[Senate Hearing 113-159]
[From the U.S. Government Publishing Office]






                                                        S. Hrg. 113-159


 HOUSING FINANCE REFORM: ESSENTIAL ELEMENTS OF THE MULTIFAMILY HOUSING 
                             FINANCE SYSTEM

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                   ON

EXAMINING THE RECOMMENDATIONS FOR THE FUTURE OF THE MULTIFAMILY HOUSING 
     FINANCE MARKET CURRENTLY SERVED BY FANNIE MAE AND FREDDIE MAC 
                         MULTIFAMILY SECURITIES

                               __________

                            OCTOBER 9, 2013

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs




[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]




                 Available at: http: //www.fdsys.gov /



                                   ______

                         U.S. GOVERNMENT PRINTING OFFICE 

86-401 PDF                     WASHINGTON : 2014 
-----------------------------------------------------------------------
  For sale by the Superintendent of Documents, U.S. Government Printing 
  Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
         DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
                          Washington, DC 20402-0001














            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon                 MARK KIRK, Illinois
KAY HAGAN, North Carolina            JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia       TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts      DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota

                       Charles Yi, Staff Director

                Gregg Richard, Republican Staff Director

                  Laura Swanson, Deputy Staff Director

              Erin Barry Fuher, Professional Staff Member

                 Beth Cooper, Professional Staff Member

                  Greg Dean, Republican Chief Counsel

            Chad Davis, Republican Professional Staff Member

                    Travis Hill, Republican Counsel

                       Dawn Ratliff, Chief Clerk

                      Kelly Wismer, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)
















                            C O N T E N T S

                              ----------                              

                       WEDNESDAY, OCTOBER 9, 2013

                                                                   Page

Opening statement of Chairman Johnson............................     1

Opening statements, comments, or prepared statements of:
    Senator Crapo................................................     2

                               WITNESSES

Thomas S. Bozzuto, Chairman and Chief Executive Officer, The 
  Bozzuto Group, on behalf of the National Multi Housing Council 
  and the National Apartment Association.........................     3
    Prepared statement...........................................    26
    Responses to written questions of:
        Chairman Johnson.........................................    82
        Senator Warren...........................................    88
        Senator Coburn...........................................    90
E.J. Burke, Executive Vice President and Group Head, KeyBank Real 
  Estate Capital, Key Corporate Bank, on behalf of the Mortgage 
  Bankers
  Association....................................................     5
    Prepared statement...........................................    57
    Responses to written questions of:
        Chairman Johnson.........................................    96
        Senator Warren...........................................    98
        Senator Coburn...........................................   102
Shekar Narasimhan, Managing Partner, Beekman Advisors, Inc.......     7
    Prepared statement...........................................    64
Terri Ludwig, President and Chief Executive Officer, Enterprise 
  Community Partners, Inc........................................     8
    Prepared statement...........................................    74
    Responses to written questions of:
        Chairman Johnson.........................................   103
        Senator Warren...........................................   105
        Senator Coburn...........................................   107

              Additional Material Supplied for the Record

Statement of the National Association of Home Builders...........   110
Principles for Multifamily Housing Finance Reform and the 
  Government Sponsored Enterprises...............................   118

                                 (iii)

 
                   HOUSING FINANCE REFORM: ESSENTIAL
                  ELEMENTS OF THE MULTIFAMILY HOUSING
                             FINANCE SYSTEM

                              ----------                              


                       WEDNESDAY, OCTOBER 9, 2013

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:02 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. I call this hearing to order.
    Today's hearing is continuing work on housing finance 
reform. This hearing will focus on the future of the 
multifamily housing finance market currently served by Fannie 
Mae and Freddie Mac multifamily securities.
    The topic of multifamily housing finance is often 
overlooked in broader housing finance reform discussions, so 
today's hearing will bring this important issue into focus for 
the Committee. Multifamily housing is a key source of housing 
to the one-third of Americans who are renters. Demographic 
trends indicate there will be growing demand for multifamily 
housing in the years to come. Without an adequate supply of 
such housing, the affordability challenges facing many American 
families will only increase.
    Fannie Mae and Freddie Mac multifamily securities help 
ensure broad access to credit across the whole market, serving 
small communities as well as larger cities on the coasts. It 
also makes housing affordable to families with a range of 
incomes. Through the recent financial crisis, these securities 
performed very well, with collective default rates peaking at 
less than 1 percent. They also provided liquidity to the 
multifamily sector at the height of the financial crisis when 
other sources of financing withdrew.
    In our discussion today, I hope to highlight the key 
elements of the enterprises' multifamily strengths and 
weaknesses before and during the crisis to help inform our 
discussions of the future. The hearing gives us a chance to 
examine recommendations from our witnesses and what essential 
elements of our Nation's multifamily housing finance system 
should be going forward, including the potential roles of 
private capital and the Government guarantee, as well as how a 
new system should be structured and regulated.
    I also look forward to considering what reforms in this 
area will mean for rural and small communities like those in my 
State and how it may affect small lenders and small properties 
as well as the workforce and affordable housing supply. At a 
minimum, we must make sure that broad access to credit is 
preserved in a new housing finance system going forward.
    With that, I turn to Senator Crapo for his opening 
statement.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you, Mr. Chairman.
    Today we continue our series of hearings on housing finance 
reform. More than 5 years after the collapse of the housing 
market and the beginning of the bailouts of Fannie Mae and 
Freddie Mac, reforming our housing system is urgently needed 
and is a top priority for this Committee.
    As we have noted in previous hearings, we are now holding a 
number of hearings examining the specific aspects of our 
housing finance system. This morning we take an in-depth look 
into multifamily housing, which refers to loans secured by 
properties with five or more residential units.
    Although the multifamily market is much smaller than the 
single-family market with around $850 billion in outstanding 
mortgage debt, it still serves as a vital source of housing for 
more than 15 million American households across the country.
    The multifamily market differs significantly from the 
single-family market. While Fannie Mae and Freddie Mac suffered 
enormous losses on single-family mortgages during the recent 
crisis, multifamily loans at both enterprises experienced 
delinquency rates of less than 1 percent. There are some 
important lessons we can learn from the enterprises' 
multifamily activities as we continue to work for reform of the 
single-family market.
    Fannie and Freddie both require private sector risk sharing 
and high-quality underwriting on all guaranteed multifamily 
loans. Fannie Mae employs strict underwriting guidelines and 
requires originators to retain risk through its delegated 
underwriting and servicing system or program. Freddie Mac 
underwrites all its own loans and shares risk with secondary 
market participants through structured transactions known as 
``K deals''. These types of policies have helped ensure that 
Fannie Mae and Freddie Mac only guarantee mortgages of high 
credit quality in the multifamily space.
    Still, by insuring mortgages against default, whether under 
the conservatorship or under a new system that involves a 
Government guarantee, the Government is inherently putting 
taxpayer money at risk.
    The Government's market share of multifamily housing spiked 
dramatically during the financial crisis from around 30 percent 
of originations in 2006 to around 80 percent in 2009. This 
number has moderately decreased, but Fannie and Freddie along 
with the FHA still finance a significant portion of multifamily 
originations, and the GSEs' market shares remain at a higher 
level than has historically been the case.
    Historically, private sources of capital, including banks, 
life insurance companies, the commercial mortgage-backed 
securities market, and real estate investment trusts, have 
played an important role in multifamily markets.
    Given the exceptional performance of multifamily loans, it 
is worth investigating whether we can do more to encourage the 
private sector to finance more of these loans on its own, thus 
shrinking the Government's footprint in the market.
    We all agree that the status quo in housing finance is not 
an option. I have seen a number of thoughtful proposals 
offering different views on how best to structure the future 
multifamily market, and I am interested to hear your views on 
these proposals, along with any recommendations regarding how 
to best reform the system in a way that ensures a liquid, well-
functioning housing market.
    How should the future multifamily housing system be 
structured? Who in the market should play the various roles 
needed for a healthy secondary market? MBA supports well-
capitalized private insurers while other groups have advocated 
private issuer guarantors. How should any guarantee fee be 
priced to ensure that the Government is not underpricing risk 
and crowding out private capital?
    I look forward to working with Chairman Johnson and the 
other Members of the Committee toward a bipartisan agreement 
that addresses these critical issues.
    Thank you, Mr. Chairman.
    Chairman Johnson. Thank you, Senator Crapo.
    I understand that there is an event at 11:30 that many of 
our Members will be attending this morning, so we will need to 
adjourn this hearing at 11:15. Because of this, opening 
statements will be limited to myself and Ranking Member Crapo.
    I would like to remind my colleagues that the record will 
be open for the next 7 days for additional statements and other 
materials.
    I would now like to introduce our witnesses that are here 
today.
    Our first witness is Mr. Thomas Bozzuto, who is chairman 
and CEO of the Bozzuto Group. Mr. Bozzuto is also representing 
the National Multi Housing Council and the National Apartment 
Association.
    Mr. E.J. Burke is executive vice president and group head 
of the KeyBank Real Estate Capital. Mr. Burke is also here on 
behalf of the Mortgage Bankers Association.
    Mr. Shekar Narasimhan is managing partner of Beekman 
Advisors.
    And, finally, we have Ms. Terri Ludwig, president and CEO 
of Enterprise Community Partners, Incorporated.
    Mr. Bozzuto, you may proceed.

 STATEMENT OF THOMAS S. BOZZUTO, CHAIRMAN AND CHIEF EXECUTIVE 
  OFFICER, THE BOZZUTO GROUP, ON BEHALF OF THE NATIONAL MULTI 
     HOUSING COUNCIL AND THE NATIONAL APARTMENT ASSOCIATION

    Mr. Bozzuto. Thank you, Senator Johnson, Ranking Member 
Crapo, and distinguished Members of the Committee. On behalf of 
NMHC and NAA, I thank you for this opportunity. My name is 
Thomas S. Bozzuto, and I am chairman and CEO of the Bozzuto 
Group, a 25-year-old privately held integrated real estate 
company. During my career, I have been responsible for the 
creation of approximately 50,000 homes, most of them 
apartments.
    The apartment industry is a competitive and robust $1.1 
trillion industry. We serve more than 35 million residents, and 
that number has been expanding and is expected to continue at 
the rate of a million a year.
    In my written testimony, I highlight the important changes 
in supply and demand as well as the economic contributions 
apartments make to society to explain to Congress why it is so 
important to pursue mortgage finance reform separately for this 
housing segment.
    While the housing crisis exposed serious flaws in our 
Nation's home mortgage finance system, the same cannot be said 
about the GSEs' multifamily programs. The industry did not 
overbuild, and the GSEs' multifamily programs performed well. 
Loan performance remains strong with delinquency and default 
rates at less than 1 percent.
    In conservatorship, the GSE multifamily programs have 
netted more than $10 billion for the Federal Government. Most 
importantly, when all other sources of capital fled the market 
during the housing crisis, the GSEs increased their 
participation, providing much needed liquidity, and they did so 
throughout the country. In other words, they functioned as 
intended.
    We share your collective desire to return to a marketplace 
dominated by private capital. The industry relies on a variety 
of sources besides Fannie and Freddie, including commercial 
banks, thrifts, life companies, FHA, CMBS, pension funds, and 
private mortgage companies. Together these sources have 
provided the apartment sector with up to $150 billion annually 
to develop, refinance, purchase, renovate, and preserve 
apartments.
    However, each of these sources has its own focus, 
strengths, and limitations and has either been unwilling or 
unable to meet the full range of the multifamily industry's 
capital needs, even during healthy economic times. There is no 
evidence to suggest that that situation is any different today.
    Yes, in the past few years, private capital has returned to 
the apartment sector, but it is typically concentrated in a 
handful of cities and on trophy assets. People who want to live 
in apartments in secondary and tertiary markets in rural areas 
are not benefiting from this resurgence.
    Even in the major markets, firms providing workforce 
housing find themselves shut out. In 2013 alone, an estimated 
$100 billion in multifamily mortgages will need to be 
refinanced, and many of these are in areas that private capital 
will not go into. For these needs, the sector will need to rely 
on the GSEs.
    But I am not here to suggest that GSEs continue. I would 
highlight instead for the Committee those elements of the 
existing system that worked well for apartment lending and, 
most importantly, did so at no cost to the taxpayer. It is our 
hope that these elements will be carried forward in any new 
program.
    Overall, we support reform that will ensure broad liquidity 
at all times and in all markets. This can only be accomplished 
if the Federal Government maintains a role. That is the 
starting point. From there, we propose that any legislation 
include a separate title to address the reforms specific to 
multifamily housing, including the process for privatizing 
entities, transitioning to a new system, and defining eligible 
successors. Our written testimony provides specific details and 
recommendations.
    Finally, we understand the desire to include an 
affordability mandate in any proposed legislation. It is 
important to note that multifamily housing is inherently 
affordable with 82 percent of existing apartments affordable to 
households earning 80 percent of area median income. We 
strongly encourage caution in defining a mandate to avoid 
unintended consequences. There are many options available, some 
better than others, and currently we are considering them. 
However, we fear that in the desire to achieve affordability, 
Congress will severely compromise the primary objective of 
ensuring adequate liquidity to all apartment markets at all 
times.
    Most importantly, Mr. Chairman and Members of the 
Committee, as part of your deliberation, we urge you to 
recognize the unique needs and characteristics of the rental 
industry and to retain the successful components of the 
existing multifamily program in whatever succeeds them.
    Thank you very much.
    Chairman Johnson. Thank you.
    Mr. Burke, you may proceed.

  STATEMENT OF E.J. BURKE, EXECUTIVE VICE PRESIDENT AND GROUP 
   HEAD, KEYBANK REAL ESTATE CAPITAL, KEY CORPORATE BANK, ON 
           BEHALF OF THE MORTGAGE BANKERS ASSOCIATION

    Mr. Burke. Chairman Johnson, Ranking Member Crapo, and 
Members of the Committee, thank you for the opportunity to 
testify today. My name is E.J. Burke, and I am the 2014 
chairman of the Mortgage Bankers Association as well as 
executive vice president and group head of KeyBank Real Estate 
Capital. I have over 34 years of experience in banking and 
commercial real estate finance. At KeyBank, I oversee multiple 
commercial real estate lending platforms in our commercial and 
multifamily finance business. KeyBank provides community 
banking services in 14 States and is a national commercial real 
estate lender and servicer.
    The multifamily rental housing market is a critical 
component of our housing system--in size, reach, and the 
households that it serves. More than one in three American 
households rent their home, and more than 16 million of those 
households live in multifamily rental housing.
    Renters include workers who want to live near their jobs, 
retirees on a fixed income, families with children, students, 
and households who value the convenience and mobility that 
renting offers. A large and diverse group of capital sources 
currently provide liquidity for multifamily housing, and that 
diversification continues to increase.
    Private capital also bears significant risk in existing GSE 
multifamily finance platforms. The Government-backed sources 
have experienced, even through the recent financial crisis, 
very strong credit performance. Importantly, as the recent 
downturn demonstrated, the countercyclical role is one that 
only the Government can fill.
    With Fannie Mae and Freddie Mac's conservatorship going on 
more than 5 years, policy makers must develop a long-term plan 
for the future role of the Government in the mortgage market. 
This plan must address the GSEs' unique role in multifamily 
rental housing. It is clear that the current state of the GSEs 
should not last indefinitely. However, policy makers should 
ensure the ongoing stewardship of valuable resources that 
support the multifamily market and utilize them to transition 
to a stronger housing finance system.
    As the Committee considers the structure of a multifamily 
housing finance system, we believe that policy makers should 
focus on ensuring the availability of capital in all market 
cycles. MBA believes that public policy should strike a balance 
that continues to attract and deploy private capital in the 
multifamily market while establishing a focused Government 
guarantee that enables liquidity and stability in all markets 
and all economic cycles.
    Bearing this in mind, MBA believes that a new system should 
incorporate several structural recommendations which I describe 
in more detail in my written testimony.
    First, a wholly owned Government corporation should 
function as a catastrophic guarantor, administrator of a risk 
insurance fund, and regulator of secondary market entities. 
This guarantor would be funded by guarantee fees paid by 
issuers.
    The new system should also allow multiple privately 
capitalized issuers of Government-guaranteed securities in the 
secondary multifamily mortgage market.
    Next, the GSEs' existing multifamily assets and 
infrastructure should be preserved and carried over to a new 
system. Not only are these businesses valuable to U.S. 
taxpayers, transferring them to new entities would minimize 
market disruption and allow them to continue to serve the 
multifamily housing finance market.
    Finally, we firmly believe that proposed approaches should 
also be reasonable, flexible, and balanced with regard to the 
need to attract private capital. For example, policy proposals 
contemplating affordability requirements should take into 
account that 93 percent of multifamily units have rents 
affordable to households earning area median incomes or less.
    We are encouraged by recent legislative activity that has 
revived the policy debate on the future of Fannie Mae and 
Freddie Mac and commend the efforts of the Chairman and Ranking 
Member and those on this Committee who have introduced 
thoughtful proposals that would create a comprehensive 
framework for the future of housing finance.
    Thank you for the opportunity to testify before you today. 
MBA remains committed to its key principle that a successful 
multifamily secondary market should rely primarily on private 
capital while ensuring stable and continued liquidity in all 
economic cycles through a Government role. We believe that this 
can be achieved in a manner that protects taxpayers, encourages 
competition, and builds upon the successes and strong 
foundation that exists today. We stand ready to work with the 
Committee as it continues to engage in this critically 
important effort.
    I look forward to your questions.
    Chairman Johnson. Thank you.
    Mr. Narasimhan, you may proceed.

   STATEMENT OF SHEKAR NARASIMHAN, MANAGING PARTNER, BEEKMAN 
                         ADVISORS, INC.

    Mr. Narasimhan. Good morning. Chairman Johnson, Ranking 
Member Crapo, and Members of the Committee, thank you for 
inviting me to testify at this hearing on housing finance 
reform. My name is Shekar Narasimhan, and I am managing partner 
of Beekman Advisors. I have spent the past 35 years in housing 
and finance, including 4 years building single-family homes in 
eastern Kentucky. Later, when I was CEO of one of the first 
publicly traded commercial mortgage finance companies, we 
developed loan products to serve the low-income housing tax 
credit market. My experience in running and operating a real 
estate financial services business as a partner with the 
multifamily businesses at Fannie Mae, Freddie Mac, and FHA is 
what brings me here today. Through all of this, I developed a 
deep and abiding passion for affordable housing.
    The multifamily businesses at the GSEs are not part of the 
problem in the housing finance system. In fact, they are part 
of the solution. Every major principle that has been 
articulated by stakeholders with regard to what a new housing 
finance system should look like is already in practice at these 
businesses today:
    Alignment of interest between the borrower, the lender/
investor, and the issuer;
    Detailed underwriting of every loan;
    Service of virtually every market segment with a menu of 
stable and responsible lending products. They have consistently 
served the middle market in multifamily, which is for lower-
income households and working families, for the last 27 years;
    Participation of both small and large private lenders. 
Lenders from Nebraska, lenders from California, large banks, 
publicly traded companies have been part of this system with 
skin in the game;
    And a lengthy record of profitable operations, which is 
what gives us considerable hope that private capital can, in 
fact, be brought in to capitalize these entities;
    And, finally, a footprint that responds appropriately to 
changing economic conditions. At a point when the capital 
markets were very frothy, the GSE multifamily businesses had 
approximately a 25-percent market share, and at the point when 
there was virtually nobody else in the capital markets during 
the crisis, they increased their market share to 70 percent. It 
is already down to 55 percent and will continue to shrink as 
the private capital market comes back in.
    So I am here today to propose that the multifamily 
businesses at the GSEs should be used to really demonstrate the 
path to the housing finance system of the future. Let us spin 
them out as privately capitalized entities with Government 
guarantees that are limited to only the securities that they 
issue.
    We all recognize that change is needed. Everyone would 
agree that 5 years of conservatorship, as Ranking Member Crapo 
said, is already too long. It has discouraged the best and 
brightest from working and remaining at the GSEs. It is, 
frankly, not allowing the secondary market to return to normal. 
But we have a large rental population that is growing: 41 
million Americans live in rental housing today, and that number 
is actually growing. So we have rental demand. We need money to 
both refinance existing loans as well as to build new rental 
properties across the country.
    The GSEs have played an enormously important role in this 
sector. We are arguing simply in order to keep rental burdens 
manageable, we need to keep the operations of these entities 
within the framework that they have operated, and one of the 
most important frameworks where perhaps we are going to be more 
prescriptive is to argue that since they have for the past 11 
years of kept records demonstrated that they can serve families 
at 60 percent of area median income and do so profitably, they 
should be continued to be held to that standard in the future.
    Responsible change does involve doing the least damage and 
encouraging the introduction of private capital. So the work 
that has been done recently at the multifamily units of Fannie 
Mae and Freddie Mac to determine how a spinout would occur is 
enormously valuable to this Committee and, frankly, gives you 
the blueprint for this to occur.
    What we proposed, therefore, is an immediate spinout of the 
multifamily operations and that can fit into the architecture 
of any bipartisan proposal that you come up with. There is no 
reason to wait given rental demand, the need for rental units, 
and the profitable track records of these current businesses.
    Thank you for the opportunity to make these remarks. I look 
forward to your questions and comments.
    Chairman Johnson. Thank you.
    Ms. Ludwig, you may proceed.

   STATEMENT OF TERRI LUDWIG, PRESIDENT AND CHIEF EXECUTIVE 
          OFFICER, ENTERPRISE COMMUNITY PARTNERS, INC.

