December 07, 2015

It's About the Buildings and the Tenants

David Brickman
David Brickman, CEO

Public policy regarding financing multifamily rental housing is very different from that in financing single-family housing primarily because the intended beneficiaries and the mechanics for delivering social benefits are very different.

In single-family financing, the beneficiary is the homeowner – the borrower – and the relationship is straightforward. However, in multifamily financing, it is the property itself that is expected to create or maintain safe, decent, affordable housing for current and future tenants.

When it comes to achieving public policy objectives in the multifamily market, the borrower merely is an intermediary through which policy goals – such as promoting affordability – may be realized. So while it is important to understand the relationships among lender, borrower, property, and tenants, the borrower is not what ultimately matters.

As a GSE, Freddie Mac Multifamily views each financing opportunity presented to us through two lenses – one for assessing credit and another for assessing the underlying property's rental-housing affordability. Admittedly, measuring rental-housing affordability can be challenging and there is room for evolution in some of the commonly used definitions. Regardless, the borrower is not part of the equation when figuring a property's affordability. So, except for factoring into the credit analysis, the borrower largely is irrelevant other than as a legal matter.

Even defining just who the "borrower" is in the modern real-estate investment world is more complicated than it might appear. Fewer and fewer large properties these days are "owned" by a single person or entity. Rather, properties often are held in funds, joint ventures, or other investment vehicles for the benefit of a diverse pool of investors. Rarely does a single individual or investor truly "own" an asset; the investors potentially include a very wide and diverse range of institutions – from state  pension plans, to university endowments, to sovereign wealth funds, or, indeed, to high-net-worth individuals or families. In some cases, asking who owns an individual property is much like asking who owns a large, public corporation, like Apple or Exxon. The question "Who controls an asset?" often is far easier and simpler to answer than "Who owns it?" It also is the more relevant for Freddie Mac Multifamily – we need to have confidence that the individual or entity controlling the property has a proven record of managing properties that meet our affordability objectives.

Freddie Mac Multifamily's public policy objectives are geared toward tenants and properties, and it is important to consider how our effect on multifamily investments helps achieve those objectives. Notably, our ability to commit mortgage capital to specific multifamily sectors tends to draw private equity capital into those sectors. In this way, we help prime the pump through which capital flows into affordable segments of the multifamily market. Indeed, our steady presence and stated commitment to support workforce housing lets multifamily owner-operators raise capital more effectively, from across the country and around the world, and to deploy it in this increasingly important sector.

This effect has been amplified by the Federal Housing Finance Agency (FHFA), our conservator, excluding certain portions of the multifamily mortgage market from our purchase-volume cap. When FHFA refined its guidance earlier this year and uncapped significant portions of the workforce housing market, it effectively turned a spotlight on this underserved asset class, which has served as a beacon to institutional investors.

This, in turn, has increased interest in renovating, rehabilitating, and preserving this important multifamily stock – stock that is aging and might otherwise be at risk of removal, when affordable rental housing already is in short supply.

Which is the better outcome for families and communities?

  • Allowing aging but affordable multifamily stock to deteriorate, become functionally obsolete, or unfit because of inadequate capital investment? And in some cases being torn down and replaced with less-affordable apartments?
  • Or supporting efforts to keep apartments available and affordable to lower- and moderate-income households and encouraging additional investment to ensure that such units remain a significant and viable part of the affordable housing stock?

Few would disagree that the second outcome is preferable. Also remember: U.S. taxpayers are largely shielded from potential losses on new loans that Freddie Mac Multifamily buys. At least 90 percent of the loans we buy are packaged and sold as securities, and our securitization model shifts the vast majority of credit risk to private investors.

Our ultimate goal always is to ensure a continuous supply of capital for affordable and livable rental housing – whatever the property and whoever the borrower. Our commitment to that goal is unwavering. You can rely on us to continue bringing leadership and innovation to every corner of the multifamily market. All in line with our mission.

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