The Federal Home Loan Mortgage Corp., under heavy political pressure and facing an imminent threat of increased congressional oversight, is preparing to announce it is getting back into financing rental housing after having cut off such funds for almost two years.
The move could begin to help ease a scarcity of funds for the purchase and rehabilitation of apartment buildings around the country and thus play a part in attacking a critical shortage in affordable rental housing.
Freddie Mac, as the government-chartered corporation is known, will make available up to $2 billion in secondary market financing for rental housing next year, according to Freddie Mac chairman Leland Brendsel.
A longer-range plan envisions some $10 billion in new financing by 1996.
In addition, starting next month Freddie Mac will begin to refinance targeted properties in its approximately $10.5 billion existing portfolio of apartment buildings around the country.
Refinancing at lower mortgage rates will help free up capital for owners to help maintain their buildings, some of which have become severely deteriorated, Brendsel said.
Freddie Mac will also offer financing for investors, including nonprofit community groups, to buy rental buildings it has foreclosed on, he added.
Freddie Mac provides capital by purchasing mortgages issued by local lenders and in most cases packaging them for sale as securities. It has bought more than 9 million mortgages, mostly on single-family homes, since it was created by Congress in 1970.
The corporation expanded heavily into buying multifamily mortgages in the early 1980s, especially in low- and moderate-income rental housing in urban areas such as New York, Chicago, Los Angeles, Atlanta and Dallas.
The corporation oversees $2.5 billion in mortgages on about 2,500 buildings in New York City, representing about 125,000 apartments housing up to 600,000 people, Brendsel said. In Chicago, Freddie Mac`s $400 million portfolio represents about 400 buildings and 20,000 apartments.
But in 1990, plagued by unanticipated defaults and losses on the apartment building mortgages, Freddie Mac announced it would stop any further multifamily financing while it figured out how to straighten out the ailing program.
Lately, however, Freddie Mac and its companion housing finance entity in the so-called secondary market, the Federal National Mortgage Association
(Fannie Mae), have come under criticism in Congress for not doing enough for lower-income housing.
A bill pending in the Senate would require both entities to devote 30 percent of their business to financing low- and moderate-income housing and 30 percent to central cities. It would also tighten up data collection and reporting requirements to enable Congress to monitor compliance.
The so-called government-sponsored enterprises bill has passed in the Senate Banking Committee and is expected to be up for a vote in June. A similar bill has already passed in the House.
Sen. Alan Cranston (D-Calif.), chairman of the banking panel`s housing subcommittee, displayed a keen interest in how Freddie Mac intended to step up its commitment to affordable rental housing in a letter to Freddie Mac last month.
Freddie Mac officials are reluctant to say they are being influenced by congressional action. But Thomas Watt, senior vice president for multifamily housing, said the corporation is intending to meet targets set for low- and moderate-income housing.
A move back into multifamily financing by Freddie Mac takes on particular significance in view of the fact that it cut off new funding just at a point when other sources of such capital were also drying up.
At about the same time, revelations surfaced concerning scandals and losses in multifamily mortgages insured by the Federal Housing Administration, pointed out Donald Campbell, senior vice president of government affairs of the National Multi Housing Council, a Washington-based trade group of apartment building owners and developers.
The FHA scandal and the Freddie Mac action together ”sent a message that multifamily housing was a highly risky sort of business,” said Campbell.
”That began to affect the thinking of other investors.”
The 1986 tax act, which sharply curtailed the tax advantages in multifamily investment, had already constricted available funds, Campbell noted. And the collapse of the savings and loan industry and the consequent credit crunch for all forms of real estate have further strangled funding, he said.
”There`s a huge vacuum being created,” he said. Funding is not just absent for new construction but also for purchase, rehabilitation and refinancing of existing builings, he pointed out.
”It`s putting enormous pressure on owners` ability to maintain economic viability of these properties,” he said. As a result, maintenance gets deferred and buildings get run down.
”Deterioration is certainly the case on the margin,” he said. ”There are a lot of properties for which needed investment is not available, and that means an accelerated loss of stock at the lower end.”
Campbell said Freddie Mac`s re-entry would constitute only a small step toward filling the financing vacuum, but could be significant if the corporation develops techniques for standardizing and packaging multifamily financing, as has been done with single-family financing.
Watt said Freddie Mac is working on such techniques, including setting up a rating system for mortgage-backed securities similar to the ones that exist with other products in the capital market such as bonds. Such a system would greatly enhance mortgage liquidity, he said.
Because of their ability to package single-family mortgages, Freddie Mac and Fannie Mae now help finance more than half of all the single-family homes sold in the U.S.
Fannie Mae continues to be the largest player in multifamily financing, with a total of $21 billion in apartment buildings financed, 90 percent for low- or moderate-income renters. Last year Fannie Mae financed $2 billion in new multifamily mortgages.
Brendsel said the two government-sponsored housing finance corporations
”have the potential” to achieve the same participation in multifamily financing as they have in single-family mortgages.
But for the moment, seared by a default rate of 7 percent in its existing multifamily portfolio-plus ”near-defaults” amounting to another 15 percent- Freddie Mac is proceeding cautiously.
Brendsel said Freddie Mac`s troubles stemmed partly from overbuilding and inflated values of rental properties in some areas, weaknesses that were exposed as the recession ground on.
But equally important was mismanagement of the program, he said. Freddie Mac had a lack of experience in multifamily finance and failed to control the quality of lenders originating the mortgages, check out the property owners and developers properly and see that the properties themselves were maintained.
Problems became particularly acute in New York and Atlanta, while Chicago has only a few problem properties, he said.
He said Freddie Mac will be more selective in the lenders it works with and more demanding in loan underwriting and in requiring inspection of properties. The corporation is planning to more than double its previous multifamily staff to a total of 220 people.
Because, like Fannie Mae, Freddie Mac has focused on properties for low-and moderate-income renters, which make up an estimated 90 percent of its portfolio, it could be a force in an area where the need is approaching crisis proportions.
The supply of low-rent housing has been steadily declining in this country for the past 20 years. The U.S. Census Bureau reported in 1989 that while in 1970 there were 6.8 million rental units with housing and utility costs of less than $250 a month (in 1989 dollars), by 1983 the number of those units had dropped to 5.9 million and in 1989 to 5.5 million.
Meanwhile, the number of low-income renters has been increasing. A report last year by the Low Income Housing Information Service said the number of low-income renter households rose from 6.4 million in 1970 to 9.6 million in 1989-even before the recession started.
While the key issues for poor renters are lack of income and need for more government subsidy programs, Freddie Mac and Fannie Mae have a significant part to play, said Barry Zigas, executive director of the Low Income Housing Information Service and president of the National Low Income Housing Coalition.
The success of government-aided programs is predicated on accessibility to capital, he pointed out. ”None of these efforts can be as successful unless the secondary market is actively engaged,” he said.