    Ms. Ludwig. Chairman Johnson, Ranking Member Crapo, and 
Members of the Committee, thank you for the opportunity to 
testify this morning, and thank you for holding this hearing on 
a crucial but often overlooked segment of our housing market--
the one-third of families that rent their homes. I am Terri 
Ludwig, the president and CEO of Enterprise Community Partners. 
We are a national nonprofit organization that creates 
opportunity for low-income families, starting with a stable 
home in a vibrant community.
    One of our many business lines is multifamily lending with 
a focus on apartments that working families can afford. Today 
we have the opportunity to build a more perfect system of 
housing finance in this country, one that fixes the problems of 
the past system while building off the parts that worked.
    As we work out the details, I urge Congress to keep two 
overarching goals in mind:
    First, we must continue to have a liquid, stable, and 
affordable housing market that appropriately supports both 
homeowners and renters;
    And second, whenever possible, Government support must be 
targeted to the families and communities that need it most.
    Multifamily housing is a key consideration in both goals. 
Today roughly 100 million Americans are renters, a number that 
is expected to rise significantly in the coming years, and 
about 40 percent live in apartment buildings of five or more 
units.
    On average, renters are younger, earn less income, live in 
smaller households, and are more likely to be people of color 
compared to homeowners.
    Each of these populations rely heavily on multifamily 
housing. And even with the current levels of support to that 
market, renters face an unprecedented affordability crisis.
    After adjusting for inflation, the typical renter's income 
has dropped over the past few years while their housing costs 
have steadily risen. At the same time, the number of apartments 
that are affordable to low-income families have declined while 
demand for these apartments has increased.
    As a result, it is more and more difficult for working 
families to find a quality, affordable home. All told, nearly 
11 million renter families are paying at least half of their 
income on housing, a severe cost burden that often leaves them 
one paycheck away from losing their home. That is more than a 
quarter of the Nation's renters, an all-time high.
    This crisis would be much worse without Fannie Mae and 
Freddie Mac's presence in the multifamily market. More than 
two-thirds of the apartments financed by the GSEs last year 
were affordable to low-income families, and many were 
affordable to very low income families.
    Meanwhile, other sources of capital, namely banks, thrifts, 
and life insurance companies, tend to stay away from this 
segment of the market, instead focusing on Class A properties 
in top-tier housing markets.
    Fannie and Freddie bring other benefits to the market as 
well, including strong underwriting, broad liquidity, and a 
buffer from severe downturns. My written testimony goes into 
detail on each of these critical roles.
    A key to their ability to perform these roles is access to 
a limited, explicit Government guarantee. And thanks to a 
series of recent reports from FHFA, we know what the rental 
market would look like without that guarantee.
    The entire rental market would be subject to wild boom-and-
bust cycles, causing interest rates to skyrockets New 
construction on multifamily properties would plummet. Average 
rents would increase. And since private capital would be less 
likely to invest in lower-end developments or second-tier 
markets, low-income families would be carrying the heaviest 
burden.
    Thus, any reform must start with an explicit, limited, and 
paid-for guarantee on multifamily mortgages, and there are 
several other important steps that need to be taken to ensure a 
well-functioning rental market, many of which Shekar just laid 
out.
    We think it is a good idea for Congress to spin off the GSE 
multifamily businesses starting immediately. When the public 
guarantor is fully operational, the insurance function should 
be transferred to the Government. And from that point on, new 
approved issuers should be allowed to purchase that same 
guarantee. We recommend starting with a co-op made up of small 
and community lenders.
    These businesses are effective, efficient, and profitable, 
and they must be preserved to avoid unnecessary disruptions in 
the rental market. But we also need to ensure that the issuer 
of a Government-insured security has a defined public purpose.
    First, the clear majority of apartments financed by 
Government-backed securities must be affordable to working 
families. Under our proposal, each issuer must prove at least 
60 percent of the apartments they finance each year are 
affordable to low-income families.
    Second, issuers should be encouraged to lead the market in 
affordable housing investments as Fannie and Freddie have for 
decades.
    Third, we recommend levying a 5- to 10-basis-point fee on 
all insured securities to fund programs that will go to the 
very low income families.
    Fourth, we recommend requiring all issuers to establish 
annual plans for serving historically underserved segments of 
the market.
    Again, thank you for tackling this important issue today. 
The decisions made in the coming months will determine whether 
a stable home is within reach for millions of working families. 
We look forward to working with the Committee on these 
important issues.
    Chairman Johnson. Thank you all very much for your 
testimony.
    We will now begin asking questions of our witnesses. Will 
the clerk please put 5 minutes on the clock for each member.
    Ms. Ludwig, in smaller communities in South Dakota, a 
limited supply of housing contributes to both affordability and 
economic development challenges as workers have trouble 
locating housing. These multifamily rental properties are also 
often smaller.
    With these factors in mind, what steps should we take in 
legislation to address the issue of serving smaller and rural 
communities in a new system?
    Ms. Ludwig. Certainly. So today there are a number of 
programs that the GSEs already have in effect that help the 
ability to have underserved markets, particularly rural 
communities, to be able to have capital flow directly. For 
example, Fannie Mae today has a small loan lenders program 
which specifically targets loans that are less than $3 million 
in some markets and $5 million in others.
    I would say that that has been a very substantial program, 
but compared to the need, we need to do significantly more.
    So what we are proposing is to use the affordability fee to 
not only go to help extremely low income families, but also to 
look at underserved markets. For example, it has been proposed 
that there is established a market access fund that could be 
used to provide credit enhancements, reduce cost of 
underwriting, and look to set up other pilots that could 
address your question about how to further promote the small 
loan programs.
    We think that some specific pilots around securitization 
are essential. And as I mentioned in my written testimony a 
moment ago, we think that Congress should stand up a new issuer 
to serve small and community banks, since that's where a lot of 
these loans are being made. These banks need to be well-
positioned to keep making loans.
    And, finally, I would say that it is not to be overlooked 
that Fannie and Freddie have been important investors in these 
markets over a long period of time. I know from Enterprise's 
experience, Fannie Mae has partnered with us to do over 700 
affordable homes on Native lands, including those in South 
Dakota and Idaho. So we certainly would like to see that some 
of the opportunities for those GSEs to continue to invest in 
programs that support affordability remain in place.
    Chairman Johnson. This question is for the full panel. Do 
each of you believe that the whole market will have access to 
affordable credit without the presence of a Government 
guarantee? Yes or no. Let us begin with Mr. Bozzuto.
    Mr. Bozzuto. No.
    Mr. Burke. No.
    Mr. Narasimhan. No.
    Ms. Ludwig. No.
    Chairman Johnson. Mr. Narasimhan, you have recommended an 
affordability threshold. Why is your proposed threshold 
important? And do you think the new issuers in your system will 
be capable of meeting your proposed target?
    Mr. Narasimhan. The current multifamily businesses at the 
GSEs have been monitoring and tracking under a different 
regime, a goals regime, what they do in different segments of 
the market. So we have a methodology to track the income of 
tenants and the affordability of rents in units across both 100 
percent of median income, 80 percent of median income, and in 
other ways. If this is done one time at the time of origination 
of a loan, it is not an intrusive requirement. It does not 
require interviewing tenants. It just involves using a rent 
roll and using AMI.
    Over the past 11 years of keeping these records, they have 
traditionally, as part of their normal business, done more than 
60 to 65 percent of their business on units that are affordable 
to those at 80 percent of median and below.
    One of the precepts of our proposal is that private capital 
will come into these issuers and take the first loss prior to 
any Government guarantee and in addition to any other losses 
that are incurred by lenders or other participants in the 
system.
    In order to bring in private capital, the first and most 
important requirement is that we have a stable regime so we 
have a track record here of performance with profitability at a 
standard that is already accepted in the market as being the 
middle of the multifamily market. So that is number one 
criteria.
    Number two, to conclude, basically in order to be able to 
meet the standard, the GSEs are not stretching and taking more 
credit risk; they are doing what is within their capability to 
do. So we think a reasonable standard that is measured once a 
year should be applied as a public policy requirement.
    Chairman Johnson. Senator Crapo, do you choose to pass?
    Senator Crapo. Yes, Mr. Chairman. Because of the time 
constraints, I will let my other colleagues go first, and so I 
will defer to Senator Corker.
    Chairman Johnson. Senator Corker.
    Senator Corker. Thank you both. That is most generous, and 
thanks for having this hearing. And to all of you as witnesses, 
thanks for your outstanding testimony. It is kind of refreshing 
to have people whose titles are ``Mr.'' and ``Mrs.'' here, so 
thank you very much.
    I do want to specifically ask a few questions--is it 
``Narasimhan''?
    Mr. Narasimhan. ``Narasimhan.''
    Senator Corker. I am going to let you say it.
    Mr. Narasimhan. I live in eastern Kentucky, and they just 
call me ``Shekar.''
    [Laughter.]
    Senator Corker. Well, Mr. Shekar----
    [Laughter.]
    Senator Corker. If you would, please walk us through the 
case series and how it works with multifamily. I know there are 
basically two types: there is a K-series and DUS. But if you 
would, walk through briefly, if you would, the basis structure 
of how the general financing arrangement works.
    Mr. Narasimhan. Sure. The difference is that one is what is 
called an ``issuer-based model,'' which is the DUS program, 
where on every single loan a lender that meets the capital 
standards required to be a lender and issuer under that program 
takes the first-loss risk if a loan goes bad. So they make a 
loan. They can sell it to Fannie Mae. Fannie Mae securitizes 
it. If that loan goes bad, they take one-third of the first of 
the losses on that loan.
    Senator Corker. Right.
    Mr. Narasimhan. Which has typically amounted to over 10 
percent of the outstanding principal balance. But in order to 
do that, they have to meet these standards, they have to meet 
the underwriting and so on. That is a loan-by-loan issuer-based 
system where I look at the financials of my counterparty.
    The K-series is a securitization-based risk sharing where I 
buy $1 billion in loans, assume that every loan is $10 million. 
The average single-family loan, by the way, is $6 million, so 
let us say it is $10 million to simplify it. We have 100 loans 
in this pool made across the country. For the sake of comity, 
it is two loans per State. But we make 100 loans. We put them 
into a trust. We securitize them, and we sell typically the 
first 14 or 15 percent of the loss in the form of a two-tranche 
security, what is called an ``unrated, bottom-of-the-barrel B 
piece.''
    Senator Corker. And that is private sector risk, first----
    Mr. Narasimhan. Somebody else is examining every loan, 
taking the risk, earning a yield on their risk, and then a 
mezzanine piece, which takes the second-loss risk, before 
anybody can hit the issuer.
    Senator Corker. And the overall risk to private investors 
is 15 percent, generally?
    Mr. Narasimhan. Typically 14 to 15 percent.
    Senator Corker. So it looks like we are way low at our 10-
percent level on single-family. I do want to point that out. So 
there are people willing to take 15-percent risk on these 
loans.
    Mr. Narasimhan. Mr. Senator, in defense of those in the 
single-family business, this is a bulkier business. In 
securitization, when you have----
    Senator Corker. You can stop now.
    [Laughter.]
    Senator Corker. And what is the role of the risk-sharing 
component in multifamily? In other words, in addition to 
putting up risk capital, what other attributes to the deal is 
having that risk capital there in advance of the public 
guarantee?
    Mr. Narasimhan. I think the most important is that this is 
a very selected group of small and large lenders who lend 
mainly regionally and nationally. So you know and can look in 
the eye of your counterparty; you know who is doing this 
business. Multifamily is essentially business-to-business 
lending where the counterparty in the landlord and the borrower 
is a sophisticated party that is borrowing a significant amount 
of money. It is not--and we actually in every single loan on a 
quarterly basis collect financials, on an annual basis do 
inspections. So the lender has tremendous obligations to not 
only make a good loan, but to monitor it, manage it, ensure 
that the property is being maintained and kept up to standards, 
and then worry about when it comes due for a refinance that a 
balloon payment is coming due and it can be refinanced.
    Senator Corker. And that is one of the reasons that they 
perform better than the single-family. Is that correct? The 
underwriting is just different because you are looking at each 
transaction in a very focused way. And if I could, and very 
briefly because I want to ask one more questions, Mr. Bozzuto, 
has that played a role in ensuring that there was not the 
overbuilding that you referred to in your testimony?
    Mr. Bozzuto. Yes, Senator. There are a variety of factors 
that are related to that. The multifamily business as opposed 
to the single-family business tends to be a relationship 
business. It really is. It is not just a business-to-business 
business, but it is a people-to-people business. People who are 
in this business are in it a very long time.
    Second, leverage is considerably lower. We have typically 
30 percent, 25-percent equity in our projects, real equity, 
before the debt, and that has certainly contributed to the 
solvency.
    Senator Corker. Thank you, and because of the generosity, I 
will stop just with making this statement, and you can nod your 
heads for brevity of time. But it is my understanding that most 
of you are pretty familiar with a bill that is before--Senate 
bill 1217 that a lot of people are involved in here. It is my 
understanding that relative to the multifamily piece, the only 
change that you would like to see happen is that the issuer be 
a private issuer, not a public issuer. And other than that, the 
bill works very well compared to the experiences that you have 
had in the past. Is that correct?
    [Witnesses nod affirmatively.]
    Senator Corker. I will note that everybody is shaking their 
head up and down, and I will yield the floor. Thank you.
    Chairman Johnson. Senator Reed.
    Senator Reed. Well, thank you very much, Mr. Chairman, and 
thank you for your testimony.
    Mr. Bozzuto and I think the whole panel concurred that 
because of much more effective underwriting, the multifamily 
programs were credible, durable, and, in fact, contributed 
significantly and are still contributing. And that is going to 
continue regardless of whatever we do, we hope.
    But there is one aspect, I think, in terms of attracting 
capital to the mortgage market there, and that is the role of 
Section 8 vouchers. Mr. Bozzuto, to what extent is a Section 8 
voucher, particularly when you talk about the affordable 
market, critical to attracting private capital and also to 
ensuring that these projects not only can be built but they can 
continue to pay on the mortgages?
    Mr. Bozzuto. Senator, without subsidy, without Section 8 
vouchers, without tax credits, it is virtually impossible in 
most parts of the country to build new construction that is 
affordable at the kinds of levels that you would be talking 
about.
    Senator Reed. So, you know, all of--and I think your 
testimony is extremely valuable--is premised upon not only sort 
of structural changes perhaps to the GSEs, et cetera, but also 
the continuation of these programs that support housing through 
tax credits and Section 8. Is that--I see nodding of heads.
    Mr. Bozzuto. Absolutely, sir.
    Senator Reed. And the other way to say that is if you look 
at the luxury market for residential, there is no problem 
there, there has never been a problem. Is that pretty fair?
    Mr. Bozzuto. No, I would not agree with that, sir. We 
build, my company, in my career--probably 7,500, 8,000 of the 
units I built have been affordable. It is impossible to build 
affordable housing without some form of subsidy. Market rate 
housing, luxury housing, which can be defined differently no 
matter where you are, can be built when capital is available, 
but private capital comes and goes. And part of the reason we 
maintain that liquidity is the public purpose is because if you 
look back at 2009, when there was a need for jobs, there was a 
need for rental housing, the only capital that was available 
for the apartment industry was coming from the public sector. 
So I would not say that at all times the luxury or the market 
rate business survives on its own.
    And, second, even today, when there is private capital, if 
I went into a smaller community--and it does not have to be in 
Nebraska or West Virginia.
    Senator Reed. Westerly, Rhode Island.
    Mr. Bozzuto. Or Westerly, Rhode Island.
    Senator Reed. As you point out in your testimony.
    Mr. Bozzuto. Yes, sir. We were thinking about Point Judith.
    Senator Reed. You are getting close.
    [Laughter.]
    Mr. Bozzuto. But even here, if I were to go to Hagerstown, 
Maryland, which is, you know, in theory a suburb of Washington, 
I could not today get a private insurance company to provide 
financing for a new project in all likelihood.
    Senator Reed. And the final point in your testimony in this 
area is that we are underbuilding given the projected demand, 
significantly; that even with this program that is working 
effectively, we need to do much, much more because just the 
projected demand for rental housing is so much greater.
    [Witnesses nod affirmatively.]
    Senator Reed. Everyone is nodding their heads. I will take 
that agreement.
    A final question, given all your expertise here, and given 
the fact that we are looking next week to this cataclysmic 
possibility of default, what would that do to your financing 
operations, Mr. Bozzuto, for example?
    Mr. Bozzuto. Even now our ability to plan new projects, our 
ability to get debt for new projects is essentially on hold 
because of great insecurity about what is being done by 
Congress.
    Senator Reed. Mr. Burke, does your business rely on 
overnight financing in terms of--I am sure the bank does, but 
are you beginning to see sort of the retraction-retention 
because of this debate?
    Mr. Burke. Yes. My business line--there is a different part 
of the bank that funds the bank and has more interaction with 
the markets. But I can tell you that there is a great--that 
uncertainty creates this----
    Senator Reed. So the secondary effect would be the part of 
the bank that funds you basically will stop doing anything 
because they are either uncertain or cannot get liquidity 
themselves. Is that----
    Mr. Burke. It would be the latter.
    Senator Reed. Yes, the liquidity would dry up, so you are 
seeing a potential huge contraction, which is two and three 
steps away from simply interest rates going up.
    Mr. Burke. Correct.
    Senator Reed. Well, thank you all for your excellent 
testimony and for your great work. Thank you.
    Chairman Johnson. Senator Johanns.
    Senator Johanns. Thank you, Mr. Chairman. Let me also say 
to the panel, your testimony has been extremely informative, 
and I must admit it is a bit head scratching, and let me offer 
a thought, and then I would like your reaction to it.
    I do not think anyone on the panel is looking to this area 
of the real estate economy or industry and trying to make the 
claim that you were the problem. I think the testimony is 
accurate. This part of the real estate industry functioned as 
we hoped it would function, and that is on the good-news side 
of things.
    On the other hand, it does not appear to me that 
historically or even now it has functioned very well outside of 
sizable metropolitan areas, and I think, Mr. Bozzuto, your 
testimony kind of nails it. If you think you are having that 
kind of challenge in Hagerstown, what would you say about 
Sidney, Nebraska, where these people are doing absolutely 
everything right, it is the home base of Cabela's, but they 
have some of the best economic development initiatives in the 
State of Nebraska--I mean, as their former Governor, I used to 
go out there and just marvel at what they were doing. You know 
what the first item on the list was every meeting I have ever 
had with them? Housing.
    Now, this is an area where incomes are strong, job creation 
is strong, opportunities are strong, and they are constantly 
battling to get housing.
    So to me, whether you are talking about Sidney, where 
everything is going right, or a very impoverished area of a 
community where things are not going so right, the job is not 
getting done.
    So my question is: How do we get that job done? How do we 
do something that helps those extremes--an area that is 
blighted and needs help and an area where everything is 
happening but it is not in a major metropolitan area? Mr. 
Bozzuto, I will give you that puzzle, because I think that is a 
pretty important issue to folks like me from more rural States.
    Mr. Bozzuto. Senator, I absolutely agree with you. And I am 
not sure I can give you a prescription except that it would 
appear to me that unless we can figure some form of continued 
Government role with relatively clear legislation that 
describes--that provides a mandate, that talks about 
communities like that, and talks about affordable housing, but 
that allows the flexibility for the regulator that we would 
recommend be installed to manage that so that at different 
points in time, adjustments can be made, I am not sure that I 
know the answer. I would tell you that if--as difficult as it 
has been, without the GSEs it would have been truly impossible.
    Insurance companies work on an allocation basis. They get a 
certain amount of money, and they get it in the beginning of 
the year, and it is much easier for them to spend their money 
in places like Washington, DC, or New York City, or L.A., or 
San Francisco than it is in places like Nebraska.
    Senator Johanns. Mr. Burke.
    Mr. Burke. Senator, what I might suggest is that the way I 
see that problem is that the money manager in New York will not 
do the work to understand Sidney, Nebraska. So what you have to 
have is a mechanism where you can attract the capital from a 
money manager who is not going to take the time to understand 
the local economy. And what we are suggesting here is that 
through a mechanism similar to what the GSEs do today, you 
create a regime where people who understand real estate, people 
who understand the communities, for instance, community banks, 
have an opportunity to originate loans which then can be 
securitized with a Government guarantee. That would then funnel 
capital into those communities that need it.
    For instance, a community bank knows--community banks have 
done a great job because they know their clients. But they have 
a liability structure that is short. So what you need to do is 
get long-term capital to be invested in these communities, and 
that is part of the reason I think we all today are saying that 
the program the GSEs have, something similar to that, could 
address that problem.
    Senator Johanns. Mr. Chairman, I am out of time, but if I 
could ask the panel to put some brain power behind this, 
because what I worry is that we pass a piece of legislation, we 
kind of declare victory--and I hope the legislation passes; I 
am one of the cosponsors--but at the end of the day we look 
back in 2 years and 4 years and 5 years and say, my goodness, 
there is a huge gap out there. But there has always been a huge 
gap out there, and it would be good to have some strategies to 
figure out how we can improve that situation, whether it is an 
inner-city area or it is a rural area in one of our States.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. Thank you all 
for your testimony.
    Mr. Chairman, I appreciate you holding this hearing. In a 
context like New Jersey, multifamily housing is a big reality 
for people to have a place to call home. And it replicates the 
third of all American households that live in multifamily 
housing, 17 million households in the country. In my State 
there is a fair amount of that. In my own life, I know that 
that has been a reality.
    I also know that 27 percent of them pay over half--half--of 
their income toward rental payments. And so that is an enormous 
challenge in the lives of individuals because when you are 
paying that much in rental payment, you know, there is very 
little else to do other things--educate your children and 
realize your hopes and dreams and aspirations, which is why I 
have been a big advocate for quite some time of having Fannie 
and Freddie expand their multifamily operations. And, in fact, 
they performed well during the crisis. They have lower serious 
delinquency rates than single-family lines and other sources of 
multifamily credit, such as private label commercial-backed 
securities and bank and thrift loans.
    As a matter of fact, the FHFA's Inspector General has 
Fannie's and Freddie's multifamily programs as their only 
profitable major business segments from 2008 to the third 
quarter of 2011. That is pretty significant.
    So my question to the panel is: What do you believe were 
the major drivers for that strong performance? And what lessons 
can we take away that can be more broadly applied?
    Mr. Narasimhan. Senator, if I may, I think the first and 
most important is risk sharing. I think there has always been a 
very strong component in the multifamily programs of everyone 
is in this, and, of course, market conditions can change and 
loans can go back, but everybody loses something in the 
bargain. And you try not to have that loss at the community, 
but with the developer or the borrower, the lender or the 
issuer, and, in effect, the guarantor.
    I do believe that that fundamental principle is probably--
that led to good underwriting, that led to an avoidance of a 
race to the bottom. When the rest of the market started doing 
crazy stuff, they did not go there, because they had lenders 
and participants and borrowers saying we do not need to go 
there, we can do our business, reduce our market share, and 
stay fine. So I fundamentally believe that is the number one 
reason.
    Senator Menendez. Anyone else?
    [No response.]
    Senator Menendez. Let me ask you this, then: You know, if--
we want availability, but we also want affordability, and I 
understand the concerns that have been raised about what that 
mechanism looks like and how that might undermine the other 
elements of the market. But how does one--I think both you and 
Ms. Ludwig mentioned in your testimony some suggested 
mechanisms to improve affordability and access rather than 
simply subsidizing developments that would ultimately have no 
trouble getting finance in purely private sources. Can you talk 
a little bit about what those can be?
    Ms. Ludwig. Sure. So, first of all, as part of the 
recommendation, we propose an annual fee from 5 to 10 basis 
points on securities that are issued that would go toward 
promoting affordability. In past legislation Congress 
established the National Housing Trust Fund and the Capital 
Magnet Fund, both of which should be funded regularly in the 
future system. We also propose putting some of that money into 
a Market Access Fund, which will look to serve underserved 
markets and ensure that capital is available. We have the 
ability to do research and development to really push our 
thinking on how to promote affordability through credit 
enhancements, new product creation.
    So, really, there are three primary uses of that fee: one 
is to provide through the National Housing Trust Fund 
essentially a block grant to lower income populations; the 
second is to the Capital Magnet Fund, to be able to use that to 
leverage private investment; and then the third is for this R&D 
type of facility.
    And, finally, I think it is really important also that we 
take a very proactive approach to underserved markets and we 
are not thinking just retroactively about what we have done in 
reporting but, rather, we're recommending an annual planning 
process where each of the issuers sit down with their regulator 
and actually form a very targeted plan to address some of those 
underserved markets. So those would be essential.
    Mr. Narasimhan. Senator, 2 seconds. I think we have talked 
about the creation of a market access fund which can enable 
private institutions to take more risk and push the envelop a 
little bit on the risk curve to be able to serve these kinds of 
markets. And I think we want to flesh that out further and then 
discuss it with you. But I think that is the way to get to this 
with the private sector taking the first-loss risk, with them 
doing the innovation.
    Senator Menendez. Well, we would love to work with you and 
anyone else on this issue, because at the end of the day, if 
you have availability but not affordability, you do not have 
availability.
    Thank you.
    Chairman Johnson. Senator Moran.
    Senator Moran. Mr. Chairman, thank you. Thank you to you 
and Senator Crapo for hosting this hearing. This is the first 
time in a few days that I have actually felt like a legislator. 
Your testimony was very valuable, well spoken, and I appreciate 
it.
    First of all, I would say, I think in answer to Chairman 
Johnson's questions, all of you made clear the necessity or the 
importance of GSE financing in housing, and that was done with 
your yes or no answer, and all of you indicated the importance 
of that GSE for housing broadly across the country.
    I also want to follow up on what Senator Johanns said. Our 
States are similarly situated, but I want to make certain that 
in any GSE legislation we are not committing the mistakes that 
have been made in the past, which seems to me to be mandating, 
requiring loans to be made that are not otherwise financially 
sound, that the risks are not accommodated by the return. And 
so when we talk about housing in rural communities, there needs 
to be a different fashion than forcing the lenders to allocate 
resources where the loans have a higher potential of going bad, 
they do not reflect market risk.
    Mr. Burke, you indicated about the unknown, that somebody 
who is making a decision does not know Sidney, Nebraska, or 
communities in Kansas. Mr. Bozzuto, you talked about Topeka, 
Kansas, as well as Rhode Island in your testimony. Tell me, is 
there something unique about multifamily housing in a rural 
setting that makes the market--that markets would need to price 
at a higher return, a greater risk is encountered? Or is it 
only what Mr. Burke said about lack of really understanding? 
And then I want to follow up with the idea about community 
banks. Is there something unique about multifamily housing in a 
rural setting that increases the risk and, therefore, requires 
a greater return?
    Mr. Burke. I think the first thing to think about is loan 
