A quick update on the GSEs and their COVID-19 related mortgage relief for multifamily borrowers. Also, a status update on plans for the GSEs exiting conservatorship.
Fannie Mae and Freddie Mac play a critical role in greasing the wheels of the U.S. housing finance system. Although that oversized role has made the two housing finance government-sponsored enterprises (GSEs) a target for critics, the liquidity they provide is proving to be more important than ever in the current COVID-19 economic crisis.
Fannie and Freddie provide and secure loans for both single-family homes and multifamily residences. Although the majority of their business focuses on single-family mortgages, they also provide significant capital to affordable and market-rate multifamily projects. Combined, agency and GSE portfolios and MBS hold the largest share of total multifamily mortgage debt outstanding at $744 billion (49% of the total) followed by banks at a distant second that hold 30% of that debt, according to the Mortgage Bankers Association.
The core mission of the GSEs is to provide liquidity to the mortgage market. The GSEs have continued to keep money flowing to multifamily properties in the current crisis even as other capital sources have dried up or become much more hesitant. Based on its 2020 Scorecard, multifamily lending caps are $100 billion each or a combined $200 billion for the five-quarter period running from fourth quarter 2019 through the end of 2020. Effectively, each agency has about $80 billion to allocate to multifamily loans for calendar year 2020 – at least 37.5% of which must be directed at mission-driven, affordable housing.
GSEs offer forbearance
During the last few months, as mounting COVID-related pressures have challenged property owners’ ability to collect rents, Fannie and Freddie have stepped in to provide a needed stop gap for both borrowers and renters in distress during the current economic crisis. Based on a mandate from the Federal Housing Finance Agency (FHFA), which is in charge of regulating the two GSEs, Fannie and Freddie began offering mortgage forbearance to qualifying borrowers who have a performing multifamily mortgage backed by Fannie or Freddie. Since the initial announcement was made in March, both agencies have updated their forbearance guidance to align with the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act.
Although each agency has its own policies, both GSEs are generally in agreement on the following key points:
- The existing mortgage must be in good standing and not already delinquent or in default prior to the COVID-19 outbreak in the U.S.
- Lenders are delegated the authority to grant forbearances, if requested by a borrower, for up to 3 monthly payments.
- The intent of the FHFA mandate was to avoid displacing people from homes during the pandemic. Borrowers who take forbearance need to agree to suspend evictions of tenants for non-payment of rent due to COVID-19 related hardship, as well as waive any late fees.
- Depending on the loan servicer, the borrower may be required to provide additional reporting, such as monthly financial statements, during the forbearance period.
Fannie Mae’s updated guidance for COVID-19
- Lenders are delegated the authority to grant forbearances, if requested by a borrower, for up to 3 monthly payments for any loan that was current as of February 1, 2020. This delegation of forbearance is effective until August 31, 2020.
- Borrowers will repay any missed payments in equal monthly installments over 12 months, beginning at the end of the forbearance period. Repayment may also occur sooner. Fannie Mae is waiving any late fees or default interest it is due.
- The Borrower will provide the Lender documentation outlining the financial hardship on the property’s operation and performance. The forbearance also requires that the Borrower remit all excess cash flow to the Lender after paying operating expenses.
- In return for forbearance, Borrowers agree to suspend evictions of tenants for non-payment of rent. This eviction moratorium covers any new evictions or the continued pursuit of current evictions already in process.
- The Borrower must remain in compliance with all other terms and conditions of the loan and will also comply with all applicable laws and regulations. Any questions pertaining to applicable laws and regulations should be raised with their legal counsel.
- A Pre-Negotiation Letter is not required to enter into a forbearance agreement but must be in place for any ongoing discussions with the Borrower regarding relief on the loan.
Freddie Mac’s announced changes align with CARES Act
- Updated Evictions Prohibition During Forbearance Period – If a borrower enters forbearance, Freddie Mac now restricts a borrower from evicting, giving notice of, or starting an eviction of a tenant for nonpayment during the forbearance period. Freddie Mac’s initial program required no evictions of tenants for non-payment related to COVID-19 during the forbearance period. The change put in place today means there is no longer a requirement that tenants demonstrate that their nonpayment is due to COVID-19 related hardship.
- Explicit Prohibition on Charging Tenants Late Fees, Penalties or Other Charges for Nonpayment – Borrowers that enter forbearance under the program cannot charge late fees, penalties, or other charges related to tenant nonpayment of rent during the forbearance period, as required by the CARES Act. This adds explicit guidance from Freddie Mac that borrowers may not charge such fees to tenants while in forbearance, in addition to Freddie Mac’s general requirement that borrowers follow all applicable laws.
