properties, which have been holding back a recovery in house prices. Here, our goal is to develop a financing vehicle that enables multifamily investors to deploy their capital into large pools of these houses, rent them out to families, and ensure property maintenance. Devising a business model that attracts additional capital to single-family housing has the potential to transform multifamily into a complete rental housing business, with benefits for families, investors, and policymakers.
Although it is a fundamentally different business, multifamily clearly complements single-family in housing our nation. Freddie Mac's actions are designed to move multifamily into the future and help our regulator and policymakers restore confidence in the U.S. housing finance system.
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