Donovan Goes to Bat for GSE Multifamily Finance

WASHINGTON, DC-The multifamily industry, at least when speaking on the record, has been reluctant to outright criticize the Federal Housing Finance Agency's plans to streamline and shrink the GSE's operations--including trimming its multifamily finance operations.

Not so Peter Donovan, immediate past chairman of the National Multi Housing Council, who gave a spirited defense of the multifamily industry and the support it receives from the GSEs at the American Enterprise Institute.

The market showed discipline and unprecedented performance during the worst recession since the Great Depression, he said.

For critics who see "a current GSE multifamily book that will cause losses to taxpayers during the next bottom of the cycle", Donovan countered with the picture a portfolio default rate that is currently 25 basis points on a combined GSE portfolio of over $300 billion that has a 20-25 year history and a business that has generated billions in income.

For critics who point to "a synchronized -- rather than locally differentiated multifamily market -- producing excessive leverage", Donovan countered that the 2012 GSE average loan to value for newly originated loans is 65% with a 1.45 debt service coverage and an outstanding balance of 50%-55% at maturity.

For critics who say that "if the federal guarantee is continued, the risk of downward pressure on multifamily underwriting standards is very high", Donovan says there has been no evidence of this under receivership. "Your reference to the growth of the aggregate multifamily mortgage debt outstanding is not shown in the context that the average loan to value has gone from 53% in 1992 to 36.5% in 2012 according to the Federal Reserve Board and that values have gone from $545 billion during that time to $2.3 trillion."

I ask you, he continued, where is the bubble in that? "Is this your GSE over-allocation of capital to the multifamily sector?"

And on and on.

Donovan also knocked down other suggestions that have been floated in lieu of GSE support.

The private capital market has not shown itself to be ready, willing, able, disciplined or reliable to take the place of a government guarantee. And the Federal Reserve Bank providing a backstop in lieu of a government guarantee "is to my mind the difference between a disaster recovery plan and a disaster prevention plan that will likely lead to more frequent and severe multifamily debt market crisis."

Donovan concluded with this: "The GSE multifamily experience was not the single family experience. In times of severe economic crisis it worked even better than any of us imagined. It was quite simply the model that needs to be emulated because it works. I don't want successor GSE multifamily to crowd out the private debt market but rather to lead it."