Residential: Experts weigh in on the effects of regulatory reform across single-family and multifamily markets

Under the Trump administration, government housing stakeholders have embarked on an ambitious regulatory reform agenda, including ending government-sponsored enterprise (GSE) conservatorship, refocusing the Federal Housing Administration (FHA) on mission-based lending, and retooling Ginnie Mae. The effects of these reforms will ripple across residential origination, the secondary servicing market and multifamily lending.

In a recent webinar, SitusAMC experts shared their insights into the proposed reforms and how they might impact real estate industry stakeholders.

Tim Rood, Managing Director of Federal and Strategic Solutions, provided a deep dive into the Treasury Department and the Department of Housing and Urban Development’s (HUD) recent housing finance reform plans. Mark Garland, Managing Director of Residential Real Estate, discussed secondary market and asset trading considerations. Finally, Steven Bean, Executive Managing Director of Commercial Real Estate, walked through what to expect in the multifamily market in the year ahead.

The state of the GSEs going into 2020

In a reversal from the Obama administration’s wind-down of the GSEs net capital, Fannie Mae and Freddie Mac are now allowed to retain $45 billion in combined capital and are working toward full recapitalization. At the same time, the GSEs continue to sell off credit risk through credit risk transfers, resulting in a “virtually pristine credit book,” said Rood. Throughout conservatorship, the GSEs made substantial investments and reforms.

Fannie Mae and Freddie Mac now enjoy more than 60% market share, compared to about 40% going into the 2008 crisis. Rood said this was due in part to the Consumer Financial Protection Bureau’s (CFPB) strict Ability-to-Repay/Qualified Mortgage (QM) rules, which have “further scared private capital away.” Rood added that “other forces” are “compelling private capital to reinvest their money elsewhere.”

Going into 2020, GSE reform is in motion, with the majority of the proposals outlined in Treasury’s reform plan requiring administrative action, instead of congressional action. However, the clear preference is for Congress to pass enduring legislation versus unilateral administrative action. The administration has already indicated that it will move forward “with haste” to implement these reforms with the eventual goal of ending conservatorship.

Rood cautioned that the multiple guarantor model, currently proposed by Treasury, may not have the intended effect. “If you’re dealing with companies that have a commodity product, where everyone is competing against virtually the same underwriting guidelines and credit fee structures, then these companies will thrive together and ultimately die together,” he said. “So I’m hoping that folks give the competitive guarantor model a hard look before they jump to any conclusions.”

Getting back to the HUD mission

HUD’s housing reform plan called for a renewed focus on mission-critical FHA lending. Rood said he was pleased to see the administration recognize the need for alignment and balance between the GSEs and FHA’s role in the market. “Harmony between these organizations – so they’re not eating into one another’s market share – and revising the Ability-to-Repay rule is probably the best way to remove impediments to private capital,” said Rood.

Under the Trump administration, the Mutual Mortgage Insurance Fund has sat above the 2% capital threshold mandated by Congress. “It should probably go a lot higher,” said Rood, with the help of targeted changes to programs like the Home Equity Conversion Mortgage (HECM) program.

A new approach to the False Claims Act

Garland discussed HUD’s recent memorandum of understanding with the Department of Justice (DOJ) to soften the approach to False Claims Act enforcement. Strict enforcement over the past decade caused many bank lenders to retreat from FHA programs. In response, HUD has revised annual eligibility certification requirements, loan limit certification requirements and defect taxonomy.

Federal Housing Commissioner Brian Montgomery “did a great job (at a recent industry conference) conveying that HUD would be working with DOJ and really trying to make it a much more rational process,” said Garland. “This would encourage more entities, including banks, back into the Ginnie Mae market.”

Garland said the larger housing market would benefit from the recent changes. “It works for everybody when the market is a little more widely distributed, and false claims was an issue that really and kept a lot of people from going to the government side of the business,” he said. “Frankly, the banks do a very good job with Ginnie Mae issuance and servicing.”

Evolving residential market participants

Since the financial crisis, nonbank lenders and servicers have assumed a growing share of the origination and servicing market – nonbank lenders now account for half of all originations, compared to 23% in 2007, and nonbank servicers represent 42% of mortgages serviced by the top 25 servicers in 2018, compared to just 4% in 2008.

“Many of the large nonbanks, who have really made a name in the last two or three years, have done an exceptionally good job,” Garland said. He said the main advantage nonbanks have over banks is their ability to recapture consumers for refinances.

Garland touched on discussion about the Federal Home Loan Banks (FHLBanks) allowing other lenders to join the FHLBank system. One of the major obstacles to wider adoption of FHLBank programs has been the relatively smaller size of the market. Garland said he believes “allowing non-FHLBank members to apply and become members will really open up the market.”

Strong fundamentals continue in multifamily market

Multifamily lending has steadily increased since 2015, enjoying “very strong fundamentals,” said Bean, who cited the convergence of strong rent growth, low vacancies, low interest rates and healthy investor demand. This year, multifamily loan volume was up 19%. The Mortgage Bankers Association estimates that the market will continue to grow, experiencing a 9% increase, bringing the market close to $400 billion in 2020.

The effects of multifamily regulatory change

The role of the GSEs in the multifamily market has been subject to recent changes in response to proposed reforms. “The GSEs were on pace to not only grow along with the market, but actually gain market share until recent regulatory changes,” said Bean.

Until recently, the GSEs had a combined cap of $70 billion in conventional multifamily lending. Mission-based lending initiatives, to affordable or underserved markets and senior housing, for example, was uncapped.

Over the summer, however, as rumors of regulatory reform circulated, Fannie Mae and Freddie Mac widened their pricing to the point that they “were frankly uncompetitive,” said Bean. Many private players, including commercial mortgage-backed securities (CMBS) insurance companies, saw this as an opportunity and “began lining up to fill the gap.”

As part of the housing reform proposals, FHFA has introduced new lending caps on GSE multifamily lending – allowing each GSE to originate $100 billion in multifamily debt over any five-quarter period. The caveat is that 37.5% of that volume must be mission-based lending.

“The regulators have pulled back the reins on GSE multifamily lending,” said Bean. “This is going to allow private market participants to play a bigger role in multifamily lending going into the new year.”

This webinar was the first in a series of SitusAMC webinars. To find out more about recent and upcoming webinars and other thought leadership, please visit the SitusAMC website, here.

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