size. The loan sizes are smaller in smaller communities. So the 
economics of doing the underwriting, the processing, and the 
closing of small loans has always made it difficult----
    Senator Moran. So the fixed costs----
    Mr. Burke. Right.
    Senator Moran. ----of that project----
    Mr. Burke. That is right.
    Senator Moran. ----associated with the financing makes it 
less economically viable.
    Mr. Burke. That is right.
    Senator Moran. OK.
    Mr. Burke. And part of the--I would say, just to buttress 
some of the comments that Shekar has made, the underwriting of 
multifamily is a very detailed and very complicated thing. So 
the smaller the loan, the higher those up-front costs are, the 
more unaffordable it gets.
    So if we have lenders who are in those communities that 
already know those communities and give them access to capital 
where an investor does not have to do that work, they do not 
have to do that underwriting, you have a more efficient system.
    Senator Moran. Would that suggest the opportunity for a 
developer packaging multifamily housing in a number of 
communities to make a larger project? Is that----
    Mr. Burke. Well, you still have to understand----
    Senator Moran. The community.
    Mr. Burke. ----each individual project in each individual 
community, so I do not know that the package would help. But I 
think that if we have a mechanism for community lenders to 
access a Government guarantee, then I think we could make a 
dent in the problem.
    Senator Moran. Mr. Burke, do you have any knowledge--is 
this a question that is fair to direct to you? Our community 
bankers would continually tell us that they are overregulated 
in ways that lack common sense, that do not reflect the risk 
that the regulators presumably are trying to overcome. Are 
there regulations that reduce the chances that a community 
banker is going to make this kind of loan, originate this loan?
    Mr. Burke. I do not know that there are specific 
regulations that would, but I think when you sit down across 
the table from your examiner and the examiner has read in the 
Wall Street Journal that XYZ market a thousand miles away is 
experiencing problems and, you know, prove to me that your 
market is not, that has a dampening effect on the next loan 
that you are going to think about.
    Senator Moran. So the broad regulatory environment as 
compared to a specific regulation----
    Mr. Burke. That is right.
    Senator Moran. ----has this dampening effect.
    Mr. Burke. That is right.
    Senator Moran. Are there States in which there is a role 
model for increasing the housing stock? Have any of you 
experienced a place where this works better in Kentucky than it 
does in Kansas?
    Mr. Narasimhan. No, I do not think so. Terri?
    Ms. Ludwig. No, I would say not. But I would also add that 
I think your question goes right to the heart of the need to do 
more testing around securitizing the smaller product, the small 
multifamily products. That is so essential for the markets we 
are talking about, regardless of which community you are in, 
but if you are in a smaller rural community. So I would turn to 
that recommendation as well.
    Senator Moran. OK. Mr. Chairman, thank you.
    Chairman Johnson. Senator Hagan.
    Senator Hagan. Thank you, Mr. Chairman and Ranking Member 
Crapo. This is an excellent hearing, and I echo my colleagues 
in thanking you for your testimony today.
    It seems like a lot of us are talking about the geographic 
diversity and the need for affordable and available housing in 
our rural communities. And North Carolina is certainly front 
and center in that situation, too.
    I can think back to hurricane seasons and people saying, 
well, you know, from FEMA's perspective we will just people up 
in apartment buildings. There are none. So there is a huge 
need. And there is also a huge need in some of the resort 
communities for affordable housing for workers that are not in 
the luxury beachfront homes.
    So it is really something that I think this Committee is 
understanding the need and the real desire that something needs 
to be done.
    And besides the issue of geographic diversity, Mr. Burke, 
regarding the recently reproposed rule on credit risk retention 
for securitized loans, does your institution see any potential 
cost impact to borrowers and, by extension, to the tenant 
families as a result of the rule? And to what extent will this 
rule help or hurt liquidity for new projects and maturing debt?
    Mr. Burke. Are you referring to the CMBS risk retention?
    Senator Hagan. Yes.
    Mr. Burke. I think the rule that allows an issuer to 
transfer its risk retention obligation to a third-party BP 
Spire, the rules that require that buyer to retain the 
investment for a certain period of time will inevitably require 
a higher yield because it's a more illiquid investment by 
virtue of this restriction, and that ultimately would end up 
finding its way into the yield that you have to charge the 
borrower.
    Now, having said that, I think the rule overall that allows 
a sophisticated third-party investor to acquire--or to take 
over that risk retention requirement is a good one. In CMBS, my 
own personal experience is that when you know that a third-
party investor is going to sit across the table and tell you to 
remove certain loans because they just do not like them, it 
creates a lot of discipline.
    So I think the rule overall is a good one, but it will 
inevitably result in a cost.
    Senator Hagan. Any other panelists?
    Mr. Narasimhan. We probably slightly disagree on this. It 
would be a good thing. But I think that the CMBS business 
turned during the crisis or prior to the crisis into 
essentially a storage business, where loans were being 
warehoused with the sole intention of being securitized even 
before the ink was dry on the paper. And part of that behavior 
occurred because very few people had really any skin in the 
game other than the ultimate investor, who might or might not 
have understood what the collateral was. And certainly the 
rating agencies played a part in that.
    So I think the notion that there should be skin in the 
game, how that is done to manage around risk-based capital and 
create a framework for competitive pricing is I think the 
issue. But we should not be debating whether there should be 
skin in the game at all.
    Senator Hagan. Let me ask about the private capital, too, 
and when we were talking--Mr. Bozzuto, I think you were talking 
about building a different part of Maryland. And yet the 
private capital, the insurance companies would not step 
forward. What will it take to get once again the community 
banks--and that might be from a regulatory situation, but 
insurance companies to start stepping back up to the plate and 
bringing private capital back into the market?
    Mr. Bozzuto. Senator, the insurance companies have come 
back into the market. In fact----
    Senator Hagan. In the rural areas, perhaps.
    Mr. Bozzuto. You have to imagine what happens at an 
insurance company in Hartford or a pension institution. A loan 
officer goes into a conference to make a presentation on a 
project: ``I have a project I want to do in Raleigh.'' Well, 
you know, everybody knows where Raleigh is. Everybody has a 
preconception. It is easy to talk about the market. There are 
comparables.
    ``I want to do a project in Whiteville, North Carolina''? I 
mean, nobody knows what he is talking about. And that fellow or 
that woman is going to be very worried about their credibility. 
They are not going to do it. And that is why we need some sort 
of an inducement in the form of Government guarantee that will 
allow us to have access to capital for those kinds of markets.
    Senator Hagan. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Crapo, would you yield to Senator 
Warner?
    Senator Crapo. I definitely will, Mr. Chairman.
    Senator Warner. Thank you. That is extraordinarily 
generous, and I am going to owe you big time, not only letting 
me jump but letting it go not in order. And I asked Senator 
Johanns to stay for a minute because I just wanted to make 
three really quick points.
    If we are going to make sure that Nebraska and Kansas and 
rural North Carolina and rural Virginia and Idaho and South 
Dakota stay in the mix, what we have got right now is--you 
know, the main thing we need to do is do not mess this up. And 
the activities right now of the FHFA by saying let us 
arbitrarily cut back 10 percent on multifamily--and you just 
got a nod on this one as well--would you not agree that if that 
10-percent arbitrary cutback, the people who are going to get 
hit first are the affordable universe that Senator Menendez is 
interested in and the rural communities, because those would be 
the first lopped off the list. Is that a yes?
    Mr. Bozzuto. Yes.
    Mr. Narasimhan. Yes.
    Ms. Ludwig. Yes.
    Mr. Burke. Well, Senator, in fact, Fannie Mae in the 
beginning of the year put out a rule that said, ``We will not 
grant waivers. Do not bring us waivers on loans less than $10 
million.''
    Senator Warner. So if we do not do reform, the status quo 
is going to even further harm rural communities, point one.
    Point two, you know, Ms. Ludwig had made a lot of comments 
about the need for this market access fund that S.1217 has. Mr. 
Bozzuto made the point, I thought a good one, that, you know, 
there are a lot of existing tools--Section 8, housing credits, 
and others--that make these deals doable at all, they have to 
remain in place. And one of the remarkable things about the 
Housing Trust Fund and all these other great ideas, we create 
them, but we have never funded them. Wouldn't the market access 
fund be the first time ever that there would be this stable 
existing fee that would be charged that would help provide some 
funding in this area?
    Ms. Ludwig. Absolutely.
    Senator Warner. Would that be a nod yes?
    [Witnesses nod affirmatively.]
    Senator Warner. And that could help in rural communities as 
well as affordability communities.
    And the third point--I know Senator Corker made this point 
already--what is the right capital number of risk sharing? And 
it seems like the multifamily business has kind of got it 
right. I do think we need more work, echoing what Senator 
Johanns said, on how we make sure the community banks--we can 
do more experimentation on securitization of those smaller 
communities' pools. But for those who feel that those of us who 
have said at the 10-percent level we have overstretched the 
amount of capital, I would again point out what Shekar's 
comments were. The market does a pretty good job of being able 
to tranche that, so if we put in too much protection, I 
actually trust your colleagues on the single-family side will 
figure out a way to tranche that, to price that risk 
accordingly.
    But at the end of the day, I'd rather overshoot because 
never has there been taxpayer losses of any significance on 
multifamily. We'd like to have the same on single-family.
    And my real great thanks to the Chair and the Ranking 
Member for letting me jump line.
    Chairman Johnson. Senator Crapo.
    Senator Crapo. Thank you. Thank you very much, Mr. 
Chairman, and I appreciate our witnesses. Your testimony has 
been very good today.
    I want to follow up on this same issue that we have been 
talking about in terms of access to the rural and smaller 
communities. And each of you have talked about it, but, Mr. 
Burke, I am going to direct my question to you.
    You have all said basically that we need to have a 
mechanism to give the lenders in the smaller communities access 
to capital. Specifically, what are we saying? Is it simply 
opening up to the community banks access to a guarantee, a 
Government guarantee? Or is there more of a mechanism that we 
need to be dealing with here? Mr. Burke, could you just walk us 
through how would we do this, getting access opened up to the 
community banks?
    Mr. Burke. If we were to create secondary mortgage market 
entities that had access to the guarantee and built some 
incentives for them to accumulate mortgages in these areas, I 
am highly confident they would develop partnerships with 
community banks to source these loans. Alternatively, if we 
could make it easier for a community bank to participate, I 
think it would help.
    I mean, the problem, as I see it, is that, you know, we are 
talking--typically a multifamily mortgage is 10 years or more, 
and to put a 10-year fixed-rate asset on your books in a small 
bank is a difficult thing to do. So it is really a way to--it 
is a funding mechanism more than anything else.
    I think banks would be--I think banks would welcome the 
opportunity to partner with a secondary mortgage market entity. 
I think, Terri, you suggested a co-op, which would be another 
mechanism. But I see it simply as a way to bring more permanent 
capital to those banks.
    Senator Crapo. Thank you very much.
    And, Ms. Ludwig, would you----
    Mr. Bozzuto. I just wanted to add briefly to that. There is 
inherent inefficiency not only in the financing but in the 
construction and operation particularly of small properties. 
And as part of your discussion, you really need to, I think, 
recognize or consider some form of subsidy to make it 
worthwhile to do these smaller projects in rural areas.
    Senator Crapo. All right. Thank you. And just in the minute 
or so I have left, Ms. Ludwig, could you give a little more 
detail to the co-op suggestion you have made? How would that 
work?
    Ms. Ludwig. Sure. I actually might yield my time to Shekar, 
who has been probably more involved in the discussions, but at 
the highest level, I would say to set up an issuer that is a 
co-op of smaller and community banks essentially to be able to 
do these types of things.
    Senator Crapo. Shekar.
    Mr. Narasimhan. The Federal home loan banks have already 
approached the idea of forming a cooperative of community banks 
and independent mortgage lenders, including CDFIs, that can 
participate in the secondary mortgage market, can put risk 
sharing in front of any Government guarantee, can have 
participants that can use their own documentation, their own 
credit standards, but have to meet certain norms of 
underwriting. I think the mechanism is exactly what E.J. Burke 
said: Figure out a way to give them access to long-term fixed-
rate financing that is stable, allow them to continue to do the 
business they do and perform on their track record.
    Senator Crapo. All right. Thank you very much. And one last 
question, back to you, Mr. Burke. Some experts have indicated 
that, at minimum, there are certain markets in this country in 
which there is sufficient private capital to satisfy the needs 
of the market without taxpayer backing. Would you agree with 
that position, that there are some markets where there does not 
need to be the Government guarantee?
    Mr. Burke. Today there is. I think we have all said that 
certainly, you know, if you are doing a luxury apartment, 
luxury high-rise apartment in Los Angeles, today there would be 
no shortage of lenders that would raise their hand to make that 
loan. As Mr. Bozzuto has said, in 2009 no one raised their 
hand. So I think that is the challenge we have, is that markets 
change every day, and availability of capital changes every 
day. And whatever legislation, you know, comes through, we have 
to keep that in mind.
    Senator Crapo. All right. Thank you.
    Senator Merkley [presiding]. Thank you very much. I 
appreciated all your testimony, and we are now in overtime, and 
in that sense, I will be very brief. But I want to address 
really kind of these different affordability strategies.
    One suggestion is that there be basis points at the point 
of closing and basis points per year on various mortgage-backed 
securities to fund the Affordable Housing Trust Fund as one way 
of providing funds that might serve a variety of purposes to 
assist with affordable housing.
    A second approach has been to say that there is a very good 
chance we are going to have two entities here, spinning off the 
Fannie and spinning off the Freddie version, and that each of 
them should have responsibility to serve a significant share of 
affordable housing, and the suggestion has been that 60 percent 
of the units should be serving families at 80 percent or less.
    We have just heard mention of the co-op strategy, and then 
also there has been a suggestion that the enterprises that 
qualify under the multifamily section submit an annual plan on 
how they are serving rural areas and so on and so forth.
    I do not think there has been much discussion to this point 
today about the concept of the basis points funding the trust 
fund and about the possibility of a requirement that 60 percent 
of the units financed by each of the entities serve under 80 
percent. So, Mr. Shekar and Ms. Ludwig, would you like to 
comment on those approaches and the pros and cons?
    Mr. Narasimhan. Sure. Let me take on the affordability 
criteria. My principal objective is to try to get them to do 
what they have been doing, that there has not--that has proven 
to be successful. They have done this before. They have done it 
over 10 years. They did it through the crisis. So, therefore, 
there is no logical reason that private capital can argue, when 
they have to invest billions of dollars in this business, that 
it cannot be done or that it requires moving out on the risk 
curve or otherwise.
    So the principal argument is this is the middle of the 
market. We absolutely want private unguaranteed capital in the 
market as well, and we want to assure that they stay in the 
middle of the market and give them a simple level playing field 
standard that everybody knows up front and they can abide by, 
not goals that can change over time but this is the standard 
that they have to live with; when I invest my first dollar of 
private equity, I know the rules of the game.
    Senator Merkley. So when folks say to you this has been 
done by the market without such a requirement, what is the 
counter position as to why it should now become a specified 
requirement?
    Mr. Narasimhan. Well, perhaps you do things inadvertently, 
and now you can do them more deliberately. I do not think we 
fully recognized the consequences of implied guarantees until 
2008. So I would argue we are doing something very cognitively 
here to say we will give a limited Government guarantee on 
securities for certain loans through certain guarantors and 
issuers that abide by certain rules. And we are setting the 
rules of conduct, if you will, for the secondary market going 
forward.
    Senator Merkley. So in some ways you are saying that given 
that we are now making an explicit Government guarantee, there 
should be some standards for how that is utilized to the whole 
spectrum of housing.
    Mr. Narasimhan. Yes, sir.
    Senator Merkley. OK. Thank you.
    Ms. Ludwig.
    Ms. Ludwig. Yes, I would agree with Shekar's point of view 
on that, so I would turn to the fee question, and what we have 
proposed is a 5- to 10-basis-point fee at the time of 
securitization on those tranches. And, you know, I guess I 
would add that this has been congressionally mandated to date 
for the Affordable Housing Trust Fund and the Capital Magnet 
Fund, but it has not been funded.
    We need assurance of that critical funding for affordable 
housing. We have just spent a lot of time talking about that 
need and how essential that is to be able to get into 
underserved markets and also to serve folks that are lower than 
80-percent AMI. Fifty percent and lower in particular for the 
Housing Trust Fund is one of the uses. The second use, again, 
is the Capital Magnet Fund, which allows us to leverage private 
dollars with this capital. And then the third use of those 
funds would be to create this capacity to address some of the 
underserved markets, think about product creation, guarantees, 
subsidies to help on the underwriting costs on some of these 
pilots. That is the type of innovation that I think we need in 
this space and that continuing obligation to serve the markets 
that currently are not getting served.
    Senator Merkley. Senator Crapo, is there anything else you 
want to ask?
    Senator Crapo. No.
    Senator Merkley. I have lots of things I would like to ask, 
but I am out of time. So in that regard, thank you to all of 
our witnesses for sharing their thoughts, not just today but in 
many conversations with different Senators on the panel as we 
work on these issues. And we look forward to your future input 
as we continue to work on this.
    Thank you very much, and the hearing is adjourned.
    [Whereupon, at 11:24 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
                PREPARED STATEMENT OF THOMAS S. BOZZUTO
 Chairman and Chief Executive Officer, The Bozzuto Group, on behalf of 
     the National Multi Housing Council and the National Apartment 
                              Association
                            October 9, 2013
    Chairman Johnson, Ranking Member Crapo and distinguished Members of 
the Committee, the National Multi Housing Council (NMHC) and the 
National Apartment Association (NAA) would like to thank you for this 
opportunity to testify on housing finance reform and the multifamily 
perspective. We applaud your leadership in seeking to address the fatal 
flaws in our finance system that led to the fiscal crisis of 2008.
    For more than 20 years, the National Multi Housing Council (NMHC) 
and the National Apartment Association (NAA) have partnered in a joint 
legislative program to provide a single voice for America's apartment 
industry. Our combined memberships are engaged in all aspects of the 
apartment industry, including ownership, development, management and 
finance. NMHC represents the principal officers of the apartment 
industry's largest and most prominent firms. NAA is a federation of 
more than 170 State and local affiliates comprised of 63,000 
multifamily housing companies representing 6.8 million apartment homes 
throughout the United States and Canada.
    My name is Thomas S. Bozzuto and I am the Chairman and CEO of The 
Bozzuto Group. The Bozzuto Group is a privately held, integrated real 
estate services organization. In our 25-year history, we have created 
quality homes and extraordinary communities--some 35,000 residences to 
date. Our more than 1,000 team members pride ourselves on providing 
outstanding service and consistent value for customers and partners.
    I appreciate the opportunity to be here today to present the 
multifamily industry's perspective on the role of the Government-
Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, and 
specifically how the meaningful differences between the multifamily 
market and single-family market require very different solutions in the 
context of housing finance reform. I will also discuss why we believe 
there will be a continued need for Federal involvement in the 
multifamily sector even after Fannie Mae and Freddie Mac are phased 
out.
    Before I do that, however, allow me to describe some key aspects of 
the apartment market and how changing demographics will demand a 
continued flow of capital into this sector if we are to meet the future 
housing needs.
    The apartment sector is a competitive and robust industry that 
helps 35 million renters live in homes that are right for them. We help 
build vibrant communities by offering housing choice, supporting local 
small businesses, creating millions of jobs and contributing to the 
fabric of communities across the country. And we are increasingly 
important.
    More than a third of America rents, and that number is growing. 
Between 2007 and 2012, the number of renter households grew by almost 
five million. \1\ In this decade, renters could make up half of all new 
households--upwards of seven million new renter households. \2\ An 
estimated 300,000 to 400,000 units a year must be built to meet 
expected demand; yet just 158,000 apartments were delivered in 2012--
less than half of what is needed.
---------------------------------------------------------------------------
     \1\ 2012 American Community Survey 1-Year Estimates, U.S. Census 
Bureau, ``Tenure''. 2007 American Community Survey 1-Year Estimates, 
U.S. Census Bureau, ``Tenure''.
     \2\ Based on Harvard University Joint Center for Housing Studies' 
forecast of 13.8 million new households by 2030. The State of the 
Nation's Housing 2012, The Joint Center for Housing Studies of Harvard 
University, p. 16. http://www.jchs.harvard.edu/sites/jchs.harvard.edu/
files/son2012.pdf
---------------------------------------------------------------------------
    While some of this growth is clearly due to the challenging 
economic circumstances following the recession, the upward trend in 
renter households predates the fiscal crisis and is increasingly the 
result of Americans' changing housing preferences. In 1955, married 
couples with children made up 44 percent of all households. Today they 
constitute just 20 percent, and that number continues to fall. Among 
the fastest growing population segments in the next decade will be 
young adults in their 20s and empty nesters in their 50s--those most 
likely to seek options other than single-family houses.
    In addition, almost 80 million Echo Boomers are beginning to enter 
the housing market, primarily as renters. Furthermore, many of their 
parents, the more than 77 million Baby Boomers, are beginning to 
downsize, and some will choose the convenience of renting.
    All this increasing demand is good news because meeting it will 
create millions of jobs. Apartments are more than just shelter. They 
are also an economic powerhouse. The $1.1 trillion industry oversees 
apartment stock valued at $2.2 trillion. In 2011, the apartment 
industry and its residents supported 25.4 million jobs. Moreover, in 
2011, new apartment construction alone produced $14.8 billion in 
spending, supported 323,781 jobs and had a total economic contribution 
of $42.5 billion. The same year, the operation of the Nation's existing 
apartments accounted for $67.9 billion, 2.3 million jobs and a total 
economic contribution of $182.6 billion. Apartment resident spending in 
2011 totaled $421.5 billion, supporting 22.8 million jobs and a total 
economic contribution of $885.2 billion. To put these numbers into 
perspective, apartments and the people who live in them contribute, on 
average, more than $3 billion a day to the economy.
    Finally, apartments also produce societal benefits; not only are 
they environmentally sustainable, resource-and energy-efficient, but 
they also help create a mobile workforce that can relocate to pursue 
job opportunities.
    I highlight these important changes in housing choice, supply and 
demand as well as the economic and social contributions apartments make 
to society to explain why it is so important for Congress to consider 
the unique needs of the apartment industry as it pursues mortgage 
finance reform options.
    Many factors influence the apartment industry's health and ability 
to meet the Nation's growing demand for rental housing, but the 
availability of consistently reliable and competitively priced capital 
is the most essential.
    The Great Recession exposed serious flaws in our Nation's 
residential home mortgage finance system. The apartment industry did 
not overbuild and for the most part did not overleverage during the 
housing boom, and the GSEs' multifamily programs did not contribute to 
the housing meltdown and are not broken. Unfortunately, the losses 
experienced in their single-family divisions have overshadowed the 
strong mortgage financing and credit performance of their multifamily 
programs.
    More than just performing well, the GSEs' multifamily programs 
serve a critical public policy role by addressing a market failure in 
the housing finance system that results in an overabundance of capital 
for high-end properties in top-tier markets, but leaves secondary and 
tertiary markets like Westerly, RI, or Topeka, KS, underserved. The 
GSEs ensure that multifamily capital is available in all markets and at 
all times, so the apartment industry can address the broad range of 
America's housing needs from coast to coast and everywhere in between.
    Let me be clear, I am not here to defend the GSEs or to suggest 
that they be continued in their current form. Instead, I would like to 
highlight for the Committee those elements of the existing system that 
worked well for multifamily lending and, more importantly, at no cost 
to the taxpayer. It is our hope that these successful elements can be 
incorporated into whatever Congress designs to replace Fannie Mae and 
Freddie Mac.
Multifamily Performance: A Success Story
    It is hard to imagine a success story coming out of the worst 
housing crash in recent history, but the performance of the GSEs' 
multifamily businesses stands out. Overall loan performance remains 
strong with delinquency and default rates at less than 1 percent, a 
tenth of the size of the delinquency/default rates plaguing single-
family. The GSEs' multifamily programs have also outperformed 
Commercial Mortgage-Backed Securities (CMBS), commercial banks and even 
FHA. In addition, since the Federal Government placed the GSEs in 
conservatorship, the multifamily programs have generated over $10 
billion in net profits for the Federal Government.
    Not only are the GSEs' multifamily programs operating in a fiscally 
sound manner, but they are also doing so while offering a full range of 
mortgage products to meet the unique needs of the multifamily borrower 
and serve the broad array of property types. This includes conventional 
market rental housing, workforce rental housing, and targeted 
affordable housing (e.g., project-based Section 8, State and local 
government subsidized and Low-Income Housing Tax Credit (LIHTC) 
properties).
    The GSEs' multifamily programs adhere to a business model that 
includes prudent underwriting standards; sound credit policy; effective 
third-party assessment procedures; risk-sharing and retention 
strategies; effective loan portfolio management; and standardized 
mortgage documentation and execution. In short, the GSEs' multifamily 
models hit the mark. They have attracted enormous amounts of private 
capital; helped finance millions of units of market-rate workforce 
housing without direct Federal appropriations; sustained liquidity in 
all economic climates; and ensured safety and soundness of their loans 
and securities. As a result of the liquidity provided by the GSEs, the 
United States has the best and most stable rental housing sector in the 
world.
A One-Size-Fits-All Solution Will Not Work
    It is tempting to believe that a single solution will solve all 
that ails our housing finance system. Unfortunately, that simply is not 
the case. Multifamily finance and single-family finance operate 
differently. The capital sources for multifamily are not as wide or as 
deep as those financing single-family, and the loans themselves are not 
as easily commoditized. Moreover, the financing process; mortgage 
instruments; legal framework; loan terms and requirements; origination; 
secondary market investors; underlying assets; business expertise; and 
systems are all separate and unique from single-family home mortgage 
activities. It is, therefore, critical for Congress to pursue a 
separate solution for multifamily. Failure to do so puts the millions 
of Americans who rely on the apartment industry for their housing and 
the $862 billion multifamily debt market at risk.
    Although I talked about rising demand and the need for new 
construction to meet it, preserving liquidity for multifamily is about 
more than just building new apartments. Unlike residential mortgages, 
which are typically for 30-year terms, most multifamily mortgages are 
for a period of 7 to 10 years. This ongoing need to refinance apartment 
mortgages makes it imperative for the industry to have access to 
reliable and affordable capital at all times, in all markets and in all 
market conditions. In 2013 alone, an estimated $100 billion in 
multifamily mortgages will need to be refinanced, many of which finance 
apartments that are not located in areas that attract private capital.
Private Capital Is Necessary, but Not Sufficient
    We share your collective desire to return to a marketplace 
dominated by private capital. Even with the critical backstop provided 
by the GSEs, private capital has always been an integral part of the 
multifamily housing finance system. However, historically, private 
capital has been either unwilling or unable to meet the full range of 
the multifamily industry's capital needs, even during healthy economic 
times. There is no evidence to suggest that the situation is any 
different today.
    Historically, the apartment industry has relied on a variety of 
capital sources to meet its liquidity needs. They include:

