Proposed new capital requirements at the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corp. (Freddie Mac) will have implications for commercial real estate, especially the multifamily sector, and could mean a delay in privatization of the agencies, which were taken over by the federal government in the wake of the global financial crisis. The government-sponsored enterprises were placed into conservatorship in 2008 and are regulated by the Federal Housing Finance Agency (FHFA).
In 2018, the FHFA said the agencies would need $180 billion in capital in order to support a privatization — but it is now looking like the number will need to be even higher. In November, the FHFA announced plans to repropose regulation on capital requirements for the GSEs in 2020.
“The capital rule is one of the most important rules I will issue as director. This rule will be reproposed and finalized within a timeline fully consistent with ending the conservatorships. Requiring the enterprises to build capital that can properly support their risk ensures that taxpayers will never be on the hook again during an economic downturn,” said Mark Calabria, director of the FHFA, in a statement.
Higher capital requirements may slow down the privatization process, even though the agencies are being allowed to retain a total of $45 billion in earnings going forward.
“They will need more than $180 billion in capital, although the final figure is largely contingent on the outcome of the FHFA capital rule,” says Bryan Shaffer, principal and managing director of George Smith Partners. “This is the first step to privatization and will show the markets that they are serious.”
“The current plan would mean the government would be out over the next five years,” says Shaffer. “We have elections next year. My best guess is that it will be very hard for them to hit the deadline.”
For commercial real estate, explains Shaffer, “the bigger question involves an ongoing commitment to the multifamily market, which is a small but very profitable part of the agencies. Because it is profitable, I believe they will remain involved and active in the market.” The FHFA announced on Sept. 13, a $100 billion cap for each agency for the five quarters beginning fourth quarter 2019, which Shaffer says is “strong support” for the multifamily sector in 2020.
“Overall, it is my view that it is best for Fannie and Freddie to remain under government control,” comments Shaffer. “During good times, they provide strong liquidity to the market and are profitable. In a downturn, they provide the government a way to keep the multifamily market flush with capital. It is common for banks and other lenders to pull out as the market moves in the wrong direction, so I also think that only the government has enough liquidity to withstand a 2008-style market movement.”
Shaffer adds: “The Trump administration has planned a privatization structure that would provide a government guarantee for possible losses, which would put us back to the same place as before 2008’s financial issues and the government conservatorship.”
