In addition to providing content for websites, blogs and marketing materials, Optimized Content & Research also offers political intelligence reporting. These reports summarize issues of interest to our clients, and offer forward-looking information based on sources in Washington, DC. Generally, these reports are utilized by hedge fund managers for investment purposes and corporate executives who need to stay informed on legislation or regulations that may impact their business.
This week, I wanted to offer some insight into political intelligence reporting. While not a full report, I thought I would share some information regarding the recent GSE reform proposal, specifically as it relates to the multifamily housing space. Future blog posts will cover other aspects of the proposal. To read the complete report, click HERE.
Treasury Recommends Reduction of GSE Multifamily Footprint
The GSEs multifamily acquisitions operate under a $35 billion cap in 2019. However, there are broad exemptions to these caps, including loans to finance affordable housing loans and loans for energy and water efficiency improvements. In 2008, the GSEs owned or guaranteed approximately 25% of all multifamily originations. The latest data suggests the GSEs now have acquired 50% of multifamily originations. Uncapped exemptions, specifically in the energy efficiency ("green") space, have fueled this growth. This has not gone unnoticed by their conservator, the Federal Housing Finance Agency.
The Treasury report, supported by FHFA Director Mark Calabria, recommends that the GSEs return to the mission of their multifamily business, which is providing rental units to low-income and moderate-income renters. This is a direct shot at the uncapped acquisitions, and the green energy space will be most impacted since it is overwhelmingly responsible for the growth of the multifamily business. The exclusions for green energy loans exploded in 2017 and maintained the same level in 2018. Here's an excerpt from the report on proposed remedies to this issue:
"FHFA should revisit FHFA’s efforts in 2012 and 2013 to restrict the GSEs’ multifamily footprint. Specifically, the exemptions from the cap merit a particularly close look. For example, exempt loans for energy efficient multifamily projects have been a significant driver of growth in the GSEs’ multifamily business, while lacking an obvious nexus to an affordability mission. FHFA also should consider requiring that a specified portion of the rental units that are in properties financed by GSE-acquired multifamily loans remain affordable to low- and moderate-income and other historically underserved renters even after origination. FHFA might also consider requiring the GSEs to ensure that those units are on an ongoing basis actually inhabited by these renters."
What Are The Prospects for Meaningful Reform?
To determine prospects for changes to the multifamily space, or overall reform, I first want to differentiate "legislative" reform and "administrative" reform. Legislative reform refers to actions taken by Congress, administrative reform refers to actions FHFA or other agencies may take without Congressional approval. Here's the formal recommendations offered by Treasury on the multifamily business:
Congress should implement a framework to limit the aggregate footprint of multifamily guarantors. (legislative)
Congress should limit the multifamily mortgage loans that are eligible to secure Government-guaranteed multifamily MBS to ensure a close nexus to a specified affordability mission. (legislative)
Pending legislation, Treasury and FHFA should consider amending each PSPA to limit support of each GSE’s multifamily business to its underlying affordability mission, including potentially through a revised framework for capping each GSE’s multifamily footprint. (administrative)"
Let's first examine the prospects for legislative fixes (Congressional action). Zero. Absolutely no chance Congress acts on GSE reform at the very least through the 2020 election, and likely far beyond that. Why? The answer is found both in the politics of the issue as well as the complexity of housing finance reform. The Corker-Warner effort provided an instructive lesson in the obstacles to housing reform. Here's a few reasons why Congress will do nothing on this issue:
The 30-Year Fixed Mortgage Is Safe: The 30-Year Fixed Mortgage is viewed as the foundation of the housing market by Congress. As long as homebuyers have access to this product, there is no political risk to passing on housing finance reform. While standards may be higher, the 30-Year Fixed remains highly accessible, and as long as that does not change, Congress will not act.
Complexity of Reform: Usually, whenever members of Congress face an incredibly complex issue, they rely on highly competent and intelligent staffers as well as outside experts to form a consensus. The consensus becomes the legislation. The problem with housing reform is that the opinions vary not only in terms of politics, but also within parties. In other words, there is no consensus on how to reform the housing finance market, and without a consensus there can be no legislation.
No One Wants to Own It: We learned from Corker-Warner that many members of Congress took an "all or nothing" approach to housing finance reform. Too many members refused to move in the negotiations, so ultimately they failed. Why? Well, let's say it passed. And, let's say there comes a time when interest rates inevitably rise. Regardless of whether a theoretical housing reform bill actually negatively impacts the housing market, if there is any downturn in the market, the supporters of the bill will be blamed. There's no political upside to that. I believe the only way to move Congress on housing finance reform is a threat to the 30-Year Fixed loan or some other systemic threat.
In terms of administrative fixes, we should look to FHFA Director Calabria. While he has a five-year appointment, if President Trump loses the 2020 election, Calabria will very likely be replaced (I believe courts have ruled that the FHFA Director is an at-will position). This gives him a year to act. When the capped and uncapped figures for the GSE's multifamily business come out for 2019, we will know whether they are actually reducing the uncapped green energy portion of their multifamily business. Based on our sources, we believe Director Calabria is committed to shifting the focus of the multifamily business back to affordable housing. That said, there are a lot of issues outlined in the Treasury report, so whether the multifamily business is a top priority remains a question, but we do believe it is definitely possible FHFA will try to reduce the uncapped portion of the business. We may see events play out similar to how the multifamily caps were instituted in the first place. In 2013 FHFA took public comments on how to reduce the GSE multifamily footprint, and two years later the caps were put in place. Another comment period may be in order with respect to the uncapped business, but again, time is a factor.
In terms of overall impact on the multifamily industry, specifically those who benefit from the GSE's green energy loan business, I think it's still too early to tell. Any FHFA action may be reversed based on election results, any action taken by Director Calabria will be highly criticized by Congressional Democrats (and perhaps some Republicans), and Congress will not take any action so there is no threat of a codified (permanent) change to the multifamily business.
Anyone interested in OCR's political intelligence reporting coverage (as well as content for websites, blogs, etc.) can contact me directly at John.Grant@optimizedcr.com