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Multifamily We have also found indications that the enterprises have relaxed underwriting standards for the multifamily mortgage loans they buy. 133 During the housing crisis, private-sector financing for multifamily residences largely vanished even though demand for multifamily rental housing increased. The enterprises stepped into the financing gap by purchasing 85% of all multifamily loans in 2009. 134 By the end of 2012, the enterprises’ market share had declined, but they were still dominant players; as shown in Figure 23 (see right), they collectively held 36% (or $305 billion) of the total outstanding debt from multifamily mortgage loans. 135 Figure 23. Multifamily Mortgage Debt Outstanding for 2012 Life Insurance Companies 6% Savings Institutions 6% Individuals and Others 12% Commercial Banks 23% Private Mortgage Conduits 9% Fannie Mae 22% Freddie Mac 14% Ginnie Mae 8% Ultimately, the value of the enterprises’ considerable multifamily mortgage holdings depends on the underlying quality of the loans. As the financial crisis demonstrated, if loans are not well underwritten, made to eligible borrowers, and supported by adequate collateral, then the enterprises’ investments in them may be exposed to undue risk. Thus, the enterprises’ respective multifamily underwriting standards can significantly influence the quality of the loans that they buy. 136 However, we found indications that the enterprises recently have relaxed their multifamily underwriting standards, which may translate to rising risk in their multifamily portfolios. For example, we found a steady increase in their partial or interestonly loans. Initially, borrowers pay little to no principal for these loans, but payments can soar as the partial or interest-only options expire. 137 In 2009, 34% and 40%, respectively, of the multifamily loans purchased by Fannie Mae and The enterprises purchased 85% of all multifamily loans in 2009. Freddie Mac were partial interest or interest only. 138 In 2011, these loan purchase rates rose to: • 43% of Fannie Mae’s multifamily loans, valued at $10 billion; and • 62% of Freddie Mac’s multifamily loans, valued at $11 billion. 139 Figure 23. Multifamily Mortgage Debt Outstanding Fannie Mae has made other changes to its multifamily underwriting standards that potentially will increase credit risk (e.g., allowing borrowers with less operating income to finance larger loans). 140 Fannie Mae also allows lenders to approve loans in which the borrower’s net operating income is less than the minimum allowable. Previously, such loans had been subject to the enterprise’s review and preapproval. 141 Freddie Mac also initiated plans to relax aspects of its underwriting standards. In April 2012, for example, the enterprise notified FHFA of its intent to revise underwriting standards for cash-out loans. These loans allow borrowers to trade mortgage equity for cash and Semiannual Report to the Congress • April 1, 2013–September 30, 2013 57
Figure 24. Typical Loan Characteristics Characteristics Multifamily Loans Single-Family Loans Enterprises’ Outstanding Unpaid Principal Balance as of December 31, 2012 Types of Properties ~$332 billion ~$4.4 trillion apartment complexes, senior housing, cooperatives, and student housing houses and condos Size of Property 5+ units 1-4 units Owners’ Use of Property income residence Borrowers legal entities individuals Average Loan Amount $5-13 million ~$200,000 Typical Loan Terms 5, 7, or 10 years, with balloon payments due at maturity 30 years are higher risk because they simultaneously increase borrowers’ debt, while decreasing their equity in the properties. In 2011, Freddie Mac financed 207 loans with over $743 million of cash out, on average about $3.6 million per loan. 142 In general, most discussions of mortgage market reform center around single-family loans, but a reformed market will also need to be structured to address characteristics specific to multifamily loans. (See Figure 24, above, for a summary of multifamily and singlefamily loan characteristics.) Multifamily properties have five or more units and vary in type from apartment complexes to senior housing. Because multifamily properties produce income, they operate like businesses. Borrowers of multifamily loans are usually legal entities such as companies or corporations. 143 Tightening underwriting standards can lead to a portfolio with less risky loans but may also lower profits. On the other hand, relaxing underwriting standards may increase risk, which ultimately leads to heavier losses. A typical multifamily loan is several million dollars; the average Fannie Mae multifamily loan is about $5 million, while Freddie Mac’s average loan is $13 million. 144 Yet, the enterprises can hold multifamily loans that are over $500 million per property. 145 Lastly, the terms of multifamily loans are 5, 7, or 10 years, with a balloon payment due at maturity. 146 Balloon payments can either be paid off or refinanced. With the specific nature of each type of loan in mind, business decisions to tighten or relax underwriting standards necessarily balance profit and risk. Tightening underwriting standards can lead to a portfolio with less risky loans but may also lower profits. On the other hand, as the housing crisis demonstrated, relaxing underwriting standards may produce increased profits along with increased risk, which ultimately leads to heavier losses. 58 Federal Housing Finance Agency Office of Inspector General
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Federal Housing Finance Agency Offi
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Section 3: Lessons for Housing Fina
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OIG’s Accomplishments from 2010 t
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A Message from the Acting Inspector
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insures mortgages against credit lo
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Semiannual Report to the Congress
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Page 44 and 45: the SEC, and others. In July 2013,
Page 46 and 47: Figure 10. Overview of the Enterpri
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Audit and Evaluation Reports with R
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Appendix D: OIG Reports See www.fhf
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Appendix F: Description of OIG Offi
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Strategic Goal 2—Operating with I
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Figure 17. Federal Home Loan Banks
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Semiannual Report to the Congress
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15 Federal Housing Finance Agency,
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33 Fannie Mae, “Multifamily Busin
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Federal Home Loan Banks Office of F
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to FHFA Scorecard Directive, at 48,
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it is preferable to limit our discu
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Position in the Housing Finance Sys
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144 Fannie Mae, “Comparison of Mu
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157 Id., “Mortgage Servicing,”
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184 Federal Housing Finance Agency,
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Transparency and Certainty for Lend
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