    Fannie Mae and Freddie Mac

    Commercial Banks and Thrifts

    Life Insurance Companies

    Federal Housing Administration

    Commercial Mortgage-Backed Securities/Conduits

    Pension Funds

    Private Mortgage Companies

    Together, these capital sources have provided the apartment sector 
with $100 billion to $150 billion annually, reaching as high as $225 
billion last decade, to develop, refinance, purchase, renovate, and 
preserve apartment properties. Each of these capital sources has its 
own focus, strengths and limitations.
    Commercial banks and thrifts generally serve as a source of credit 
for smaller, local borrowers. They typically provide floating rate, 
short-term debt, and often their willingness to extend this credit is 
based on the availability of permanent take-out financing offered by 
the GSEs. They have resumed lending to multifamily after the crisis, 
but they are unlikely to return to their precrisis levels because of 
higher risk-based capital requirements.
    Life insurance companies tend to restrict their lending to a 
handful of primary markets and to luxury apartment properties. They do 
not generally finance affordable apartments, and their loan terms 
typically do not extend beyond 10 years. Importantly, they enter and 
exit the multifamily market based on their investment needs and 
economic conditions. On average, they have generally provided 10 
percent or less of the annual capital needed by the multifamily 
industry, but that number has gone as low as 3 percent.
    The private-label CMBS market did not become a material source of 
capital to the apartment industry until the mid-1990s, peaking at 16.5 
percent of the market ($17.6 billion a year) in the housing bubble 
years of 2005-2007. The CMBS market completely shut down after the 2008 
crisis and suffered high delinquency rates--reaching 17.4 percent in 
2011. While CMBS is rebounding, regulatory changes imposed by financial 
regulatory reform legislation will mean that it will not return to its 
pre-bubble levels of lending.
    Some have suggested that the Federal Housing Administration (FHA) 
could step in and fill the liquidity provided by Fannie Mae and Freddie 
Mac. This solution is unrealistic. FHA serves a very different market 
from Fannie Mae and Freddie Mac, focusing on construction lending and 
affordable rental properties not served by other sources of capital.
    In all, however, FHA represents 9 percent of all outstanding 
multifamily mortgage debt, and even at that level has experienced 
serious capacity issues. When demand for FHA financing spiked during 
the credit crisis, FHA's backlog was so significant that borrowers 
reported loan applications languishing for 18 months or more.
    Private capital has returned to the apartment sector, but already 
in this recovery we are seeing the historical pattern of uneven access 
to capital repeat itself. The new private capital coming into the 
apartment sector is concentrating in a handful of cities and on trophy 
assets. Apartment firms providing critical housing in secondary and 
tertiary markets and rural areas are not benefiting from the resurgence 
in private capital. Even in the larger markets, firms providing 
workforce housing find themselves equally shut out. The market failure 
the GSEs' multifamily programs addressed was ensuring capital reached 
markets deemed too risky or otherwise undesirable by institutional 
capital. It is imperative that a reformed system continue to fill this 
important public policy need.
    Finally, it must be noted that a December 2012 Freddie Mac report 
commissioned by the Federal Housing Finance Agency (FHFA) estimated the 
potential consequences to the apartment sector of eliminating the 
Federal guarantee. According to that research, which was undertaken by 
Freddie Mac and independent third-party experts, interest rates would 
rise and debt financing capital would fall by 10 percent to 20 percent. 
That could result in a 27-percent drop in apartment supply, which 
could, in turn, cause rising rents nationwide and significant spikes in 
tertiary geographic markets. \3\
---------------------------------------------------------------------------
     \3\ Freddie Mac, ``Report to the Federal Housing Finance Agency: 
Housing Finance Reform in the Multifamily Mortgage Market'', pp. 24-32. 
http://www.fhfa.gov/webfiles/25161/FREReport_MF_MarketAnalysis.pdf
---------------------------------------------------------------------------
Federal Credit Guarantee: Meeting the Needs When Private Capital 
        Disappears
    Fannie Mae and Freddie Mac have served as the cornerstone of the 
multifamily housing finance system, successfully attracting private 
capital to the sector. Unlike any other single source of capital, they 
offer long-term debt for the entire range of apartment properties 
(market-rate work-force housing and subsidized properties, large 
properties, small properties, etc.), and they are active in all markets 
(primary, secondary and tertiary) during all economic conditions.
    As the chart below shows, the Enterprises' share of the multifamily 
mortgage market has varied considerably over time, increasing at times 
of market dislocation when other sources of capital are scarce and 
scaling back during times when private credit is widely available.
    When credit markets have been impaired for reasons that have 
nothing to do with multifamily property operating performance, the 
federally backed secondary market has ensured the continued flow of 
capital to apartments. For example, when private capital left the 
housing finance market in 2008, the apartment industry relied almost 
exclusively on Fannie Mae, Freddie Mac, and FHA/Ginnie Mae for capital.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Between 2008 and 2010, the GSEs provided $94 billion in mortgage 
debt to the apartment industry. Without that critical backstop, 
thousands of otherwise performing multifamily mortgages would have gone 
into default because there were no private capital sources willing to 
refinancing maturing loans. This could have meant disruption to 
millions of renter households. The GSEs served a similar role during 
the 1997-1998 Russian financial crisis and in the post-9/11 recession 
of 2001.
    Even now, with all players back in the market, Fannie Mae and 
Freddie Mac still provided 45 percent to 50 percent of multifamily 
mortgage debt in 2012. Again, this is not meant to suggest that Fannie 
Mae and Freddie Mac be allowed to continue. Rather it is to point out 
how large a chasm private capital would have to fill and to emphasize 
the public policy mission the existing system has served, ensuring 
liquidity and avoiding widespread adverse effects for the millions who 
rent.
Principles of Reform
    There is widespread agreement that Fannie Mae and Freddie Mac must 
be dissolved. A reformed housing finance system should, however, retain 
the successful components of the existing multifamily programs in 
whatever succeeds them. Accordingly, multifamily housing reform must:
1. Provide Access to Federal Credit Support.
    Given the market failure of the private sector to meet the 
apartment industry's broad capital needs, an explicit Federal guarantee 
for multifamily-backed mortgage securities should be available in all 
markets at all times. A private-only housing finance system would 
result in an abundance of capital for high-end properties in top-tier 
markets but leave secondary and tertiary markets like Sioux Falls, SD, 
or Boise, ID, underserved.
2. Provide Broad Liquidity Support at All Times, Not Just ``Stop-Gap'' 
        or Emergency Financing.
    Any Federal credit facility should be available to the entire 
apartment sector and not be restricted to specific housing types or 
renter populations. Moreover, it would be impossible to turn on and off 
a Government-backed facility without seriously jeopardizing capital 
flows.
3. Restrict Federal Credit Support to the Security Level.
    The benefit of any Federal guarantee should only accrue to the 
investors of multifamily mortgage-backed securities; it should not 
apply to the underlying multifamily mortgages or the entities issuing 
the securities.
4. Support Private Capital and Protect Taxpayers Through Effective 
        Guarantee Structure and Pricing.
    Borrowers should pay for the guarantee in the form of an 
appropriately priced credit enhancement fee that insures taxpayers 
against future losses. Additionally, the fee should be priced to ensure 
that any advantage the GSEs historically have enjoyed over private 
mortgage capital is addressed and market participants not using 
Government guarantees are not crowded out.
5. Encourage Competition.
    Other entities should be allowed to obtain a Federal charter to 
compete with the GSEs or their successors if they can meet mandated 
requirements, including robust levels of core capital and significant 
experiences in mortgage underwriting.
6. Empower a Strong Regulator.
    A strong and independent regulator with expertise in multifamily 
lending is critical. To ensure sufficient financial resources and 
political independence, the regulator should be funded through industry 
assessments instead of congressional appropriations as is the case with 
the Federal Deposit Insurance Corporation, the Federal Reserve, and 
Office of the Comptroller of the Currency.
7. Impose Effective Capital Requirements.
    Effective capital reserve requirements, both for mortgages held in 
portfolio and those securitized, are vital to further protect taxpayers 
from future losses.
8. Retain Limited Portfolio Lending (Without a Federal Guarantee) While 
        Expanding Securitization.
    Any restructured or successor entity should be able to retain 
limited multifamily mortgage portfolios, but no Government guarantee 
should apply to mortgages held in portfolio. Limited retained 
portfolios would be allowed for the following activities: (1) 
aggregating mortgages for pooled securities executions; (2) 
implementing pilot mortgage programs and product modification testing; 
(3) engaging in targeted higher-risk transactions (e.g., financing 
properties with rent-regulatory restrictions, student housing and 
senior and assisted-living developments); and (4) engaging in pilot and 
risk-sharing transactions for affordable and workforce housing 
production. To avoid a return to an overreliance on portfolio lending, 
portfolio loans would be subject to: (A) commercial bank mortgage risk-
based capital standards; and (B) limits regarding absolute levels and 
percentage of guaranteed mortgage securities.
9. Reduce Existing Portfolios in a Responsible Manner.
    As the GSEs are wound down, the current GSE multifamily portfolios 
should be largely transferred to the Federal Government to allow 
taxpayers to capture the portfolios' positive income stream and to 
eliminate any market advantage the GSE-successor entities would gain by 
retaining them on their balance sheets. However, any GSE-successor 
entities should be allowed to retain the minimum number of mortgages 
currently held in portfolio that are necessary to make them 
operationally viable. The GSE-successor entities should be charged with 
continuing to service the mortgages transferred to Government control 
and would be paid a fee for doing so.
10. Create Certainty and Retain Existing Resources/Capacity During the 
        Transition.
    To avoid market disruption, it is critical that policy makers 
clearly define the Government's role in a reformed system and the 
timeline for transition. Without that certainty, private capital 
providers (e.g., warehouse lenders and institutional investors) are 
likely to limit their exposure to the market, which could cause a 
serious capital shortfall to rental housing. In addition, during the 
transition years, it is vital to retain many of the resources and 
capacity of the existing GSEs. The two firms have extensive personnel 
and technological expertise, as well as established third-party 
relationships with lenders, mortgage servicers, appraisers, engineers 
and other service providers, which are critical to a well-functioning 
secondary market.
11. Focus on Liquidity, Not Mandates.
    The public mission of a federally supported secondary market for 
multifamily should be clearly defined and focused primarily on using a 
Government backstop to provide liquidity and not for specific 
affordable housing mandates.
Essential Elements of a Reformed Multifamily Housing Finance System
    Putting the principles outlined above into legislative action could 
be accomplished in a number of ways. We have provided additional 
details in Appendix I. NMHC/NAA believe that Congress would be well 
served by including the following provisions in any housing finance 
reform legislation:
1. Separate Title Addressing the Unique Needs of the Multifamily Sector
    As noted earlier, a one-size-fits-all solution will not work in 
housing finance reform. We strongly recommend that any reform measure 
include a separate multifamily title. This separate title should 
address not only what will replace the GSEs' multifamily programs, but 
also how the transition to that new system will be handled.
2. Establish an Office of Multifamily Mortgage Oversight
    An Office of Multifamily Mortgage Oversight should be established 
to oversee and regulate all aspects of Government-backed multifamily 
mortgage finance. In addition to serving as regulator, this Office 
should be charged with establishing and collecting fees paid by 
borrowers for Government-backed mortgages.
3. Transfer the Enterprises' Multifamily Activities to Successor 
        Entities
    Having documented the need for an ongoing Federal presence in 
multifamily finance, namely to serve properties and localities not well 
served by private capital, and having established the strong 
performance record of the existing GSEs' multifamily programs, reform 
legislation should include a mechanism for explicitly transferring 
Fannie Mae and Freddie Mac's multifamily lines of business to successor 
entities. This transfer should be separate and apart from the GSEs' 
single-family business given the significant differences between the 
two. We recommend that the regulator oversee the complete privatization 
of Fannie Mae and Freddie Mac's multifamily lines of business beginning 
no later than one year after a new regulator is put into place. In 
addition to overseeing the transition of Fannie Mae and Freddie Mac's 
multifamily programs from Government-sponsored enterprises to privately 
held entities, the regulator should evaluate whether there should be 
more than two private entities chartered to issue guaranteed mortgage-
backed securities.
Focus on Liquidity Given the Innate Affordability of Multifamily
    Policy makers are understandably still struggling to determine the 
degree to which an ongoing Federal role in the rental finance system 
should be connected with the pressing need to address the Nation's 
affordable housing shortage. We begin by noting that multifamily 
housing is inherently affordable housing; fully 82 percent of existing 
apartments are affordable to households earning 80 percent of area 
median income, a common standard for measuring affordability. 
Therefore, the mere extension of a Government role to ensure liquidity 
to the multifamily sector is, by definition, supporting affordable 
housing.
    It is tempting to believe that more can be done to address 
affordability through housing finance reform, namely through imposing 
limitations on Federal guarantees or other mandated benchmarks. We 
caution policy makers not to overreach, however, as such well-intended 
moves, if overly prescriptive, could have adverse consequences.
    To begin with, one way the GSEs have been able to produce such a 
stellar performance record in multifamily is by being able to build a 
balanced book of business where lower-risk, higher-end properties 
enabled them to take on riskier, deeply targeted affordable housing 
properties, such as Section 8 and Low-Income Housing Tax Credit 
properties. Just as critical, the GSEs' multifamily programs have been 
able, through their broad platforms, to provide capital for projects 
located in markets that do not meet the credit or return standards 
required by many private capital debt providers.
    Not only does a broad multifamily lending platform help the GSEs 
and successor entities manage risk, but it also ensures that there is a 
sufficient supply of liquidity in severe market downturns. For 
instance, in the most recent financial crisis, even firms and 
properties that would normally be well served by private capital found 
themselves with no options.
    After 2008, the insurance companies, banks and other private 
capital debt providers exited the market leaving even higher-rent or 
luxury properties scrambling for debt capital to refinance maturing 
mortgages. Publicly traded apartment REITs were unable to issue bonds 
to finance their assets and had to seek funding from Government 
programs. If the successor entities to Fannie Mae and Freddie Mac are 
more limited in what markets or properties they can serve, they will be 
unable to fill the critical public policy mission they have 
historically served. Failure to ensure sufficient liquidity for all 
types of apartments will have a spillover effect that could be 
disastrous for America's renters.
    Nevertheless, we understand the need to tackle housing finance 
reform and affordability in the same debate. NMHC/NAA are reviewing the 
spectrum of options that could serve the Nation's affordability needs 
without putting the broader multifamily market at risk. They include 
portfolio goals, explicit on-budget funding, loan limits and 
affordability-based-guarantee-fee pricing. NMHC/NAA look forward to 
working with Congress on developing workable solutions to this vital 
policy issue.
Comment on Federal Housing Finance Agency Action To Curtail Fannie Mae 
        and Freddie Mac's Multifamily Activities
    Before closing, I would like to draw to the Committee's attention a 
letter that NMHC/NAA submitted to the Federal Housing Finance Agency 
(FHFA) regarding strategies it is considering as part of its 2014 
Scorecard to reduce Fannie Mae and Freddie Mac's multifamily 
businesses. We appreciate that FHFA is seeking input before making this 
decision. However, placing caps on the GSEs' multifamily lending volume 
and reducing the diversity and availability of multifamily mortgage 
products as FHFA has proposed are not justified or necessary and will 
only lead to market uncertainty and instability. For this reason, we 
cannot support any further actions to restrict liquidity to the 
industry and residences we serve. Moreover, decisions made regarding 
the Enterprises' future activities are best left to Congress as opposed 
to their regulator. (Appendix II: NMHC/NAA Comment Letter: FHFA Letter 
To Limit Enterprises' Multifamily Activities.)
    Finally, I would like to take a moment to address the opportunity 
you have to rebalance our national housing policy through housing 
finance. For decades, the Federal Government has pursued a ``home 
ownership at any cost'' housing policy, ignoring the growing disconnect 
between the country's housing needs and its housing policy. That had a 
devastating effect on our national economy, on local communities and 
for millions of households.
    We now know that housing our diverse Nation means having a vibrant 
rental market along with a functioning ownership market. How we as a 
Nation tackle the housing finance reform effort that must be undertaken 
will, in large part, determine whether or not the country continues to 
have a strong rental sector. The stakes are too high to let the 
multifamily market become a collateral victim of the single-family 
housing crash.
    I thank you for the opportunity to present the views of NMHC and 
NAA.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                    PREPARED STATEMENT OF E.J. BURKE
 Executive Vice President and Group Head, KeyBank Real Estate Capital, 
   Key Corporate Bank, on behalf of the Mortgage Bankers Association
                            October 9, 2013
Introduction
    Chairman Johnson, Ranking Member Crapo, and Members of the Senate 
Banking Committee, thank you for the opportunity to testify on behalf 
of the Mortgage Bankers Association. My name is E.J. Burke, and I am 
Chairman-Elect of MBA, as well as Executive Vice President and Group 
Head of KeyBank Real Estate Capital. I oversee multiple commercial real 
estate lending platforms for KeyBank, NA in its commercial and 
multifamily real estate finance business, including construction and 
development lending, portfolio lending, community development lending, 
commercial mortgage-backed securitization, life company placement, FHA 
multifamily programs, and Fannie Mae and Freddie Mac multifamily 
lending. I have over 34 years of experience in banking and commercial 
real estate finance. KeyBank, NA is a $91 Billion regional bank that is 
headquartered in Cleveland, Ohio. KeyBank, NA provides community 
banking services in 14 U.S. States and corporate banking services 
nationwide. KeyBank Real Estate Capital is a national commercial real 
estate lender and commercial loan servicer.
    Today's hearing serves as a catalyst to underscore the importance 
of multifamily rental housing. With Fannie Mae and Freddie Mac having 
been in conservatorship for more than 5 years, it is imperative that 
policy makers define a long-term plan for the future role of the 
Federal Government in the mortgage market. This plan must fundamentally 
include their unique role in multifamily rental housing. I commend the 
Chairman and Ranking Member for your leadership toward this end. We 
look forward to working with the Committee to help shape a vibrant 
rental housing market that builds upon the foundation that exists 
today.
    As this Committee considers the essential elements of the 
multifamily housing finance system, we believe that policy makers 
should focus on ensuring that capital continues to be available in all 
market cycles. With this in mind, the policy discussion on the role of 
private capital and that of the Federal Government, in our view, is not 
mutually exclusive in character. We believe that public policy can 
strike a durable balance that continues to attract and deploy private 
capital in the multifamily market, while establishing a focused 
Government guarantee that enables liquidity and stability in all 
cycles--a role that only the Government can fulfill. This, in turn, 
will protect taxpayers and strengthen the financing system for rental 
housing.
    These goals can be accomplished by building upon the strong 
foundation that currently exists in multifamily finance--where there is 
greater and increasing diversification in capital sources for 
multifamily housing, where private capital bears significant risk in 
existing multifamily finance platforms, and where Government-backed 
sources have experienced, even through the recent financial crisis, 
very strong credit performance. \1\
---------------------------------------------------------------------------
     \1\ For example, both GSE multifamily businesses have been 
profitable and have been prudent in their lending practices, as 
reflected in their current credit performance with less than a 20 basis 
point delinquency rate.
---------------------------------------------------------------------------
    My testimony begins with an overview of the multifamily housing 
market and capital sources, including the GSEs, that support this 
market.
    I then discuss overarching policy principles that we believe should 
guide the future of multifamily housing finance.
    Based on these principles, I recommend a system that would 
strengthen multifamily housing finance, while providing commentary on 
current legislative approaches.
    I conclude my testimony by emphasizing the importance of ensuring a 
stable transition and careful stewardship of taxpayer assets, in order 
to provide greater flexibility for Congress as it frames the regime 
that will govern the housing finance market.
Overview of the Multifamily Housing Market
Importance of Multifamily Rental Housing
    More than one in three American households rent their home, and 
more than 16 million of those households live in multifamily rental 
housing, a development with five or more units. The multifamily rental 
housing market is a critical component of our housing system--in size, 
reach and the households that it serves. Renters include workers who 
want to live near their jobs, young professionals, empty-nesters, 
retirees on a fixed income, families with children, students, and 
households who value the convenience and mobility that renting offers. 
The vast majority of multifamily rental housing provides homes for 
households earning modest incomes, with 93 percent of multifamily 
rental apartments having rents affordable to households earning at or 
below the area median income. Overall, renters' median household income 
is about half of that of homeowners. \2\
---------------------------------------------------------------------------
     \2\ Joint Center for Housing Studies, Harvard University, State of 
the Nation's Housing 2013.
---------------------------------------------------------------------------
    The share of households renting their homes has risen to 35 percent 
from a low of 31 percent in 2004. And since the end of 2006, the number 
of renter households has increased by five million, while the number of 
owner-occupied households has declined by 1.5 million.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    The number of renter households is expected to continue to increase 
substantially over the next decade. Harvard's Joint Center for Housing 
Studies ``estimates that the number of renter households could increase 
by 360,000-470,000 annually between 2010 and 2020, in line with growth 
over the past decade.'' \3\ This growth in renter households will 
require substantial investment in multifamily housing.
---------------------------------------------------------------------------
     \3\ Joint Center for Housing Studies, Harvard University, State of 
the Nation's Housing 2011.
---------------------------------------------------------------------------
    The nature of financing multifamily rental housing differs from 
that in single-family lending in important ways. Among them, 
multifamily lending involves loans that have larger balances with more 
complex and heterogeneous properties, compared to single-family loans. 
Multifamily loans require a detailed underwriting process due to the 
fact that the repayment of the loan is dependent on the ongoing 
financial performance of the property, which is in turn dependent on 
the property's income streams, expenses, market conditions and outlook, 
and numerous other factors. As a result, careful underwriting is 
required to confirm a property's creditworthiness and the borrower's 
ability to successfully operate the apartment property. The 
origination, underwriting, securitization and investor reporting, and 
servicing expertise necessary to successfully finance multifamily 
rental properties is considerable.
    The finance market that supports multifamily rental housing is 
substantial and includes a range of market participants. The total 
amount of multifamily mortgage debt outstanding is approaching $900 
billion. \4\ Capital sources that finance the multifamily housing 
market include Fannie Mae and Freddie Mac, commercial banks, the 
Federal Housing Administration's (FHA) multifamily programs, life 
insurance companies, commercial mortgage-backed securities (CMBS) 
issuers, REITs, pension funds, State and local government agencies, and 
others. While all sources play an integral role in supporting the 
multifamily market, each has its own focus, strength, and limitations.
---------------------------------------------------------------------------
     \4\ MBA's Quarterly Analysis of Commercial and Multifamily 
Mortgage Debt Outstanding.
---------------------------------------------------------------------------
    Importantly, when most private capital sources exited the 
multifamily finance market during the recent economic downturn, the 
GSEs and FHA continued to provide liquidity during this period of 
unprecedented market disruption.
The GSEs' Performance and Countercyclicality During Market Downturn
    Let me turn to the role that Fannie Mae and Freddie Mac have 
recently played in the multifamily housing markets. The GSEs' role 
during the financial crisis demonstrates that they served a 
countercyclical role as providers of liquidity in the multifamily 
market when other sources pulled back. The GSEs' peak market share 
reached 59 percent of the total multifamily mortgage originations (and 
85 percent of the institutional market) \5\ in 2009. And since the 
crisis, their market share has trended downward--in 2012, 40 percent of 
the total multifamily market and 57 percent of the institutional 
market--even as overall multifamily origination volumes have increased.
---------------------------------------------------------------------------
     \5\ MBA defines the institutional market as the part of the market 
served by lenders with a platform dedicated to lending to commercial 
and multifamily property owners.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    As the market has stabilized, other lending sources have increased 
market share, with non-GSE capital sources competing vigorously with 
Fannie Mae and Freddie Mac to finance multifamily properties.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    In sum, the GSEs' multifamily businesses, their performance and 
role in the market are unique in many respects. As Acting FHFA Director 
Edward DeMarco observed in a speech earlier this year:

