What Fannie and Freddie Touch Turns to a Bubble
Fannie Mae and Freddie Mac have too much money sloshing around to be doing nothing.
The New York Times reports, Fannie Mae is guaranteeing a billion dollars in loans to the largest single-family landlord in the country and now Freddie Mac “could provide up to $1 billion in financing or loan guarantees to smaller firms that buy single-family homes and operate them as what it considers affordable-housing rentals, a company official said in an interview. Some nonprofit housing groups might also be eligible for financing.”
Freddie says it’s all about affordable rentals. Matthew Goldstein writes, “The approach being taken by Freddie Mac is in part a response to criticism of Fannie Mae’s deal to provide a guarantee to investors in the 10-year, $1 billion loan that Wells Fargo provided to Invitation Homes and will securitize. The loan is backed by about 7,000 rental homes.”
Back in 2007, everyone wanted to own a home, and there were 11 million homes rented. Now about 17 million homes are being rented. Invitation Homes, created by Wall Street giant Blackstone, and other big Wall Street-backed firms that sprouted up after the crisis like American Homes 4 Rent, Colony Starwood Homes and Pretium Partners control 300,000 of these rentals.
While Fannie provided financing guarantees for the huge firms, Freddie plans to guarantee loans to nonprofit housing groups and midsize investor landlords who have had to rely mainly on private-equity-backed firms for financing.
What could go wrong here?
After all, as Reason’s Veronique de Rugy pointed out,
Fannie and Freddie contributed to the housing crisis by making it easier for more people to take out loans for houses they could not afford. Beginning in 2000, Fannie and Freddie took on loans with low FICO scores, loans with low down payments, and loans with little or no documentation.
Ms. de Rugy explains Fannie and Freddie not only are able to obtain capital from the public equity market, but have “a line of credit with the government, no oversight by the Securities and Exchange Commission, and a government guarantee that gives these entities a lower cost of funds than their private sector rivals.”
Bill Bonner provided the result of these benefits in the Christian Science Monitor,
Armed with these advantages, GSEs increased their book of business from $13 billion in 1965 to $1 trillion by 1990 and $3.4 trillion in 2003. Once the great real estate bubble had concluded by year-end 2007, Freddie and Fannie combined had purchased $4.9 trillion of mortgages, repackaging 70 percent of these into guaranteed securities for the secondary market.
Of course we all know what happened, in September 2008, the federal government took over Fannie and Freddie, by placing the two into conservatorship by the U.S. Treasury. Instead of being allowed to die an undistinguished death, the two mortgage GSEs keep creating market malinvestments and bubble mischief.
Since then the two giant GSEs have financed the apartment building boom. I wrote recently, the GSEs made 53% of all apartment loans in 2016, down from their combined 68% market share in 2012. “So, their conservator, The Federal Housing Finance Agency (FHFA), recently eased the GSE’s lending caps so they can crank out even more loans.”
Mary Salmonsen writes for multifamilyexecutive.com, “Currently, Fannie and Freddie are particularly dominant in garden apartments [and] in student housing, with 62% and 61% shares, respectively. The two remain the largest mid-/high-rise lenders but hold only 35% of the market.”
Mr. Richter warns us, “Government Sponsored Enterprises such as Fannie Mae guarantee commercial mortgages on apartment buildings and package them in Commercial Mortgage-Backed Securities. So taxpayers are on the hook. Banks are on the hook too.”
Meanwhile, homeownership has fallen from 69% to 63.7% according to the Census Bureau. What all this renting and now cheap, government guaranteed financing has created a merger mania to the home rental corporation market.
The Times Goldstein writes,
The two institutional landlords, Invitation Homes, a rental business spun out of the private equity giant the Blackstone Group, and Starwood Waypoint Homes said they would combine to create an entity with about 82,000 homes in more than a dozen big markets.
The deal could set the stage for other institutional investors to join forces. With fewer opportunities to buy homes at a discount, the keys to growth will be reducing operating costs, gaining market share and potentially increasing rent.
Whatever Fannie and Freddie touch, turns to a bubble.