WASHINGTON, DC- Federal Housing Finance AgencyActing Director Edward J. DeMarco couldn't have been more specific about his plans forthe GSEs' multifamily finance operations: there will be a 10%reduction target in business volume from 2012 levels—achievedthrough some combination of increased pricing, more limited productofferings, and tighter overall underwriting standards.

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This is the first tangible sign that, after years of rumblings,the government means business with its plans to scale back theGSEs. For the multifamily space, this is no small consideration.GSE support has, in part, kept the sector robust even during therecession. With a 10% haircut in financial support, how will thesector fare?

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The conventional wisdom is that it will be a blow or at least asetback for deals. Certainly a pullback is a reason for concern,says Steve Edwards, partner at Manatt,Phelps & Phillips in the Real Estate & Land Usepractice group. " As the capitalization rates for multifamilyproperties continue to fall, one reason that the market hasremained viable is the relative availability of low interestfinancing from Fannie Mae and Freddie Mac," he tells GlobeSt.com."It can be expected that any curtailment in the availability ofsuch financing will not have a positive market impact."

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But while there undoubtedly will be some difficulties formultifamily borrowers, a case can be made that the sector willsurvive the pullback by GSEs -- and maybe even thrive. The movewill likely bring discipline to marginal markets and couldultimately be a positive event, Jacob Frydman,chairman and CEO of United Realty Partners, tellsGlobeSt.com. "In the long run, Frydman speculated, "it willprobably be a catalyst for a new type of securitized mortgage bond,probably in the form of a multi-family bond offering, which willeventually take the place of the financing currently provided byFannie and Freddie."

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Sam Chandan, president and chief economist withChandan Economics, also is sanguine about adiminished GSE role. "It has been suggested that agency financingalways and everywhere results in better outcomes," he tellsGlobeSt.com. "That's not the case."

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"Non-agency competition to lend on multifamily assets isgenerally very strong. In highly contested markets, competitiveforces have converged with the agencies' access to subsidizedcapital to strain underwriting quality. In these markets, whereagency financing for high quality assets is sometimes crowding outbanks and life companies, a slow adjustment to a more limited rolefor the agencies is consistent with long-term market health."

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However, Chandan adds, it is important to keep in mind there aremany other markets and market segments where multifamily creditneeds are undeserved. " The challenge is that a smaller multifamilybook of business may see agency lending pull back from underservedmarkets and not the markets where banks and life companies areactively engaged and already competing aggressively for lendingopportunities." In the best case, the FHFA will work to define moreclearly the circumstances in which an implicit or explicitguarantee is appropriate and when it is not, Chandan says.

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Also consider this, says David Reiss, aprofessor of Law at Brooklyn Law School who haspublished papers on the GSEs: "We are living through a veryabnormal time when the federal government dominates the market forsingle family and multifamily mortgages."

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This is neither necessary nor optimal, he tells GlobeSt.com. "Itis not necessary because there have been long stretches in the pastwhen the government had a much smaller role in those markets. Andother credit markets operate well with no or a much smallergovernment footprint."

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This is not to say that there is no role for the federalgovernment in the multifamily mortgage market, Reiss continues --just that it is far too large at this point in time. "If thereduction in the GSE footprint is telegraphed over a reasonabletime horizon to the other market participants, this change shouldbe taken in stride by the multifamily market," he predicts.

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