- Extension of Program to End of Emergency Period – The last day to enter forbearance under the program is now the end of the federally declared emergency period or December 31, 2020, whichever comes first. Freddie Mac previously set the program to expire August 1, 2020.
The forbearance assistance has the potential to impact thousands of landlords. Freddie Mac alone has said that its forbearance program is accessible to borrowers across more than 27,000 properties that currently have performing Freddie Mac loans. However, the number of GSE-backed loans in forbearance to date represents a small percentage overall. As of May 19th, Fannie Mae had reported 200 loans in forbearance. Based on a report from Freddie Mac that was released April 29, its master servicers had reported 336 forborne securitized loans, or roughly 1.4% of its total securitized loan population. This equates to about $1.7 billion of outstanding unpaid principal balance (UPB) and represents 0.6% of its total securitized UPB.
Road to reform
Landlords are relying more heavily on Fannie and Freddie in the current crisis even as the agencies are moving down the path towards what could be a major shake-up that includes additional reforms and a long-awaited exit to its current conservatorship.
Proposed reforms are the latest chapter in what has been a long and colorful history for the two agencies. Fannie Mae was founded in the late 1930s as part of the Great Depression-era New Deal and was later privatized in 1968. Freddie Mac was created in 1970 to expand the secondary mortgage market and was privatized in 1989. Both ended up back under government control via FHFA conservatorship following the infamous $190 billion government bailout in 2008 during the Great Financial Crisis. The purpose of the two agencies was to provide low-cost capital to fund mortgages for homeownership. The problem is that they also were allowed to issue debt to finance discretionary investments. Essentially, the two got way over their skis on mortgage backed securities – decisions that turned out to be disastrous when the housing bubble burst and the mortgage backed securities market imploded.
Discussions on reforming the agencies have been ongoing for nearly as long as the two have been in conservatorship. Opinions differ on whether additional reforms are needed in light of changes that have already been made. However, most agree that the two agencies do need recapitalization. As part of the bailout agreement, all of the agencies’ profits go into the government’s general fund. Legislation to introduce comprehensive reforms has proved to be a tough political football to advance in Congress, which has prompted a shift to an administrative approach.
In September, the Treasury Department released a comprehensive, 50-page plan to reform Fannie Mae and Freddie Mac that outlined administrative and legislative steps that needed to be taken that aims to define a more limited role for the federal government in the housing finance system, enhance taxpayer protections against future bailouts and promote competition in the housing finance system. On the heels of that, the FHFA also released its own 2019 Strategic Plan for the Conservatorships of Fannie and Freddie.
Current FHFA Director Mark Calabria has been very vocal about his goal to recapitalize the agencies and move them out of government conservatorship by the end of his term in 2024. That recapitalization is expected to involve IPOs, which could come sometime within the next two years. In a May event hosted by the Mortgage Bankers Association, Director Calabria said that while COVID-19 had likely delayed Fannie and Freddie’s exit from conservatorship by three or four months, he was still confident that the GSEs would be able to go to market with IPOs sometime in 2021. In addition, both Freddie Mac and Fannie Mae announced in mid-May that they would be issuing RFPs seeking to hire financial advisors to help them navigate an end to their conservatorships.
On May 20, Director Calabria and the FHFA also re-proposed the Enterprise Regulatory Capital Framework Rule, which outlines regulatory capital requirements for both Fannie and Freddie to help prepare the two entities for an exit from conservatorship. The latest Framework Rule is a modified version of an earlier rule first proposed in 2018. The next step to exit conservatorship likely will come from the Treasury Department. It will need to revise the Preferred Stock Purchase Agreements (PSPAs) – the contracts between the Treasury and the GSEs that govern the amounts of capital Fannie and Freddie are allowed to build from their respective earnings.
Although administrative-led efforts could be a more successful path, reforms and an exit from conservatorship still face significant challenges ahead, chief among them being the current economic downturn and uncertain recovery ahead. Most people think that an exit from conservatorship is inevitable. When they do occur, the combined IPOs are expected to rank among the largest, if not the largest, in history based on total valuations. The question is how to make that a smooth transition so as not to disrupt critical liquidity to both single-family and multifamily housing markets. What is certain is that the role Fannie and Freddie play in providing needed affordable housing for the country will be more important than ever in light of the COVID-19 crisis. However, they might not be able to operate on a for-profit basis for investors for still some time to come.