        Unlike the single-family credit guarantee business, the 
        Enterprises have a smaller market share and there are other 
        providers of credit in the multifamily market . . . Another 
        difference from the single-family business is that each 
        Enterprise's multifamily business has weathered the housing 
        crisis and generated positive cash flow. In contrast to their 
        common approach to their single-family businesses, Fannie Mae 
        and Freddie Mac do not take the same approach to their 
        multifamily businesses. Each approach also already embeds some 
        type of risk sharing. For a significant portion of its 
        business, Fannie Mae shares multifamily credit risk with loan 
        originators through its delegated underwriting program. For a 
        significant and increasing portion of its business, Freddie Mac 
        shares multifamily credit risk with investors by issuing 
        classes of securities backed by multifamily mortgages where the 
        investor bears the credit risk. \6\
---------------------------------------------------------------------------
     \6\ FHFA's Conservatorship Priorities for 2013, Remarks Prepared 
for Delivery by Edward J. DeMarco, Acting Director, FHFA (March 4, 
2013).
---------------------------------------------------------------------------
Policy Principles for Multifamily Housing Finance
    Recognizing the unique attributes of the multifamily market, MBA 
recommends that policy makers support proposals that advance the 
following principles.
    Our Nation's multifamily housing finance system should rely on 
private capital. Private capital should be the primary source of 
financing for multifamily rental housing. Private capital has 
historically been brought to bear through the range of lending 
institutions that have supported multifamily finance, such as portfolio 
lenders and CMBS issuers, the GSEs' multifamily programs that require 
loss sharing with originators and with investors, and the 
capitalization of the GSEs themselves. We believe that Government 
policies should maintain this reliance on private capital going 
forward.
    Past experience shows that the Federal Government is the only 
entity that can ensure the availability of liquidity in all market 
cycles. The recent financial crisis and recession demonstrated that 
only the Federal Government can ensure liquidity through all market 
cycles, and, as demonstrated by the conservatorship of Fannie Mae and 
Freddie Mac, as well as programs like the Federal Reserve's asset 
purchases, the Federal Government will fill this role when necessary. 
Government policies should anticipate and prepare for this role.
    The Government should ensure liquidity for multifamily mortgages 
through a carefully crafted guarantee on multifamily mortgage-backed 
securities. The Federal Government should provide a catastrophic 
backstop guarantee on mortgage-backed securities. The catastrophic 
backstop role would be similar to that of the U.S. Government in a 
number of sectors and markets, including Federal deposit insurance in 
the banking system. This Government backstop should be available at the 
mortgage-backed securities level (rather than at the level of the 
issuer, as it is today with the GSEs) at all times to ensure liquidity 
in the multifamily finance market.
    Taxpayers and the mortgage finance system itself should be 
protected through a strong regulatory framework and multiple layers of 
private capital. To protect taxpayers and the system itself, the 
Government guarantee-related market should be subject to strong and 
independent regulatory oversight and risk-based capital requirements. 
Taxpayers also should be protected through multiple layers of private 
capital, including the equity in the multifamily property itself and 
the entity-level capital of the security-issuing institution and any 
risk sharing it may undertake. As noted above, a Federal risk insurance 
fund should also be established, capitalized by risk-based premiums 
paid by participating firms. Only when all layers of capital are 
exhausted would a draw on the U.S. Treasury be authorized.
    Policy makers should protect and preserve existing resources, as 
well as support greater transparency, during the transition to an 
overhauled housing finance system. Given the significant role of the 
GSEs in the multifamily market, their infrastructures, human capital, 
and resources should be carefully managed to avoid disruptions to the 
market, as well as to ensure an orderly transition to a new housing 
finance system. Prudent management of existing multifamily executions 
and mortgage portfolios is important due to its quality and positive 
cash flow generated--all of which are taxpayer assets.
Structural Recommendations for the Future of Multifamily Housing 
        Finance
    To implement these principles, MBA believes that a legislative 
solution should incorporate the following structural recommendations:
    Establish a Government Guarantor. A wholly owned Government 
corporation should function as a catastrophic guarantor, administrator 
of a risk insurance fund, and regulator of secondary market entities. 
The Government guarantor, which would be backed by the full faith and 
credit of the U.S., would not be subject to the Federal appropriations 
process, but be funded by guarantee fees paid by issuers, as well as 
other statutorily defined assessments.
    The Government corporation would, pursuant to statutory guidelines, 
approve private sector secondary market entities, as well as set 
standards by which secondary market entities would be eligible to issue 
Government-backed securities. The pricing of the guarantee should 
encourage competition, be commercially reasonable, and be subject to 
calibration based on predetermined criteria that considers market 
conditions.
    Allow Multiple, Privately Capitalized Issuers of Government-
Guaranteed Securities in the Secondary Multifamily Mortgage Market. 
Privately capitalized secondary market entities would be eligible to 
purchase mortgages, aggregate (if applicable), and issue Government-
backed mortgage-backed securities that support the multifamily market. 
Regular and dependable security issuances would create the liquidity in 
the market to get attractive pricing and broad market participation by 
bond investors.
    These issuers would be expressly permitted to purchase catastrophic 
reinsurance from the Government guarantor to wrap the MBS. The 
Government guarantee should be structured so that it can be expanded in 
times of market disruption. A mono-line structure, with segregated 
assets and separate capital standards, would facilitate capital 
adequacy determinations, regulatory oversight, and aggregation 
capabilities to support structured risk-sharing transactions. The 
Government guarantor/regulator would be able to authorize the 
establishment of multiple such entities.
    The secondary market entities should be required to be separately 
capitalized. Governance structures that enhance independence from 
potential affiliated business lines (if any) should be considered. We 
believe that these entities could be (but need not be) affiliated with 
single-family market entities. They would provide liquidity to the 
workforce rental housing market, including secondary and tertiary 
markets.
    Preserve and Carry Over Execution Models. The GSEs' multifamily 
executions incorporate substantial private capital and risk sharing 
with other market participants, and have exhibited strong credit 
performance with current delinquency rates of less than 20 basis 
points. This and other flexibility in the structure of the Government 
wrap on MBS is important to allow for multiple risk-sharing executions 
to manage credit risk. These businesses are valuable to U.S. taxpayers 
and should be transferred to new entities that would serve the 
multifamily housing finance market. Notably, in the multifamily space, 
we do not believe there is a need for utilization of a common 
securitization platform, private mortgage insurance, or other single-
family-specific concepts at this time.
    Consider Affordable Character of Multifamily Rental Housing. By its 
very nature, multifamily rental housing tends to be affordable, with 93 
percent of multifamily units having rents affordable to households 
earning area median incomes or less. Policy proposals contemplating 
affordability requirements, if any, on secondary market entities should 
take this into account. Any proposed approaches also should be 
reasonable and flexible, as well as balanced with regard to the need to 
attract private capital.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



Pending Legislative Proposals
    MBA is encouraged by recent legislative activity that has revived 
the policy debate on the future of Fannie Mae and Freddie Mac. Senate 
and House members have introduced thoughtful proposals that would 
create a comprehensive framework for the future of housing finance. We 
commend these efforts. MBA views all such proposals through the lens of 
our guiding principles. In particular, the future system of multifamily 
finance should rely on private capital and protect taxpayers, while 
ensuring stable and continued liquidity in all economic cycles through 
a Government backstop.
    In the Senate, Senators Corker and Warner have introduced 
bipartisan legislation that would transform the housing finance system. 
To the extent that the Committee considers portions of this bill in its 
efforts to craft comprehensive GSE reform legislation, we offer several 
recommendations.
    With regard to its treatment of multifamily housing finance, MBA 
strongly supports the bill's approach that provides an explicit 
Government guarantee (through a Federal Mortgage Insurance Corporation 
(FMIC)) for multifamily loans. We also support the establishment of 
premiums paid into an FMIC-administered insurance fund, oversight by 
the FMIC as a strong regulator, and recognition of the value and 
retention of the GSEs' multifamily executions (i.e., Delegated 
Underwriting and Servicing and Capital Markets Execution/K-Deals).
    However, we would urge that the statutory language explicitly 
distinguish between the roles of the FMIC and multifamily private 
sector participants: The FMIC should retain the role of regulator, 
Government guarantor and administrator of an insurance fund--but other 
roles should be transferred to private sector entities. Specifically, 
the bill should direct the FMIC to establish privately capitalized 
secondary mortgage market entities to serve as issuers in the 
multifamily housing finance market. The current multifamily platforms 
of the two GSEs could be moved over into such new entities. Moving 
these businesses to the private sector (through a sale or public 
offering)--with continued access to a Government guarantee--would 
likely return substantial capital to the U.S. Treasury.
    These secondary market entities would purchase multifamily 
mortgages, aggregate loans, manage and distribute credit risk, credit 
enhance, and structure and issue Government-backed MBS that support the 
multifamily market. In other words, the secondary market entities would 
have access to purchase catastrophic reinsurance from the Government 
guarantor that wraps the MBS. We also believe that the FMIC should be 
authorized to approve several such companies in order to foster 
competition and innovation, setting forth criteria for the approval of 
these multifamily issuers. Governance guidelines and approval standards 
should be established as well.
Importance of FHA Multifamily and Health Care Programs
    While not the focus of today's hearing, I would like to emphasize 
the essential role that FHA plays in supporting the multifamily housing 
market. The Federal Housing Administration is a critical source of the 
long-term, fixed-rate debt needed to build and refinance affordable 
rental units for working families, seniors, and underserved 
populations. FHA's multifamily and health care loan programs are each 
designed to address a different loan type or segment of the market. \7\ 
FHA has played a strong, countercyclical role in this market as well. 
Its status as a Government agency subject to the Federal appropriations 
process, however, has presented inherent limitations in FHA's capacity, 
as we are witnessing today with commitment authority limitations and 
the recent Federal Government shutdown.
---------------------------------------------------------------------------
     \7\ Some of the major FHA multifamily programs are: (1) new 
construction/substantial rehabilitation (NCSR); (2) section 223(f) for 
the purchase or refinancing of existing multifamily properties; and (3) 
section 223(a)(7) for the refinancing of loans that already have an 
FHA-insured mortgaged. FHA and its lender partners also provide 
financing programs to support health care and assisted-living 
facilities.
---------------------------------------------------------------------------
    FHA provides an explicit Federal Government guarantee on 
multifamily and health care loans through a range of programs 
established by Congress. The guarantee is paid for through a mortgage 
insurance premium set by HUD and paid by the borrower. Not only have 
FHA multifamily and health care loans performed well with low default 
rates (as published by HUD in May 2013), but the programs generate 
significant revenue to the Federal Government in the form of a negative 
credit subsidy, generating positive cash flow to the U.S. Treasury. 
Diversification in business mix for FHA multifamily programs is 
essential and has contributed to their strong credit performance. 
Mortgage insurance premiums are deposited into FHA's GI/SRI fund, 
separate from the MMI fund that supports FHA's single-family programs. 
FHA serves a wide market that is sometimes bypassed by other capital 
sources. Many properties are in secondary or tertiary markets supported 
by niche borrowers and lenders, and this capital source supports a 
vital need in these areas.
    Accordingly, MBA strongly recommends that Congress (1) reduce 
disruptions--at this time and on an ongoing basis--to the FHA 
multifamily and health care programs; (2) provide adequate FHA 
Commitment Authority for the full fiscal year to avoid costly and 
counterproductive stop and start problems; and (3) continue to 
encourage FHA to maintain a balance of affordable and market rate FHA 
multifamily financings.
Transition and Stewardship of GSE Multifamily Resources
    As the Committee is well aware, the GSEs are subject to FHFA's 
conservatorship and the Treasury Department's controlling interest 
pursuant to the preferred stock purchase agreement originally entered 
into in September 2008. \8\ With the GSEs controlled by the Federal 
Government, we urge policy makers to exercise stewardship with regard 
to the resources and assets of the GSEs' multifamily businesses--for 
purposes of ensuring a stable transition to the future system of 
multifamily housing finance.
---------------------------------------------------------------------------
     \8\ The Treasury Department's August 2012 announcement on the most 
recent amendment to the agreement, requiring an expedited reduction in 
the GSEs' retained portfolios and an all income sweep of the GSEs' 
profits (but for specified capital reserve amounts), further 
underscores the integral tie between these entities and the Federal 
Government.
---------------------------------------------------------------------------
    While it is clear that the current state of the GSEs should not 
last indefinitely, policy makers should ensure the ongoing stewardship 
of valuable resources that support the multifamily market, utilizing 
them to transition to a stronger multifamily housing finance system. 
The resources of the GSEs, as taxpayer assets, should be preserved to 
support an orderly transition to a new mortgage finance system and 
ultimately to optimize potential returns to taxpayers.
    The talent, expertise and intellectual capital of their staff are 
valuable to the Federal Government, and the future deployment of these 
resources should be a core consideration in the transition to the 
future state of housing finance. Similarly, the mulitfamily market 
executions of the GSEs (each utilizes a distinct structure as its 
primary execution and attract private capital that assumes a 
substantial credit risk position) and their existing multifamily books 
of business are clearly taxpayer assets, and should be viewed in a 
manner that supports the pathway toward the future state of multifamily 
finance.
    We also caution that the multifamily finance market and the role 
GSEs play should not be viewed as a potential thought experiment to 
test out scenarios. Blunt or dramatic changes imposed in 
conservatorship, for example, would be highly disruptive, risk the loss 
of significant talent, and reduce the value of taxpayer assets. 
Regulatory or legislative actions that could substantially jeopardize 
the viability and value of key resources within the GSEs' multifamily 
businesses should be avoided. While policy makers should continue to 
explore steps to faciliate the transition forward, the do no harm 
principle should equally govern.
Conclusion
    Thank you for the opportunity to testify before you today. MBA 
remains committed to its key principle that a successful multifamily 
secondary market should rely primarily on private capital, while 
ensuring stable and continued liquidity in all economic cycles. We 
believe that this can be achieved in manner that protects taxpayers and 
builds upon the successes and strong foundation that exists today. We 
would be pleased to assist the Committee as it continues to engage in 
this critically important effort.
                                 ______
                                 
                PREPARED STATEMENT OF SHEKAR NARASIMHAN
                Managing Partner, Beekman Advisors, Inc.
                            October 9, 2013
    Chairman Johnson, Ranking Member Crapo, Members of the Committee: 
Good morning. Thank you for inviting me to testify at this hearing on 
Housing Finance Reform. My name is Shekar Narasimhan, and I am Managing 
Partner of Beekman Advisors, which provides consulting services to 
various commercial real estate and financial services companies. I have 
spent the past 35 years in housing and finance, including 4 years 
building single-family homes in Eastern Kentucky. Later, when I was CEO 
of one of the first publicly traded commercial mortgage finance 
companies, we developed loan products to serve the low-income housing 
tax credit market. My experience in running and operating a real estate 
financial services business as a partner with Fannie Mae, Freddie Mac 
and FHA is what brings me here today. Through all this, I developed a 
deep and abiding passion for affordable housing.
    The multifamily businesses at the GSEs are not part of the problem 
in the housing finance system. In fact, they are part of the solution. 
Every major principle articulated by stakeholders with regard to what a 
new housing finance system should look like is in practice at the 
multifamily businesses of the GSEs:

    Alignment of interest between the borrower, lender/
        investor, and issuer. Typically 20-percent borrower equity, 
        lender, or investor taking risk if loan defaults and issuer 
        putting its capital and reputation on the line;

    Detailed underwriting of every loan. Significant property, 
        borrower and financial reviews with quarterly monitoring after 
        loan closes and annual inspection to ensure maintenance;

    Service of virtually every market segment with a menu of 
        stable and responsible lending products. Consistently serving 
        the multifamily market for working class and lower-income 
        households--strong rationale for policy makers to consider 
        limited Government support for multifamily finance;

    Participation of both small and large private lenders in 
        the system with skin in the game. Both issuer- and security-
        based risk-sharing models are already in place;

    A lengthy track record of profitable operations, even 
        through conservatorship ($13.6 billion in profits over the last 
        3 years). Gives credence to the belief that private capital 
        will be willing to capitalize these companies; and

    A footprint that responds appropriately to economic 
        conditions. Market share ranging from 25 percent during a bull 
        period for the capital markets to 70 percent at the height of 
        the crisis.

