A fix for Fannie Mae and Freddie Mac already exists

Congress has progressed steadily through an ambitious agenda of financial, tax and regulatory reform legislation. Now, it’s time to focus on a lingering but critical legislative effort: smart, permanent reform of America’s housing finance system. 

Federal conservatorship of government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac was emergency triage for the global economy and was never meant to be a permanent solution. We cannot continue to have Fannie and Freddie operate within the Band-Aid fix that is conservatorship — with very thin capital reserves and no clear future. 

{mosads}A good home, whether as a renter or owner, is a necessity for all Americans. As the dominant providers of capital to the U.S. housing industry, Fannie Mae and Freddie Mac exist to make affordable, safe housing available to all of America. 

Fannie and Freddie’s impact is felt in every neighborhood across the country, and when the GSEs are sound and strong, we all benefit. 

The country needs a solution that maintains Fannie and Freddie’s important role in the U.S. housing finance industry while also ensuring taxpayers are never again faced with the prospect of having to pay billions to keep the GSEs alive. Fortunately, there is a lending model, right under our noses, that is tried and tested and will achieve that objective.  

The GSEs’ multifamily lending businesses, where they back loans to owners of apartment buildings across the country, is the model that should be applied to all lending done by the GSEs.

If done correctly, this shift would immediately de-risk the American taxpayer from future losses, avoid any disruption to the U.S. mortgage market, maintain the scope and scale of the GSEs’ lending to benefit all Americans and ensure a consistent flow of capital to the U.S. housing industry during this time of economic expansion.

For over 30 years, the GSEs’ multifamily businesses have led the way in apartment-building financing with safe, sound lending across the country. 

It’s the same role they play in financing single-family homes, but with a fundamental difference: In the multifamily business, private capital is required to take risk on every loan the GSEs guarantee, protecting the GSEs and taxpayers in the process.     

Private capital risk-sharing not only creates a huge buffer against economic loss for the government and taxpayers, it also ensures that loan originators have a vested economic interest in originating quality loans. Risk retention is the only way to maintain long-term discipline in the housing finance markets. 

This point is underscored by the exceedingly low loan losses in Fannie Mae and Freddie Mac’s multifamily loan portfolios during the Great Recession.

The GSEs’ multifamily model also works because Fannie and Freddie do business with a small group of licensed, well-capitalized lenders — unlike their single-family businesses, where thousands of loan originators with varying degrees of standards and capitalization sell their loans to the GSEs. 

Clear standards should be established, minimum capitalization levels should be rigorously maintained, and real credit risk transfer should be implemented into the GSEs’ single-family businesses.

If we were able to truly implement risk-sharing in every loan originated for the GSEs’ single-family businesses, we would dramatically de-risk the federal government’s exposure and immediately solve for the No. 1 concern Republicans have with the current system. 

If we maintained the underlying mortgage credit system, which provides broad access to capital for Americans of every walk of life (including affordable housing for lower-income citizens), we would solve the No. 1 concern Democrats have with making any changes to the current system. 

Finally, if we maintained the strong regulatory oversight of the GSEs that the Federal Housing Finance Agency currently implements, we’d meet a major concern of both parties.  

Housing is a key component to America’s economic prosperity and growth, and Fannie Mae and Freddie Mac should continue providing financing to both the single-family and multifamily housing markets.

A better model exists today for Fannie and Freddie’s single-family businesses, one that has produced fantastic results for their borrowers and investors over decades. 

Why not use the multifamily model to permanently de-risk the American taxpayer while maintaining the current housing financing system that is the envy of the world? 

Willy Walker is Chairman and CEO of Walker & Dunlop, a commercial real estate finance firm. Walker & Dunlop is one of the largest lenders to multifamily owners in the U.S.