NCPA - National Center for Policy Analysis

Federal Guarantee of Multifamily Debt Market Exposes Taxpayers to Risk

March 18, 2013

A multifamily home is defined as a housing unit that is located in a building of five or more units. In the multifamily industry, just as in the single home market, access to capital is crucial in the maintenance and construction of the nation's multifamily stock. The government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac are engaging in risky lending in this industry that needs to be corrected, say Tom White and Charlie Wilkins of the American Enterprise Institute.

  • Thirty-three percent of Americans live in rental housing and over 40 percent of that housing in considered multifamily.
  • With more than 12 percent of the total housing stock considered multifamily rental housing, it is important for millions of Americans that the multifamily mortgage market operates correctly.
  • Currently, the GSEs guarantee multifamily lending activity, which drives out competitors by backing loans at uncompetitive low rates and presses guarantors to make unwise loans in response to political pressure.

In addition, the GSEs have increased the use of debt over equity and have exposed taxpayers to significant risk when the market takes a cyclical swing downward. Proponents of the GSE guarantee claim that removing the guarantee will raises rents and affect small properties the most.

  • However, tenant rents are determined by supply and demand factors, not by the interest rates or apartment owners' costs.
  • The GSE guarantee have allowed developers and owners of apartments to make more profits than they would have made and have led to over-allocation of capital to the multifamily sector as well as the overuse of debt.
  • While multifamily prime lending is safe, below-prime loans in the multifamily market are just a risky as the subprime loans that sparked the housing bubble in 2008.

As long as GSEs control the market, taxpayers will be exposed to risk, especially if interest rates rise in the future, which they are likely to do. Slowly drawing down the GSE guarantee, encouraging prime loans and privatizing the multifamily business units of the GSEs would reduce taxpayer and industry exposure to risk.

Source: Tom White and Charlie Wilkins, "Moving Toward a Viable Multifamily Debt Market with No Ongoing Federal Guarantee," American Enterprise Institute, March 13, 2013.


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