    I am here today to propose that the multifamily businesses at the 
GSEs should be used to demonstrate the path to the new housing finance 
system, by spinning them out as privately capitalized entities with 
Government guarantees limited to only the securities they issue.
    We all recognize change is needed as everyone agrees that 5 years 
of conservatorship is already too long. It has discouraged the best and 
brightest from remaining at the GSEs and has stifled creativity. 
Moreover, it has left secondary markets uncertain. This is not good 
given that the significantly larger rental population (41 million at 
last count) desperately needs a steady supply of new rental housing 
units to keep housing burdens manageable. This is especially true for 
renters earning less than 80 percent of area median income. This is the 
market the current GSE multifamily businesses have served yesterday and 
today with over 60 percent of the units they finance affordable to 
those at 80 percent of area median income or below.
    Responsible change, however, should involve doing the least damage. 
The work done recently at the multifamily units of Fannie Mae and 
Freddie Mac (at the behest of their regulator, FHFA) supports our 
conclusions on how to make this shift. Continue the focus of the new 
entities on the middle of the market and that they meet reasonable 
standards. Allow multiple entities to become issuers, but do not allow 
one to become dominant. Regulate the resulting issuers and guarantors 
to ensure a level playing field and have the ability and motivation to 
serve the broad markets now and in the future. In short, we believe our 
proposed pathway, if followed, will result in the least disruption to 
the markets and maximize the return to the Treasury.
    What I propose therefore is an immediate spinout of the multifamily 
operations of Fannie Mae and Freddie Mac. It can fit into the 
architecture of any bipartisan proposal that embodies the principles of 
private risk capital in front of a limited Government guarantee and 
continued availability of multifamily financing at all times in all 
markets. Transition to this new multifamily state can occur within a 2-
3 year period. First, create wholly owned multifamily subsidiaries of 
the current GSEs that can operate autonomously with a contract to 
manage the multifamily assets of their parent companies. Then, as soon 
as the Government guarantor is stood up, spin them out with a well-
constructed regulatory framework that encourages private capital to 
invest in these entities for the long-term.
    There is no reason to wait given rental demand and the profitable 
track record of these current businesses. This is laid out in the paper 
and subsequent proposal my two colleagues and I have written.
    Thank you for the opportunity to make these remarks. I will enter 
our proposal and the supporting information into the record, and look 
forward to your questions and comments.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                   PREPARED STATEMENT OF TERRI LUDWIG
 President and Chief Executive Officer, Enterprise Community Partners, 
                                  Inc.
                            October 9, 2013
    Chairman Johnson, Ranking Member Crapo, and Members of the 
Committee, thank you for the opportunity to testify this morning. I am 
Terri Ludwig, president and CEO of Enterprise Community Partners.
    Enterprise works with partners nationwide to build opportunity. We 
create and advocate for affordable homes in thriving communities linked 
to jobs, good schools, health care, and transportation. We lend funds, 
finance development and manage and build affordable housing, while 
shaping new strategies, solutions, and policy. Over more than 30 years, 
Enterprise has created 300,000 affordable homes across all 50 States, 
invested $14 billion into communities and improved millions of lives.
    One of Enterprise's many business lines is mortgage debt financing 
with a focus on affordable multifamily rental housing in low-income 
communities. Last year we originated $788 million in multifamily 
mortgages through our subsidiary, Bellwether Enterprise Real Estate 
Real Estate Capital, Inc., working with the Federal Housing 
Administration (FHA), Fannie Mae and Freddie Mac (the GSEs), private 
investors, and other partners. We are an FHA Multifamily Accelerated 
Processing (MAP) lender and Ginnie Mae issuer, a Fannie Mae Special 
Affordable Delegated Lender, a Freddie Mac Program Plus Seller Servicer 
and Targeted Affordable Housing lender and a U.S. Department of 
Agriculture Section 538 lender. We also make loans through the FHA 
Section 232 program and operate a registered community development 
financial institution, Enterprise Community Loan Fund, which invested 
$97 million into communities last year.
    Before becoming president and CEO of Enterprise, I worked for more 
than 20 years in investment banking. My team and I used capital markets 
to efficiently invest in affordable housing and community development, 
often partnering with groups like Enterprise. This experience taught me 
that public-private partnerships are critical to bringing capital to 
working families in low-income neighborhoods. In countless communities 
across the country--rural, urban, and suburban--the combination of 
public and private financing is effectively producing quality 
affordable housing.
    Still, there is an urgent and growing need for decent and 
affordable rental housing. Enterprise is working with Members of this 
Committee and others in Congress on several issues to ensure that the 
needs of low-income renters are met, including housing finance reform, 
preserving and expanding the Low Income Housing Tax Credit (Housing 
Credit), ensuring adequate appropriations for critical housing and 
community development programs, authorizing much needed reforms to 
rental assistance programs such as public housing and Housing Choice 
Vouchers, and finding new ways to preserve and improve the country's 
aging affordable housing stock. We look forward to continuing to work 
with you on these important issues as we work toward a day when every 
person in the U.S. has a quality and affordable home in a vibrant 
community.
    We greatly appreciate the leadership of the Chairman, the Ranking 
Member and Members of this Committee as you work to determine the 
future of Fannie Mae, Freddie Mac, and the rest of the country's 
housing finance system. And we thank you for focusing today on an 
often-overlooked component of the reform effort: the multifamily 
mortgage market, which finances rental buildings with five or more 
units.
    Above all else, we believe that any GSE reform plan must start with 
a simple goal: ensuring a liquid, stable and affordable housing market 
with appropriate support for both homeowners and renters, especially 
low income families.
    In my testimony this morning, I will make the following points:

    Multifamily housing is a key part of a well-functioning 
        housing market. Today more than one-third of the U.S. 
        population rents, and that number is expected to grow in the 
        coming years. And given who we expect these new renters to be--
        namely older or younger single-person households--multifamily 
        will play an increasingly important role.

    Fannie Mae and Freddie Mac play a critical role in 
        multifamily housing finance today. Among other things, Fannie 
        and Freddie provide broad liquidity to the multifamily mortgage 
        market, much-needed financing for affordable housing and a 
        buffer from severe booms and busts in the rental market.

    A limited, explicit Government guarantee is essential to a 
        well-functioning rental market. According to a series of recent 
        studies from the Federal Housing Finance Agency (FHFA), without 
        a Government guarantee on multifamily mortgages new 
        construction of rental housing would plummet, average rents 
        would rise significantly, and the entire rental market would be 
        more vulnerable to boom-and-best cycles. \1\ Low-income 
        families would be disproportionately harmed, at a time when 
        they already face an unprecedented affordable housing crisis.
---------------------------------------------------------------------------
     \1\ Federal Housing Finance Agency. News Release: ``FHFA Releases 
Fannie and Freddie Reports on Viability of Their Multifamily Business 
Without Government Guarantees''. Attachment: ``2012 Conservatorship 
Scorecard: The Enterprises' Reports on a Multifamily Future State 
Without a U.S. Government Guarantee''. FHFA, 3 May 2013.

    Congress should pursue smart reforms to the multifamily 
        market that preserve the business lines and other activities 
        that work. I will lay out a series of steps Congress should 
        take to ensure a liquid, stable, and affordable rental market, 
        starting by spinning off Fannie's and Freddie's multifamily 
        businesses and providing access to a limited, paid-for 
---------------------------------------------------------------------------
        Government guarantee.

    Any future system of multifamily housing finance must have 
        explicit provisions to support affordable housing, reach 
        underserved segments of the market, and promote long-term 
        sustainability. I will lay out specific recommendations for 
        each of these goals, which Congress should include in any 
        housing finance reform legislation.

    I'd like to start by providing a bit of context, including some 
background on the U.S. rental market and the Government's essential 
role in it.
Background on the U.S. Rental Market, Multifamily Housing, and the 
        Growing Affordable Housing Crisis
    More than 100 million people in the United States--about 35 percent 
of the population--rent their homes. In recent years more and more 
families have turned to the rental market, some because they are not 
ready for or not interested in home ownership, others because they have 
no other option. Over the past 8 years, the percentage of renters in 
the U.S. has increased by 4 percentage points. \2\
---------------------------------------------------------------------------
     \2\ Joint Center for Housing Studies of Harvard University. 
Chapter 5: ``Rental Housing, The State of the Nation's Housing 2013''. 
JCHS, June 2013.
---------------------------------------------------------------------------
    On average, renters are younger, earn less income, are more likely 
to be people of color and live in smaller households compared to 
homeowners. Their median age is 40, compared to 54 for homeowners. The 
typical renter household earns just over $31,000 per year, almost 
exactly half of the typical homeowner. Forty-seven percent are 
households of color, compared to 22 percent for homeowners. And 37 
percent of renters are single-person households, compared to 23 percent 
for homeowners. \3\
---------------------------------------------------------------------------
     \3\ Ibid.
---------------------------------------------------------------------------
    Analysts predict a further shift toward rentals in the coming 
years. Part of this is due to the carry-over effects of the recent 
housing crisis, but the key driver is changing demographics. Harvard's 
Joint Center for Housing Studies projects an additional 3.6 million new 
households will become renters between 2010 and 2020, led mostly by an 
increase in younger, senior, and minority households. \4\
---------------------------------------------------------------------------
     \4\ Joint Center for Housing Studies of Harvard University. 
``America's Rental Housing: Meeting Challenges, Building on 
Opportunities''. JCHS, April 2011.
---------------------------------------------------------------------------
    These populations increasingly rely on multifamily housing as a 
source of stable, affordable rental housing. Today 40 percent of rental 
units in the U.S. are in multifamily buildings, but roughly 60 percent 
of single-person renters--often a sign of a younger or senior 
household--live in multifamily buildings. In addition, analysts at 
Harvard have found that younger renters ``tend to favor multifamily 
housing in center city locations'' linked to transit, jobs, and other 
opportunities. \5\
---------------------------------------------------------------------------
     \5\ Ibid.
---------------------------------------------------------------------------
    Regardless of what type of housing America's renters live in, one 
thing is clear: they are facing an unprecedented affordable housing 
crisis. That's especially true for renters at the lower end of the 
income scale.
    Housing costs for the typical renter rose by 6 percent between 2008 
and 2011, while their income dropped more than 3 percent after 
adjusting for inflation, according to the Center for Housing Policy. 
\6\ While the number of very low-income renters has increased by 17 
percent since 2007, the total number of affordable rental units has 
actually declined. \7\ As a result, of the 17.1 million very low-income 
renters in the U.S. today, 7.1 million spend more than half their 
income on rent, live in substandard conditions, or both, according to 
the Department of Housing and Urban Development. \8\
---------------------------------------------------------------------------
     \6\ Janet Viveiros and Maya Brennan. ``Housing Landscape 2013: An 
Annual Look at the Housing Affordability Challenges of America's 
Working Households''. National Housing Conference, Center for Housing 
Policy, May 2013.
     \7\ Joint Center for Housing Studies of Harvard University. ``Fact 
Sheet, The State of the Nation's Housing 2013''. JCHS, June 2013.
     \8\ U.S. Department of Housing and Urban Development, Office of 
Policy Development and Research. ``Worst Case Housing Needs 2011: 
Report to Congress''. HUD, PD&R, August 2013.
---------------------------------------------------------------------------
    All told, 27 percent of renters--about 11 million families--are 
paying at least half of their monthly income on housing, a severe cost 
burden that often leaves families one paycheck away from losing their 
home. That's an all-time high. \9\
---------------------------------------------------------------------------
     \9\ Joint Center for Housing Studies of Harvard University. 
Chapter 6: ``Housing Challenges, The State of the Nation's Housing 
2013''. JCHS, June 2013.
---------------------------------------------------------------------------
Fannie Mae and Freddie Mac Play a Critical Role in Multifamily Housing 
        Finance Today
    Today there is roughly $875 billion in multifamily mortgage debt 
outstanding. \10\ Capital flows to the multifamily mortgage market from 
five main sources and several smaller ones:
---------------------------------------------------------------------------
     \10\ Mortgage Bankers Association. ``MBA Commercial Real Estate/
Multifamily Finance: Mortgage Debt Outstanding: Q2 2013''. MBA, 
September 2013.

    Fannie Mae and Freddie Mac, which account for 36 percent of 
        multifamily debt outstanding. The GSEs serve a wide geography 
        and a range of income levels and housing types, during both 
---------------------------------------------------------------------------
        good and bad economic times.

    Banks and thrifts insured by the Federal Deposit Insurance 
        Corporation (FDIC), which account for 28 percent of multifamily 
        debt outstanding. Banks and thrifts typically offer floating-
        rate, short-term debt, serving a broad range of lenders and 
        communities. But their presence in the multifamily market has 
        shrunk significantly since the start of the financial crisis.

    The Federal Government, which accounts for 10 percent of 
        multifamily debt outstanding. This includes Ginnie Mae 
        securities backed by mortgages insured by the Federal Housing 
        Administration (FHA), the Department of Agriculture, and other 
        Federal agencies. The FHA insures high-leverage loans with 
        terms of up to 40 years and offers construction financing as 
        part of the permanent loan.

    Conduits for commercial mortgage-backed securities (CMBS), 
        which account for 9 percent of multifamily debt outstanding. 
        These are securities issued by financial institutions made up 
        of multifamily, office, retail, and other loans that are not 
        backed by the Federal Government. The CMBS market was a leading 
        source of capital during the recent housing bubble--peaking at 
        17 percent of the market in 2007--before it practically shut 
        down during the crisis.

    Life insurance companies, which account for 6 percent of 
        multifamily debt outstanding. Historically, life insurance 
        companies have preferred to finance ``Class A'' multifamily 
        assets, such as luxury apartment buildings in top-tier housing 
        markets.

    Other sources, which account for the remaining 11 percent 
        of multifamily debt outstanding. This includes State and local 
        governments, private pension funds, Real Estate Investment 
        Trusts, and nonbank corporate businesses.

    From their volume alone, it's clear that Fannie and Freddie are a 
critical part of today's multifamily market. By purchasing and 
securitizing a range of multifamily mortgages across geographies and 
lender types, Fannie and Freddie ensure that developers and owners have 
the capital they need to build, maintain, and preserve rental housing. 
But increased liquidity is just one of many roles the GSEs play.
    First, they promote stability and broad access to credit through 
flexible products. Fannie and Freddie tend to offer longer-terms and 
more fixed-rate loans than banks, thrifts, and life insurance 
companies, which helps owners plan for future costs. Shorter-term, 
adjustable-rate mortgages, on the other hand, require frequent 
refinancing and recapitalization, which could discourage owners from 
holding onto a property over a long period.
    Second, the GSEs promote strong underwriting, which mitigates 
systemic risk in the rental market. Fannie and Freddie multifamily 
deals are carefully underwritten and include a significant amount of 
risk sharing with purely private investors, which further limits 
taxpayer exposure to risk. For example, Freddie Mac's K-Series deals 
typically require private investors to cover the first 15 percent of 
losses without a guarantee, while Fannie Mae's mortgage-backed 
securities require its licensed lenders to cover the first 5 percent 
plus a significant portion of further losses. \11\
---------------------------------------------------------------------------
     \11\ David Brickman. ``K-Deals A Model for the Future of Mortgage 
Securitization. Freddie Mac, Executive Perspectives Blog: Insights on 
Housing Finance'', September 2013. Available at http://
www.freddiemac.com/news/blog/david_brickman/
20130906_mortgage_securitization.html.
---------------------------------------------------------------------------
    As a result, GSE multifamily loans have experienced much lower 
delinquency rates than similar loans from private investors. According 
to the Mortgage Bankers Association, today only about 0.2 percent of 
Fannie- or Freddie-backed multifamily loans are delinquent by 60 or 
more days, compared to 2.1 percent for loans held by banks and thrifts 
and 7.8 percent for loans in commercial mortgage-backed securities. 
\12\
---------------------------------------------------------------------------
     \12\ Mortgage Bankers Association. ``MBA Commercial Real Estate/
Multifamily Finance: Mortgage Delinquency Rates for Major Investor 
Groups: Q2 2013''. MBA, August 2013.
---------------------------------------------------------------------------
    Third, they provide crucial countercyclical support to the market. 
As recently as 2007, Fannie and Freddie combined for less than 30 
percent of multifamily loan originations, while private investors 
absorbed the rest of the market in their eagerness for mortgage debt. 
By 2009--the year after the housing market collapsed, taking the entire 
financial system with it--Fannie's and Freddie's share nearly tripled 
to 85 percent as investors were leery of putting their money into 
housing without a Government guarantee. \13\ Without that support, 
financing for multifamily housing would have all but dried up, halting 
all new construction and making it extremely difficult for building 
owners to refinance maturing loans.
---------------------------------------------------------------------------
     \13\ Federal Housing Finance Agency, Office of Inspector General. 
``FHFA's Oversight of the Asset Quality of Multifamily Housing Loans 
Financed by Fannie Mae and Freddie Mac''. FHFA OIG, February 2013.
---------------------------------------------------------------------------
    Finally, the GSEs are critical sources of financing for affordable 
rental housing. This includes both the apartments financed through GSE 
multifamily securities and the investments held in each company's 
portfolio. Over the years, Fannie and Freddie have developed working 
relationships with small community banks, State housing finance 
agencies, and community development financial institutions across the 
country, allowing them to efficiently and profitably finance affordable 
housing in lower-income communities.
    Last year, 67 percent of the rental units financed by Fannie or 
Freddie were affordable to families earning less than 80 percent of 
Area Median Income (AMI), commonly referred to as ``low-income,'' while 
roughly 17 percent were affordable to families earning less than 50 
percent of AMI, commonly referred to as ``very low-income.'' \14\ While 
rent data are not available on units financed by banks, we know that 
private investors tend to prefer higher-end properties in top-tier 
markets.
---------------------------------------------------------------------------
     \14\ Fannie Mae financed 559,000 multifamily units in 2012, 
376,000 of which were affordable at 80 AMI or below and 109,000 of 
which were affordable at 50 AMI or below. Freddie Mac financed 435,000 
multifamily units in 2012, 299,000 of which were affordable at 80 AMI 
or below and 60,000 of which were affordable at 50 AMI or below.
---------------------------------------------------------------------------
    A key to Fannie's and Freddie's ability to play this important role 
in the market is their access to an explicit guarantee from the Federal 
Government.
A Limited, Explicit Government Guarantee Is a Key Part of a Well-
        Functioning Rental Market
    After 5 years of conservatorship, we are pleased to see Congress 
making meaningful progress on housing finance reform. Regardless of 
what lawmakers decide to do with Fannie Mae and Freddie Mac, I urge you 
to preserve the aspects of the current system that have proven to work. 
This includes an explicit, limited guarantee on multifamily mortgages.
    The Government guarantee on multifamily mortgages makes the U.S. 
rental market more liquid, more stable, and more affordable. These are 
four powerful reasons for maintaining it in any reform effort.
    Eliminating the multifamily guarantee would have devastating 
consequences for the U.S. rental market, with low-income communities 
bearing the largest share of the burden. Earlier this year FHFA asked 
Fannie, Freddie and external consultants to assess what the market 
would look like without a Government guarantee on multifamily 
mortgages. \15\ They found that:
---------------------------------------------------------------------------
     \15\ Federal Housing Finance Agency. News Release: ``FHFA Releases 
Fannie and Freddie Reports on Viability of Their Multifamily Business 
Without Government Guarantees''. Attachment: ``2012 Conservatorship 
Scorecard: The Enterprises' Reports on a Multifamily Future State 
Without a U.S. Government Guarantee''. FHFA, 3 May 2013.

  1.  Without a Government backstop, the rental market would be subject 
        to wild boom-and-bust cycles, leading to significantly less 
        development during market downturns. According to Freddie Mac's 
        estimates, this lack of stability would cause multifamily 
        interest rates to increase by 150 basis points and multifamily 
        property values to decrease by as much as 16 percent; and \16\
---------------------------------------------------------------------------
     \16\ Ibid.

  2.  Rental housing would be much more difficult to find and much more 
        expensive. If the Government guarantee were to go away, new 
        construction on multifamily housing would plummet by as much as 
        27 percent, while average rents would rise by as much as 2 
        percent. \17\ And since purely private investors would be less 
        likely to finance lower-end developments in second- and third-
        tier markets, lower-income families would likely see even 
        bigger increases in rent.
---------------------------------------------------------------------------
     \17\ Freddie Mac. ``Report to the Federal Housing Finance Agency: 
Housing Finance Reform in the Multifamily Mortgage Market''. Freddie 
Mac, December 2012.

    It's also important to note that Fannie's and Freddie's current 
multifamily businesses are quite profitable--as they have been 
throughout the housing crisis--and have steadily returned money back to 
the U.S. Treasury in recent quarters. According to 2012 financial 
reports, Fannie Mae's multifamily business reported a net income of 
$1.5 billion last year, \18\ while Freddie Mac reported $2.1 billion. 
\19\ Meanwhile, according to FHFA's own analysis, ``there is little 
inherent value in (Fannie's and Freddie's) current multifamily 
businesses without the Government guarantee.'' \20\
---------------------------------------------------------------------------
     \18\ Fannie Mae. ``Form 10-K: Annual Report Pursuant to Section 13 
or 15(d) of the Securities Exchange Act of 1934''. United States 
Securities and Exchange Commission, December 2012.
     \19\ Freddie Mac. ``Form 10-K: Annual Report Pursuant to Section 
13 or 15(d) of the Securities Exchange Act of 1934''. United States 
Securities and Exchange Commission, December 2012.
     \20\ Federal Housing Finance Agency. News Release: ``FHFA Releases 
Fannie and Freddie Reports on Viability of Their Multifamily Business 
Without Government Guarantees''. Attachment: ``2012 Conservatorship 
Scorecard: The Enterprises' Reports on a Multifamily Future State 
Without a U.S. Government Guarantee''. FHFA, 3 May 2013.
---------------------------------------------------------------------------
Our Plan for Multifamily Housing Finance Reform
    Last month, Enterprise coauthored a detailed plan for multifamily 
housing finance reform, along with members of the Mortgage Finance 
Working Group. The plan was initially drafted as a supplement to the 
bipartisan Housing Finance Reform and Taxpayer Protection Act of 2013 
(S.1217), which preserves a limited and paid-for Government guarantee 
on qualifying multifamily securities. We propose: \21\
---------------------------------------------------------------------------
     \21\ Mortgage Finance Working Group. ``Multifamily Housing Finance 
Reform Proposal for Corker-Warner''. Center for American Progress, 
August 2013. The Working Group's full proposal is available at: http://
www.americanprogress.org/wp-content/uploads/2013/08/MFWG-Corker-Warner-
multifamily-recommendations-Aug1-FINAL.pdf.

    Starting immediately, spin off Fannie's and Freddie's 
        multifamily businesses into two self-contained subsidiaries of 
        their respective corporations. The new entities would maintain 
        the current multifamily products--namely the Fannie Mae DUS 
        Program and the Freddie Mac CME Program K-Series--and contract 
        with Fannie and Freddie to manage the existing multifamily 
---------------------------------------------------------------------------
        assets.

    During a brief transition period, these entities would 
        continue to purchase, securitize, and insure qualifying 
        multifamily mortgage-backed securities, with support from the 
        U.S. Treasury as needed.

