August 1, 2009

The Role of Fannie Mae and Freddie Mac in The Multi Family Sector

Most of the mortgages in this country are indirectly held by the US Government, since the demise of the secondary markets.

A quick look at how these institutions have helped provide liquidity in this crises is interesting. Whether you think that they have done a good job by providing liquidity in this crises or whether they have absorbed a level of debt that is unwise remains to be seen.

Here is what they have done

These Government Sponsored Enterprises (GSE) were created in 1938 to provide liquidity to the real estate markets so that people could buy a home. Of course, it was never intended for them to own most of the countrys mortgages...but here we are.

Many of the lenders got in trouble for a few reasons. Bubble thinking or what Greenspan called irrational exuberance. Another reason that the lenders became reckless is the lenders business model changed. It went from lend to hold to lend to sell and so the need for good and detailed due diligence was lessened. If you intend to loan and then sell it, your risk is off loaded to other investors. Lenders got sloppy. An unintended consequence of a good system designed to spread the risk and keep liquidity in the marketplace created a mind set that fueled a bubble and crashed the system. Result? A 22 month great recession.

This opened the door for many investors without deep pockets to get loans to speculate. When the markets turned they didnt have the deep pockets to hold and and when equity evaporated so did the reason to carry the loan.

So Where Are We Now

According the the National Multi Housing Council, 53% of their multifamily total is held in their portfolio and Freddie Mac, 86% of their multifamily in portfolio. 62% of the Fannie and Freddies' multifamily business is retained, while 93% single-family loans are sold off.

From October 2007 through September 2008, multifamily mortgage debt outstanding grew by $83 billion, $68 billion (82 percent) was provided by Fannie and Freddie. When the markets collapsed Fannie and Freddie did what they were created to do... provide a liquidity.

How this will unwind is anybodys guess, whats clear is we own it now...all of us, and that we cant let this happen twice.

Thanks for Reading
Howard Bell
A web site of over 450 articles related to real estate focused primarily on property management.

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