A Multifamily Expert's Take on the GSE Bill

WASHINGTON, DC—As expected, a much-awaited bill to reform the government-sponsored enterprises, sponsored by Senate Banking Committee Chairman Tim Johnson, D-S.D., and Ranking Member Mike Crapo, R-ID, has been formally introduced. It can be found here.

Briefly, the proposal would provide an explicit government guarantee for mortgages, but only after private investors have taken the first losses. A new federal regulator would be established, the Federal Mortgage Insurance Corp., that would provide this guarantee and oversee the system. Fannie and Freddie would be wound down and eliminated and specific benchmarks and timelines would be put in place to guide Federal Mortgage Insurance Corp. and market participants in the transition.

Not surprisingly, multifamily lenders have been bombarded with questions about the industry's future, assuming this legislation goes through. Walker & Dunlop was no exception, judging from a memo that CEO Willy Walker sent to production staff Monday morning.

Walker went through the issues systematically breaking them down into three areas: the chances it actually becomes law; the implications of Johnson/Crapo to the Fannie/Freddie shareholder lawsuits filed against the Treasury Department; how would the Johnson/Crapo legislation impact the GSEs' multifamily businesses?

His take on these points:

Will it make it into law? Probably not. Walker calls the the political landscape "exceedingly challenging for a bill of this magnitude" and notes that many experts believe the bill will likely be voted out of the Banking Committee with broad support, but probably won't get to the floor of the Senate if the Majority Leader believes the legislation will have any negative impact on the mid-term elections.

Also, there is no mirror legislation making its way through the House of Representative today.

Will the shareholders' case hold up? Maybe, Walker says.

Shareholders in the GSEs have filed suit alleging an "unjust taking" in 2010 when the Treasury Department began sweeping all profits back into the US Treasury instead of receiving a 10% preferred dividend on Fannie and Freddie's earnings. Walker believes these lawsuits will play themselves out in the courts over the coming years, and may actually have a significant role in the future of Fannie and Freddie if they are decided prior to GSE reform legislation becoming law.

The proposed legislation is silent about the common and preferred shareholders in the GSEs, Walker noted. "Senator Bob Corker was vocal last week saying that common and preferred shareholders will get nothing," he said in his memo. "But if the courts determine that there was an unjust taking by the US Treasury, Congress will have a very difficult decision to make-write checks for billions of dollars to a number of high profile hedge funds, or spin Fannie and Freddie back out as private enterprises, allowing the hedge funds to maintain their ownership going forward."

What It Means for Multifamily. Walker calls the legislation a "fantastic step forward" for the multifamily businesses of Fannie and Freddie. The legislation explicitly endorses the Fannie Mae DUS and Freddie Mac Seller/Servicer models by saying the businesses should be maintained and separated into distinct subsidiaries of Fannie and Freddie within one year of Johnson/Crapo being enacted as legislation, he writes.

"Almost everything in the legislation related to the GSEs' single family businesses has a five-year implementation timeline-yet with the multifamily businesses, they want them separated into subsidiary enterprises almost immediately, with all the people, technology, and assets moving over at no cost."

The legislation also calls for the multifamily businesses to be adequately capitalized and calls on the FHFA to determine whether the multifamily businesses of Fannie and Freddie should be completely spun-off and sold to private investors.

"The legislation does not call for the enterprises to be spun-off with an explicit government guarantee," Walker writes. "But if FHFA were to decide to sell the multifamily businesses of Fannie and Freddie, it is required to maintain a covered mortgage market for multifamily loans as well as broad availability of credit. The only way to meet these legislative demands would be to spin-out the businesses with a government guarantee."