    When the public guarantor (the FMIC under S.1217) is fully 
        operational, the insurance function would be transferred to the 
        Federal Government. From that point on, the new entities would 
        have the option of purchasing FMIC insurance on the multifamily 
        securities they issue, backed by the full faith and credit of 
        the U.S. Government. The FMIC maintains all multifamily 
        guarantee fees in a separate insurance fund.

    Over time, the new entities would be required to raise 
        private capital with the option of buying out the Government's 
        interest. Meanwhile, other Government-approved, privately 
        funded companies would have the option of purchasing FMIC 
        insurance on the multifamily securities they issue. As soon as 
        possible, the FMIC would establish a third issuer (beyond the 
        two new entities) to ensure that smaller banks have access to 
        the secondary market for multifamily mortgages.

    By spinning off the GSEs' multifamily businesses, Congress can 
ensure that the multifamily market continues to function smoothly 
through any transition period. By preserving Fannie's and Freddie's 
tried-and-true multifamily products, Congress can provide much-needed 
certainty to multifamily investors, ensuring that money keeps flowing 
into the rental market. And by setting a clear path forward for the 
companies' multifamily businesses--which remain profitable--Congress 
can help Fannie and Freddie keep top talent, retain institutional 
memory, and invest in the staff, systems and technology necessary to 
compete in a constantly evolving market.
    In addition, by opening the Government guarantee to other 
Government-approved issuers down the line, Congress can promote 
competition in the market and protect taxpayers from ``too-big-to-
fail'' bailouts. And by setting up a third approved issuer put in place 
to support smaller lenders, lawmakers can ensure that all communities 
have equitable access to the Government guarantee.
Other Important Components of Any Future System of Multifamily Housing 
        Finance
    There are other important issues that require attention in any 
multifamily reform legislation. These include:
Broad Affordability Mandate for Issuers of FMIC-Insured Multifamily 
        Securities
    A Government guarantee on multifamily securities is remarkably 
valuable. So it makes sense for policy makers to target the benefits of 
that support to the renters who need it most--namely low- and moderate-
income families.
    We propose a broad affordability mandate for all issuers of FMIC-
insured multifamily securities. For each issuer, not less than 60 
percent of the rental units financed through FMIC-insured securities in 
a given year must be affordable to low income families making 80 
percent of AMI or less. This requirement would be assessed at the time 
of origination based on a 30-percent affordability standard and would 
be reported to the FMIC at the end of each fiscal year.
Support for Deeply Affordable Housing for Lower-Income Families
    During the past two decades, Fannie and Freddie have shown that 
investors can finance affordable housing in a way that's both 
responsible and profitable. For very low-income renters below 50 
percent of AMI, however, it's very difficult to make those deals pencil 
out without outside subsidy to help cover operating costs.
    Therefore, instead of mandating that a certain percentage of 
Government-backed issuers serve very low-income families, we recommend 
levying an additional 5-10 basis point fee on all FMIC-insured 
multifamily securities to fund programs that provide housing to 
families earning 50 percent of AMI or less. Specifically, the proceeds 
from that fee would fund the National Housing Trust Fund, the Capital 
Magnet Fund and additional programs to support broad access to safe, 
affordable mortgage credit in low-income communities.
    These funds have the potential to meaningfully expand the supply of 
affordable rental housing in the U.S.--through States for the Housing 
Trust Fund and through community development financial institutions and 
nonprofit housing developers for the Capital Magnet Fund. The Capital 
Magnet Fund is particularly effective at encouraging private investment 
in affordable housing; in the initial round of funding in 2010, 
recipients were able to leverage 15:1 with private capital sources. 
\22\ As originally envisioned, both funds should have received funding 
through assessments on the GSEs' ongoing business, but those 
obligations were suspended when Fannie and Freddie were put into 
conservatorship.
---------------------------------------------------------------------------
     \22\ U.S. Department of the Treasury, Community Development 
Financial Institutions Fund. ``Treasury Officials, Congresswoman Lee 
Announce $80 Million in Awards for Affordable Housing: Inaugural Round 
of Capital Magnut Fund Awards Provides Critical Financing To Meet 
Affordable Housing Need''. CDFI Funds, October 2010. Available at 
http://www.cdfifund.gov/news_events/CDFI-2010-43-Treasury-Officials-
Congresswoman-Lee-Announce-80-Million.asp.
---------------------------------------------------------------------------
    While we don't recommend placing a hard limit on the type of 
multifamily properties the FMIC can insure, there could be a benefit in 
discouraging higher-end properties from accessing the Government 
guarantee. For example, if the majority of units in a multifamily 
property financed by a FMIC-backed security are unaffordable to 
families earning less than 150 percent of AMI, the FMIC could collect 
an additional fee to fund affordable housing programs.
Plans To Reach Underserved Segments of the Multifamily Market
    Private investors have historically done a poor job of serving the 
entire rental market on their own. Certain segments--namely low-income 
communities, rural and Native American communities, subsidized 
affordable multifamily housing and small multifamily housing--have been 
underserved by traditional capital markets, resulting in housing 
scarcity, disproportionately expensive rents, and unacceptably poor 
conditions.
    Fannie and Freddie are critical sources of capital for these 
underserved segments. For example, prior to 2008 Fannie Mae was a 
primary investor in several affordable housing developments in tribal 
lands financed with the Housing Credit. In fact, Fannie was one of the 
only private investors in this market at the time. Over the past two 
decades Enterprise has partnered with Fannie to build or preserve 
nearly 700 affordable homes on Native Lands.
    We recommend addressing this problem through an annual strategic 
planning process. Each year, each approved issuer of FMIC-insured 
multifamily securities should work with the FMIC to create a plan for 
serving underserved market segments. At the end of each year, each 
issuer would report on their performance toward that plan. If the 
issuer does not comply or routinely misses their targets under this 
plan, the FMIC can apply financial penalties or revoke their approved-
issuer status.
    In addition, we recommend mandating that the FMIC establish at 
least one pilot program to test the securitization of small multifamily 
loans, which typically finance rental properties with between 5 and 50 
units. These buildings are a critical source of affordable housing in 
many communities, but they are often difficult to execute profitably 
through traditional capital channels.
Encouraging Investments in Low-Income Housing Tax Credits
    For decades, Fannie Mae and Freddie Mac played a critical role in 
the Housing Credit market. Since its inception in the late 1980s, the 
Housing Credit has been America's main tool for building and preserving 
affordable homes, creating 2.6 million and counting. Each year the 
program finances roughly 90 percent of affordable homes created in the 
U.S., generating 140,000 jobs and $1.5 billion in State and local tax 
revenues in the process. \23\
---------------------------------------------------------------------------
     \23\ National Association of Home Builders.`` The Low Income 
Housing Tax Credit: The Most Successful Affordable Rental Housing 
Production Program in Our Nation's History''. NAHB.
---------------------------------------------------------------------------
    Before the financial crisis, the GSEs provided roughly 40 percent 
of Housing Credit investments producing tens of thousands of affordable 
apartments each year, including in markets with little to no CRA-
related investment. After the financial crisis began, Fannie and 
Freddie all but withdrew from the Housing Credit market. The market has 
since rebounded and is running smoothly today, but it lacks a stable 
entity to keep money flowing into Housing Credit deals during future 
economic downturns.
    To further promote affordable housing, we believe that any future 
system of multifamily housing finance should include rules that 
encourage issuers of FMIC-backed securities to invest in Housing Credit 
deals. As one possible approach, the FMIC could count any affordable 
units financed through Housing Credit investments toward the issuer's 
annual affordability requirement described above.
Promoting Energy Efficiency and Long-Term Sustainability in Multifamily 
        Housing
    There are tremendous economic benefits to investments in energy-
efficient systems for multifamily buildings. That's especially true for 
the existing affordable housing stock, where we're seeing rising 
utility costs straining many owners.
    For example, Enterprise recently extended a line of credit to 
owners of a large multifamily development in Brookline, Massachusetts. 
The owners made an up-front investment of just under a million dollars 
to install energy-efficient boilers, water pumps, and controls. The 
retrofits brought a 25-percent reduction in energy usage in the first 
year, translating to $170,000 in savings. The owners project that 
future savings will stay around that level, meaning they'll recoup 
their investment in less than 6 years.
    And that doesn't even account for the broad social and 
environmental benefits of greener housing. For example, green homes 
have proven to improve a resident's asthma, \24\ cardiovascular health, 
mental health, and other major health issues. \25\ Because low-income 
families have so much to gain from living in healthy, energy-efficient 
homes, we launched the Enterprise Green Communities initiative more 
than a decade ago, and today we're working to make green building the 
norm for our industry.
---------------------------------------------------------------------------
     \24\ Tim Takaro, James Krieger, Lin Song, Denise Sharify, and 
Nancy Beaudet. ``The Breathe-Easy Home: The Impact of Asthma-Friendly 
Home Construction on Clinical Outcomes and Trigger Exposure''. American 
Journal of Public Health, January 2011.
     \25\ Jill Breysse, David E. Jacobs, William Webber, Sherry Dixon, 
Carol Kawecki, Susan Aceti, and Jorge Lopez. ``Health Outcomes and 
Green Renovation of Affordable Housing''. Public Health Reports, 2011.
---------------------------------------------------------------------------
    In recent years, Fannie Mae has been an important partner in that 
effort. Despite clear evidence of the long-term benefits of green 
investments, owners and developers often have difficulty securing 
financing to cover the up-front costs. Fannie is working to solve this 
problem through its Green Refinance Plus program, which helps owners of 
affordable multifamily housing access the capital they need to make 
economically justifiable energy and water retrofits. This also helps 
Fannie's bottom line: the lower operating costs in green multifamily 
properties tend to lower the risk of default.
    The program is still in the pilot phase, but it has already helped 
several developers complete energy-efficiency retrofits that otherwise 
would not be possible. And perhaps most importantly, the program is 
taking steps toward creating a new industry standard by incorporating 
future energy savings into the underwriting and physical needs 
assessments for multifamily developments.
    We believe that Congress should pursue similar programs that 
promote healthy, energy-efficient rental housing with any future 
replacement for Fannie and Freddie to.
Conclusions and Next Steps
    Thank you again for tackling this important issue. The decisions 
made in Congress today on GSE reform will have a profound impact on the 
U.S. housing market and the broader economy, so it's important that we 
get the details right.
    A liquid, stable and affordable market for multifamily mortgages is 
absolutely critical to a well-functioning housing market--and that 
depends on a limited, explicit guarantee. It's also important that any 
reform effort preserves other components of the existing system that 
have proven to work, including Fannie's and Freddie's existing 
multifamily products and underwriting standards and a clear requirement 
that investors who benefit from a Government guarantee support 
affordable rental housing investments.
    That said, housing finance reform on its own will not solve all of 
our Nation's housing problems. We are facing a critical affordable 
housing crisis in this country, with more than a quarter of renters 
living one paycheck away from losing their homes, while rental demand 
is expected to rise exponentially in the coming years. So GSE reform 
must be part of a series of policy changes and investments to address 
the needs of low-income families and communities, including preserving 
and expanding the Housing Credit, reforming rental assistance programs 
and investing in proven housing and community development programs with 
adequate appropriations that help communities build capacity to meet 
their specific housing needs.
    I look forward to working with you Chairman Johnson, Ranking Member 
Crapo, and other Members of the Committee on these and other critical 
reforms. I appreciate the opportunity to testify today and look forward 
to your questions.
               RESPONSES TO WRITTEN QUESTIONS OF
            CHAIRMAN JOHNSON FROM THOMAS S. BOZZUTO

Q.1. Can you share with us any recommendations you have 
regarding the multifamily housing provisions in S.1217?

A.1. As lawmakers look ahead to reforming the housing finance 
system, NMHC/NAA urge them to recognize the unique needs of the 
multifamily industry, an industry that provides housing to 35 
million Americans. The single-family and multifamily sectors 
operate differently, have divergent performance records, and 
require distinct reform solutions. A one-size-fits-all solution 
will not work. The capital sources for multifamily are not as 
wide or as deep as those financing single-family, and the loans 
themselves are not as easily commoditized. In addition, the 
financing process; mortgage instruments; legal framework; loan 
terms and requirements; origination; secondary market 
investors; underlying assets; business expertise; and systems 
are all separate and unique from single-family home mortgage 
activities.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                     FROM THOMAS S. BOZZUTO

Q.1. According to a September 2012 GAO report, multifamily 
housing programs played a large role in helping Fannie Mae and 
Freddie Mac achieve their annual affordable housing goals. As 
the report states, ``multifamily mortgages had a 
disproportionate importance for the housing goals because most 
multifamily housing serves targeted groups.'' Meanwhile, the 
delinquency rates on the GSEs' multifamily mortgages were 
extremely low. Even during the height of the housing crisis, 
less than 1 percent of the GSEs' multifamily mortgages were 
delinquent. Does this demonstrate that a Government-backed 
multifamily housing program can pursue affordable housing goals 
without creating excessive risk of delinquency or default?

A.1. Yes. It's true that multifamily housing is inherently 
affordable, which played a significant role in the low 
delinquency rates for the GSEs when it came to multifamily 
mortgages. In addition, approximately 90 percent of the 
apartment units the GSEs financed--more than 10 million units--
were affordable to families at or below the median income for 
their community. This included an overwhelming number of 
market-rate apartments with no Federal rent subsidies that were 
produced with virtually no risk to Federal taxpayers.

Multifamily Housing Provides a Diversity of Credit Risk

    One of the ways the GSEs were able to produce such a 
stellar performance record in multifamily is by building a 
balanced book of business where lower-risk, higher quality 
loans enabled them to take on riskier loans like deeply 
targeted affordable housing properties, such as Section 8 and 
Low-Income Housing Tax Credit properties. This diversification 
of credit risk across the guaranteed portfolio (both 
securitized and balance sheet) is necessary in order to provide 
competitive and affordable loans to a wide range of borrowers, 
properties, and locations.
    Many targeted affordable loans have demonstrated strong 
performance, but due to their income restrictions and other 
factors, they present greater risk to the lender. Often less 
experienced and financially strong owners, weaker market 
locations, and typically higher operating costs are what create 
greater risk both during the loan term and at maturity. In 
addition, the value of targeted affordable properties does not 
typically appreciate like market-rate apartment properties, 
which adds to the loan maturity risk.
    Higher quality loans with lower-risk profiles are not only 
luxury rental communities, they include a wide range of 
properties. They can be newer or older, with significant 
amenities, or their location can be such that amenities are not 
significant to the value. High quality loans often include 
properties with rents serving a range of income levels, from 
workforce households to meeting the housing needs of families 
with incomes above the area median income. Most properties 
built after 1980 typically have some set-aside of units that 
meet the needs of lower-income households.

Multifamily Programs Help To Provide Capital in Underserved Areas

    Just as critical, the GSEs' multifamily programs have been 
able, through their broad platforms, to provide capital for 
projects located in secondary and tertiary markets that do not 
meet the credit or return standards required by many private 
capital debt providers. The GSEs have to vary their portfolio 
through being active in geographic diversification and do so in 
as many markets as possible--avoiding any geographic 
concentration. This has the added impact of providing capital 
to preserve and support rental housing in these markets. Much 
of this rental housing is targeted at moderate and lower-income 
households and is not as focused on meeting goals as it is on 
providing capital on good quality multifamily properties in 
sound rental housing markets.
    In addition, the extent to which the goals have an impact 
on the performance of the GSEs needs to be put into the context 
of a mortgage lender that cannot diversify their debt 
investments beyond multifamily rental housing. This, along with 
the goals, creates the need to expand their debt offerings in 
order to cover a broader range of market locations and meet the 
needs of borrowers.

Q.2. Could you describe what the multifamily housing market 
would have looked like--before, during, and after the crisis--
if the GSEs had not had affordable housing goals?

A.2. It is difficult to quantify the impact the affordable 
housing goals have had on the GSEs' multifamily lending 
activities. The GSEs' affordable housing financing is the 
result of many factors other than the influence of the 
Government-mandated goals. Since the early 1990s the primary 
focus of the GSEs' multifamily financing activities has been on 
meeting the sector's liquidity needs. It is this comprehensive 
approach that has had a significant impact on financing 
workforce and affordable rental housing.

Multifamily Housing Is Inherently Affordable

    Without question, an overwhelming number of apartment 
properties are affordable to households below the area median 
income. The majority of rental housing units are also 
affordable at rents between 60 to 100 percent of area median 
income and the demand for rental housing is only expected to 
grow in the coming decade and beyond.
    The current multifamily lending structure has allowed the 
GSEs to diversify the risk in their lending activities, giving 
them greater reach to address affordable housing needs. Without 
this diversification, the expense associated with higher risk 
affordable housing would have been higher mortgage costs.
    In addition, even when the regulator specifically asked 
that there be a greater focus on credit, over meeting goals, 
the GSEs multifamily programs continued to implement sound 
credit policy and serve the rental housing needs of America's 
families. All this reflects the strength of the multifamily 
market and helps emphasize that it is inherently affordable.
    It is important to note that certain activities may have 
been impacted more than others if the affordable housing goals 
were not in place. For example, a large number of older 
properties would likely not have received important 
investments, fewer private activity bonds would have been 
issued to support low-income rental housing, and owners in 
secondary markets would not have had access to competitive 
mortgage capital. Although it would be difficult to quantify, 
the goals may also have provided additional assistance to both 
the LIHTC and the Section 8 Project-based housing program.
    One thing is clear, multifamily housing's core business 
practices support lending on workforce housing, and housing in 
all markets, during all economic conditions. The broad 
multifamily lending platform has helped the GSEs manage risk 
and ensured that there was a sufficient supply of liquidity--
before, during and after the most recent crisis. It is this 
comprehensive approach, more than the affordable housing goals 
that support the production and the preservation of multifamily 
affordable rental housing.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR COBURN
                     FROM THOMAS S. BOZZUTO

Q.1. In addition to the financing activities of the GSEs, the 
Federal Government has a number of direct spending programs and 
tax expenditures to support multifamily housing. An essential 
component of housing finance reform must be an examination of 
existing Federal subsidies for multifamily housing. Please 
identify all of the Federal programs and tax expenditures that 
support multifamily housing and the total Federal cost of these 
programs.

A.1. The Federal Government supports rental housing using 
direct loans, loan guarantees, and grants through a variety of 
programs designed to support broad and discrete housing needs 
including senior assisted living, military housing, farm labor 
housing, low income, and housing for person with disabilities. 
The primary programs NMHC/NAA members engage with are listed 
below.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



Department of Housing and Urban Development

    Federal Housing Administration: Section 221(d)(3) and (4): 
The Section 221(d)(4) program insures mortgage loans to 
facilitate the new construction or substantial rehabilitation 
of multifamily rental or cooperative housing for moderate-
income families, elderly, and the handicapped. The program 
insures loans made to nonprofit and cooperatives (Section 
221(d)(3) profit-motivated borrowers by private lenders 
(Section 221(d)(4)).
    Federal Housing Administration: Section 232/223(f): The 
Section 223(f) program insures loans for the purchase or 
refinancing of existing multifamily rental properties financed 
with conventional or FHA loans.
    Section 8: Project-Based Voucher Program: The PBV Program 
operates as a contract between a local housing authority and a 
private property owner, wherein a tenant will pay 30 percent of 
their monthly income and HUD will pay the remaining cost for 
that unit. The subsidy remains on the unit for a contractual 
term, and is not portable with the tenant.
    Section 8: Tenant-Based Voucher Program: The Tenant-Based 
Voucher Program provides a rent subsidy to a family to use for 
any qualifying rental unit, wherein the family will pay 30 
percent of their monthly income toward their rent and HUD will 
pay the remaining cost for that unit. The subsidy is portable 
with the tenant, who can move from one property to another and 
apply their subsidy as appropriate.

Department of Agriculture, Rural Housing Service

    Section 538 Loan Guarantee Program: The 538 Program 
encourages private sector financing for rural rental housing 
for low- and moderate-income families. Approved activities for 
financing include construction of new rental housing, 
acquisition, and rehabilitation of existing rural rental 
properties, Eligible borrowers for this program include 
Individuals, general and limited partnerships, corporations, 
LLC's, trusts, nonprofits, tribes, and public bodies.
    Section 515 Direct Loan Program: The 515 Program makes 
direct, competitive mortgage loans to provide affordable 
multifamily rental housing for very low-, low-, and moderate-
income families, elderly persons, and persons with 
disabilities. Individuals, partnerships, limited partnerships, 
for-profit corporations, nonprofit organizations, limited 
equity cooperatives, Native American tribes, and public 
agencies are eligible to apply.
    [For more information on these programs, please contact the 
Department of Housing and Urban Development and the Department 
of Agriculture, Rural Housing Service.]
    With respect to tax expenditures that impact multifamily 
housing, these must be divided into two categories: (1) tax 
expenditures that are directly targeted to multifamily housing; 
and (2) tax expenditures that can benefit owners, operators and 
developers of multifamily housing but are not uniquely designed 
to benefit the apartment sector (e.g., like-kind exchanges, the 
deduction for taxes on real property, and the exclusion of 
capital gains at death). For simplicity's sake, the remainder 
of our response is focused on the former category.
    To identify the tax expenditures specifically targeted to 
multifamily housing and their cost, we have looked to Estimates 
of Federal Tax Expenditures for Fiscal Years 2012-2017, which 
was prepared by the staff of the Joint Committee on Taxation 
and released February 1, 2013 (JCS-1-13). The value of tax 
expenditures cited covers the 2013 to 2017 period. Our analysis 
of this document indicates that the following tax expenditures 
are directly targeted to multifamily housing:

    Credit for low-income housing ($36.5 billion);

    Exclusion of interest on State and local government 
        qualified private activity bonds for rental housing 
        ($5.2 billion); and,

    Depreciation of rental housing in excess of 
        alternative depreciation system ($21.0 billion).

Q.2. Would you agree many of these Federal programs, such as 
Low-Income Housing Tax Credits and tax-exempt bonds, have the 
same purpose and generally overlap one another?

A.2. We would disagree with the premise that many of these 
Federal programs are duplicative and make the argument that 
each serves to benefit a segment of renter populations. 
Accordingly, the various housing programs are actually quite 
complementary of one another. An analysis of each type of 
incentive is illustrative.
    The tax provision allowing for 27.5-year depreciation of 
rental property, for example, is designed to enable investors 
in rental housing to recover the cost of buildings serving the 
broadest spectrum of renters. Lengthier depreciation schedules 
would make multifamily housing developments less attractive 
relative to other types of investments. The provision helps to 
ensure that the Nation can continue to provide safe and decent 
housing to 18 million households. It is noteworthy that whereas 
just 158,000 apartments were delivered in 2012, an estimated 
300,000 to 400,000 units must be built each to year to meet 
expected demand.

Low-Income Housing Tax Credit

    Turning to programs targeted to meet the needs of income-
restricted residents, the Low-Income Housing Tax Credit (LIHTC) 
is a public-private partnership program designed to serve 
families with incomes of 60 percent of area median income or 
less. As a key driver of the production of affordable units, 
the vast majority of which would otherwise not be constructed, 
the LIHTC program has done so admirably, financing more than 
2.6 million units since its inception in 1986.
    According to a New York University Furman Center for Real 
Estate and Urban Policy study, What Can We Learn About the Low-
Income Housing Tax Credit Program by Looking at the Tenants? 
(October 2012), which analyzes the program's performance in 16 
States, 43 percent of LIHTC units serve households with incomes 
of between 0 percent and 30 percent of area median income.

Section 8 Housing Voucher Program

    The Section 8 Housing Voucher Program has long served as 
America's primary rental subsidy program. Funded by HUD and 
administered by local public housing authorities, the program 
provides subsidized rents for qualifying low-income families in 
private rental housing, including apartments. The Section 8 
program is required to distribute 75 percent of vouchers to 
those with incomes of 30 percent or less of area median income.
    This public-private partnership has the potential to be one 
of the most effective means of addressing our Nation's 
affordable housing needs and supporting mixed-income 
communities. However, the program's potential success is 
limited by too many inefficient and duplicative requirements, 
which discourage private providers from accepting vouchers. 
These include a required three-way lease between the provider, 
resident, and the public housing authority; repetitive unit 
inspections; resident eligibility certification and other 
regulatory paperwork. Collectively, these make it more 
expensive for a private owner to rent to a Section 8 voucher 
holder.
    The program has also been plagued with a flawed and 
volatile funding system that has undermined private sector 
confidence in the program. With Congress focused on austerity 
measures, insufficient funding is expected to be worse in the 
near-term budget cycles.
    Commonsense reforms that could help control costs, improve 
the program for both renters and property owners and increase 
private housing participation include: (1) putting a reliable 
funding formula in place; (2) streamlining the property 
inspection process; (3) simplifying rent and income 
calculations; (4) reducing costly Limited English Proficiency 
(LEP) translation requirements; and, (5) extending the contract 
term for project-based vouchers from 15 to 20 years. According 
to the Congressional Budget Office (CBO), these reforms would 
reduce Section 8 program costs by more than $3 billion over 5 
years.

FHA Multifamily Programs

    The FHA multifamily programs (Section 221(d)(3) and (4) and 
Section 232/223(f)) continue to be a credible and reliable 
source of construction and mortgage debt. FHA not only insures 
mortgages, but it also builds capacity in the market, providing 
developers with an effective source of construction and long-
term mortgage capital. In normal capital markets, FHA plays a 
limited, but important, role in the rental housing sector. 
During the economic crisis, however, FHA became virtually the 
only source of apartment construction capital. Applications 
have increased from $2 billion annually to $10 billion, and HUD 
anticipates that demand for FHA multifamily mortgage insurance 
will remain high for the next several years.
    Since its inception in 1934, FHA has insured over 53,000 
multifamily mortgages and has been a cornerstone for the 
construction and permanent financing and refinancing of 
apartments. According to HUD, FHA holds approximately 13,000 
multifamily mortgages in its portfolio (compared to 4.8 million 
single-family mortgages). While it accounts for 9.2 percent of 
the total outstanding multifamily mortgage debt, it is a 
material and important source of capital for underserved 
segments of the rental market.
    FHA multifamily is best known for offering an alternative 
source of construction debt to developers that supplements bank 
and other private construction capital sources. It also serves 
borrowers with long-term investment goals as the only capital 
provider to offer 35-40-year loan terms. FHA lending is 
essential to borrowers in secondary markets, borrowers with 
smaller balance sheets, new development entities, affordable 
housing developers and nonprofit firms, all of which are often 
overlooked or underserved by private capital providers.
    FHA's Multifamily Programs have continually generated a net 
profit, and have met all losses associated with the financial 
crisis with reserves generated by premiums paid through the 
loan insurance program structure. Because premiums have 
consistently reflected the risk associated with the underlying 
loans, and because underwriting requirements have remained 
strong within the program, FHA's Multifamily Programs are able 
to operate as self-funded, fully covered lines of business at 
HUD. Some programs have struggled during the real estate 
downturn, however, any losses have been covered by the capital 
cushion the multifamily programs collectively generate.

Rural Rental Housing Programs

    The Guaranteed Rural Rental Housing Program (Section 538) 
and Rental Housing Loan Program (Section 515), administered by 
the Rural Development Housing and Community Facilities Programs 
within the U.S. Department of Agriculture, are important 
programs that encourage commercial financing of rural rental 
housing.
    The Section 538 program is focused on affordable housing 
for low- and moderate-income rental populations. While HUD has 
several multifamily mortgage insurance programs, none of these 
programs can take the place of the Section 538 program. HUD's 
programs are designed for larger, more expensive properties 
than are generally seen in rural areas.
    Section 515 is one of the few resources that enable very 
low-income and low-income renters in rural America to access 
decent, safe and affordable housing. The Section 515 program 
also reduces homelessness and overcrowding.

LIHTC and Tax-Exempt Housing Bonds

    Finally, the question above specifically asks whether the 
LIHTC and tax-exempt housing bonds have the same purpose and 
overlap. Just as is the case with the various housing 
incentives, tax-exempt bonds enable a key prong of the LIHTC 
program, the so-called 4-percent credit, to operate.
    The LIHTC has two components: (1) a 9-percent tax credit 
that subsidizes 70 percent of new construction and cannot be 
combined with any additional Federal subsidies; and (2) a 4-
percent tax credit that subsidizes 30 percent of the unit costs 
in an acquisition of a project or a new development financed in 
conjunction with tax-exempt private activity housing bonds.
    Whereas States are limited in the amount of 9-percent 
LIHTCs they may award, there is no limit applicable to 4-
percent LIHTCs. Thus, so long as a State has not exceeded its 
overall cap on private activity bonds, the 4-percent LIHTC 
program can enable the overall LIHTC program to finance the 
production of additional units. Investors are willing to accept 
lower returns applicable to private activity bonds because tax 
is not owed on interest paid. These lower returns, however, are 
exactly what make the underlying tax credit projects 
economical.

Q.3. Would you agree consolidation of these programs could 
achieve efficiencies with which the Federal Government could do 
``more with less,'' i.e., help more families without needing to 
increase program funding?

A.3. Ensuring taxpayer dollars are utilized in the wisest 
possible manner must be of paramount concern to Congress and 
all Americans, particularly at a time of high national 
deficits. While we welcome the opportunity to work with policy 
makers to improve the effectiveness of the Nation's housing 
programs, ensuring all Americans have access to quality rental 
housing is critical, particularly when current demand for such 
housing is literally surging and supply is falling short.
    Given the discussion above that makes the case that the 
various housing programs complement one another, we believe 
that policy makers should look to improve these programs before 
they look to consolidation. The bursting of the housing bubble 
exposed serious flaws in our Nation's housing finance system. 
Yet, those shortcomings were largely confined to the 
residential home mortgage sector. The multifamily housing 
programs administered by the GSEs, HUD, RHS, and others worked 
in concert to meet America's increasing demand for rental 
housing during the crisis, and continue to address the needs of 
underserved or unserved populations today. Because the 
financing structures used by the multifamily industry are often 
as varied as the properties themselves, programs designed to 
meet the needs of a certain rental class often do so in the 
absence of other programs. This dynamic must be acknowledged in 
any debate over consolidation or elimination of housing 
programs, taking in to account the populations that stand to be 
harmed by such actions.
    While our testimony before the Committee outlines our 
recommendations for reforming the Government-Sponsored 
Enterprises' multifamily programs, we would like to use this 
opportunity to offer our support to make a critical improvement 
to the Low-Income Housing Tax Credit (LIHTC) program. As is 
noted above, the LIHTC is composed of a 9 percent and a 4-
percent credit. However, because these rates float and are not 
fixed, their value can be reduced by as much as 50 basis 
points, which, in turn, reduces the amount of resources 
available to finance affordable housing. Notably, in January 
2013, Congress enacted the American Taxpayer Relief Act of 2012 
that extends the temporary fixed rate on the 9-percent tax 
credit, which was first enacted as part of the Housing and 
Economic Recovery Act of 2008, for projects that received a 
LIHTC allocation prior to January 1, 2014. Given the current 
low interest rate environment, the actual value of the credit 
is likely to fall below the 9-percent mark for projects 
receiving an allocation following the deadline, reducing 
investors' activity in the affordable housing sector. In fact, 
in the absence of the temporary 9-percent credit, the credit 
would actually be worth 7.59 percent as of November 2013. The 
4-percent credit is currently worth 3.25 percent.
    For this reason NMHC and NAA propose to make the fixed 9-
percent credit permanent and to extend the fixed rate policy to 
the 4-percent tax credit, keeping financing flowing for 
acquisitions. S.1442, Improving the Low Income Housing Tax 
Credit Rate Act, introduced by Senator Cantwell, makes these 
changes, and we urge Congress to enact it as soon as possible.
    In addition, NMHC and NAA have continued to support cost 
effective reforms to the Section 8 Housing Choice Voucher 
programs.
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
                CHAIRMAN JOHNSON FROM E.J. BURKE

Q.1. Can you share with us any recommendations you have 
regarding the multifamily housing provisions in S.1217?

A.1. The recent financial crisis and recession demonstrated 
that only the Federal Government can ensure liquidity through 
all market cycles. The provisions of S.1217 appropriately 
provide for a Federal backstop to ensure liquidity for 
multifamily housing finance in all markets. We also support the 
provision that would require the Federal guarantee to be paid 
for--thereby helping capitalize the Federal insurance fund, as 
well as promoting competition among capital sources in the 
multifamily finance market. In addition, S.1217's approach that 
preserves and carries over the GSEs' multifamily businesses 
(e.g., the Delegated Underwriting and Servicing (DUS) and 
Capital Markets Execution/K-Deal programs), with a Government 
backstop, would continue to provide liquidity in a broad range 
of markets, geographic locations, and through various market 
conditions. We strongly support these provisions.
    We note, however, that the multifamily businesses of both 
GSEs go beyond the DUS and CME/K-Deal programs identified in 
S.1217. For example, the GSEs operate affordable lending 
programs with additional lender networks. Thus, we recommend 
that any legislation specify that the multifamily businesses of 
Fannie Mae and Freddie Mac be moved over to new or successor 
entities pursuant to the legislative proposal. By doing so, the 
activities that the GSEs engage in to serve various geographic 
regions, specialized housing (e.g., seniors housing, student 
housing) and smaller properties could be transferred to the 
entities and serve as a foundation to serve such markets going 
forward--if so directed by Congress.
    We also note that S.1217 provides that the GSE's 
multifamily businesses would be transferred to the Regulator 
(FMIC) in their entirety and there would be no private capital 
at risk for multifamily backed securities. Importantly, 
legislators should distinguish the roles between the Government 
guarantor/regulator and private sector participants. The 
Government agency should retain the role of regulator, 
Government guarantor and administrator of an insurance 
fund(s)--but other business roles should be transferred to 
private sector entities. Specifically, the bill should direct 
the Government agency to establish/approve multiple (at least 
two) secondary mortgage market entities to serve as issuers in 
the multifamily housing finance market. In contrast, S.1217 
provides that for single family mortgage loans, these functions 
would be performed by privately capitalized secondary market 
entities with access to a limited Government guarantee. 
Authorizing multiple secondary market entities that pay 
guarantee fees to access the Government guarantee would foster 
competition among such entities and with other sources of 
capital in the multifamily finance market.

Q.2. Each of you propose to establish new issuers in a reformed 
multifamily housing finance system. Can you discuss how the new 
issuers will attract private capital, how many you anticipate 
to form, and how small lenders could participate in this 
system?

A.2. As we pointed out in our written and oral testimony, there 
is strong demand for multifamily housing in the U.S. today and 
this demand is expected to continue for many years to come. To 
meet this demand, a significant amount of capital must be 
raised to finance a growing population of renter households. 
This capital must be longer term in nature. With access to a 
limited Government guarantee, private issuers can fund a 
significant portion of their capital structure without being 
required to pay onerous liquidity premiums that are associated 
with longer duration liabilities. With strong demand for 
mortgages and a stable funding source, private capital can 
focus on managing credit risk instead of managing liquidity 
risk.
    With respect to private capital, we believe that the new 
issuers should seek to attract private capital in three 
respects.
    First, they should attract private capital to share in the 
credit risk of the multifamily finance transaction. To the 
extent that the GSEs' existing multifamily platforms are 
preserved and carried over into the new system, the new private 
issuers should be able to continue to attract private capital 
that provides a buffer to protect taxpayers as part of core 
business of the new issuers.
    Second, the historical credit performance and prospects 
going forward (dependent on policy maker decisions) will likely 
attract private investors to fund the capital structure of the 
new issuers and/or successors to the current GSE multifamily 
businesses. The existing multifamily books of the GSEs 
(multifamily loans and securities) could be used to transition 
to the future state where, for example, the new issuers could 
earn an asset management fee to help capitalize its new 
operations.
    Third, that the approved new issuers (whether successors to 
the GSE multifamily platforms or new market entrants) would be 
able to access a Government guarantee would attract capital to 
the sector and to the entities themselves. In this regard, we 
would recommend that the platforms of the new issuers be broad 
enough (and the regulatory regime be flexible enough) to 
attract private capital to the new entities. That these 
entities would be mono-line institutions (in the housing 
finance sector, whether as multifamily or single-family and 
multifamily finance entities), charged premiums when accessing 
the Government guarantee, subject to significant regulation, 
and required to hold meaningful capital, would appropriately 
confine their scope. Because private capital is opportunistic, 
policy makers should exercise care in order to enable the new 
entities to attract capital and operate as viable entities.
    With regard to the number of such entities, we believe that 
the regulator should be authorized to approve enough entities 
that would provide stability to the multifamily finance market, 
but balanced with the goals of competition among the range of 
capital sources that support this market, as well as the 
financial viability of approved, privately capitalized 
entities. At a minimum, we believe there should be no less than 
two issuers and likely more than two.
    For the small multifamily loan market, we would note that 
there is a significant amount of lending that occurs today. 
According to MBA research, small multifamily loan lenders 
(typically, community banks/depository institutions), defined 
as lenders with an average loan size of $1 to $3 million, made 
47 percent of all 2012 multifamily loans (over 19,000 loans; 
$34 billion in volume) and the very small loan lenders (those 
with an average loan size of $1 million or less) made an 
additional 26 percent of all 2012 multifamily loans 
(approximately 10,800 loans; $6 billion in volume). These loans 
typically have shorter terms, simpler loan documentation, and 
often are recourse loans. However, a large portion of this 
lending is believed to occur in larger, urban markets. 
Attracting multifamily capital to rural areas or very small 
markets is difficult today. Part of this difficulty may be 
attributed to the fact that without access to longer term 
capital, Community Banks have avoided long term multifamily 
loans. Other natural sources of long term mortgage capital 
(Life Insurance Companies and CMBS lenders) have difficulty 
with the economics of small loans. To remedy this, the 
Regulator could work with issuers to create programs where 
local lenders could partner with issuers that either specialize 
in small loans or offer small loans as part of a broader loan 
offering.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                        FROM E.J. BURKE

Q.1. According to a September 2012 GAO report, multifamily 
housing programs played a large role in helping Fannie Mae and 
Freddie Mac achieve their annual affordable housing goals. As 
the report states, ``multifamily mortgages had a 
disproportionate importance for the housing goals because most 
multifamily housing serves targeted groups.'' Meanwhile, the 
delinquency rates on the GSEs' multifamily mortgages were 
extremely low. Even during the height of the housing crisis, 
less than 1 percent of the GSEs' multifamily mortgages were 
delinquent. Does this demonstrate that a Government-backed 
multifamily housing program can pursue affordable housing goals 
without creating excessive risk of delinquency or default?

A.1. By its very nature, multifamily rental housing tends to be 
affordable, with 93 percent of multifamily units having rents 
affordable to households earning area median incomes or less. 
Overall, renters' median household income is about half of that 
of homeowners. As a result, the GSEs' multifamily finance 
activities historically assisted their efforts to meeting the 
affordable housing goals, particularly when compliance with the 
affordable housing goals were based on the combined 
affordability of their single-family and multifamily mortgage 
purchase transactions. We agree that the GSEs' multifamily 
businesses have largely been able to meet applicable affordable 
housing requirements (which have changed over time by 
regulation or statute) while maintaining strong credit 
performance--with current delinquency rates at less than 20 
basis points.
    We support affordability in the multifamily rental housing 
and believe that new or successor issuing entities should focus 
on the workforce segment of the multifamily housing market. We 
recommend an affordability approach in which the vast majority 
of the annual cohort of an entity's multifamily activities 
would finance properties with units affordable to families at 
or below 100 percent of area median income (i.e., the lower 
half of the income spectrum). Other affordability thresholds 
also could be appropriate. Overall, we recommend a rational 
approach that clearly advances policy objectives to support 
workforce rental housing and provides flexibility, as 
determined by the regulator subject to market conditions, 
during periods of market disruption and illiquidity. 
Affordability standards, including the overall number of such 
requirements, should also be balanced with the need of the new 
or successor entities to attract private capital, mitigate 
potential market distortions, and prudently manage credit risk.
    To the extent that Congress establishes new affordable 
housing goals or other affordability requirements, we would 
support a regime that would incentivize the new issuers to 
serve the broad multifamily housing finance market, rather than 
restricting the entities to narrow market segments. 
Importantly, neither the statute nor the regulatory regime 
should be overly prescriptive or excessive in implementing an 
affordability objective. For example, any affordability 
requirement should not be structured to apply on a property-by-
property basis (such as loan or AMI limits at the property 
level). In addition, the Government guarantee on a particular 
transaction or security should not be tied to compliance with a 
particular affordability standard, as this could create 
significant uncertainty for investors relying on the security-
level guarantee. (If an issuer pays a guarantee fee/premium to 
the regulator/guarantor for a particular transaction, the 
guarantee should attach.) The issuer itself would be subject to 
any governing affordability requirements. We would be pleased 
to discuss in greater detail possible affordability-related 
requirements.

Q.2. Could you describe what the multifamily housing market 
would have looked like--before, during, and after the crisis--
if the GSEs had not had affordable housing goals?

A.2. While the affordable housing goals have clearly had an 
impact on the GSEs and the mortgage market, it is difficult to 
determine what the market would have looked like absent the 
goals. This is further complicated by the fact that the 
affordable housing goals were modified a number of times since 
they were first statutorily enacted in 1992. A fundamental 
change also occurred as part of the Housing and Economic 
Recovery Act of 2008, which decoupled the single-family 
mortgage housing goals from those that govern the GSEs' 
multifamily finance activities.
    A core strength of the GSEs' multifamily businesses has 
been that they were a countercyclical source of liquidity to 
the broad multifamily housing market, including to affordable 
rental units, while maintaining strong credit and underwriting 
discipline. The affordable housing goals, along with other 
mission requirements, influenced the businesses lines to 
provide liquidity to market segments that, absent such 
requirements, may not have been pursued, such as mortgages on 
very low-income properties or loans that were less economically 
attractive. In the multifamily business lines, the GSEs were 
largely able to balance the various mission requirements, while 
running profitable businesses. To the extent that Congress 
considers any affordability regime, we urge a balanced approach 
that supports a sustainable multifamily finance system.

Q.3. It appears the GSEs played an important countercyclical 
role during and after the 2008 housing crisis. In 2009, the 
GSEs financed about 80 percent of the multifamily loans 
originated that year--preventing a terrible crisis from getting 
even worse. But by 2012, the GSEs had reduced their role and 
were only financing 44 percent of the multifamily loans 
originated that year. What factors allowed the GSEs to play 
such an effective countercyclical role?

A.3. The GSEs served a countercyclical role during the 
financial crisis as providers of liquidity in the multifamily 
housing finance market, when other capital sources pulled back. 
And since the crisis, their market share has trended downward, 
even as overall multifamily origination volumes have increased. 
As the market has stabilized, other lending sources have 
increased market share, with non-GSE capital sources competing 
vigorously with Fannie Mae and Freddie Mac to finance 
multifamily properties. We believe several factors allowed the 
GSEs to serve a countercyclical role.
    Government Guarantee. A Government guarantee (an explicit 
guarantee beginning in September 2008) that backed the 
multifamily finance activities of the GSEs enabled them to 
provide this countercyclical role in the market. To ensure that 
there is countercyclical liquidity in the market, the Federal 
Government should provide a guarantee on mortgage-backed 
securities. We believe that this Government backstop should be 
available at the mortgage-backed securities level at all times 
to ensure liquidity in the multifamily market.
    Scalability, Infrastructure, and Expertise. The 
infrastructure and resources (including their DUS and Program 
Plus partnerships) of the GSEs were scalable, enabling them to 
play the countercyclical role that they did during the 
financial crisis. Such resources include the talent and 
expertise of their staff that have enabled the multifamily 
businesses to provide ongoing liquidity, maintain credit 
discipline, and serve a countercyclical role.
    While private capital sources should clearly continue to 
play a substantial and predominant role in the multifamily 
finance market (as is increasingly the case), new entities with 
access to a security-level Government guarantee should have the 
capability to scale up as necessary when market disruptions 
occur. This effectively requires that the entities be viable, 
privately capitalized business that can function during 
``normal'' market conditions as well. The nature of multifamily 
lending (and commercial real estate finance generally) is such 
that it is extremely difficult to expand activities in an 
expedited manner. A mechanism that remains dormant, but called 
to rapidly expand during market disruptions in order to meet 
the needs of a deep and complex market, would not be a viable 
option.
    Broad Mission Purposes. The public mission of the GSEs, 
particularly their ``liquidity'' mission specified by statute, 
enabled the GSEs to play a countercyclical role in multifamily 
finance. The charters of both GSEs specify the following public 
purposes: (1) To provide stability in the secondary market for 
residential mortgages; (2) to respond appropriately to the 
private capital market; (3) to provide ongoing assistance to 
the secondary market for residential mortgages (including 
activities relating to mortgages on housing for low- and 
moderate-income families involving a reasonable economic return 
that may be less than the return earned on other activities) by 
increasing the liquidity of mortgage investments and improving 
the distribution of investment capital available for 
residential mortgage financing; and (4) to promote access to 
mortgage credit throughout the Nation (including central 
cities, rural areas, and underserved areas) by increasing the 
liquidity of mortgage investment and improving the distribution 
of investment capital available for residential mortgage 
financing.
    The GSEs' mission--to provide liquidity, stability, and 
affordability to the residential (both single-family and 
multifamily) mortgage markets--has remained in effect during 
the financial crisis. While we do not believe that the status 
quo should be maintained in the future state of housing 
finance--and Congress should proceed with deliberate speed to 
determine the scope and purposes of any future secondary market 
entities--we believe that a sufficiently broad scope and 
purpose would be necessary to ensure liquidity in all markets 
and economic cycles.

Q.4. What steps do you think Congress can take to make sure 
that some entity--whether it is Fannie Mae, Freddie Mac, or 
some new entity--plays the same kind of countercyclical role in 
the multifamily housing market as we move forward?

A.4. All of the factors identified in response to question 
three above would facilitate the ability of future entities to 
play a countercyclical role in the multifamily housing market 
moving forward. In other words, (1) a Government guarantee, (2) 
scalability, stable infrastructure and multifamily finance 
expertise, and (3) broad business/mission scope, would all be 
critically important in ensuring countercyclical liquidity in 
the future of multifamily housing finance.
    In addition, we believe that policy makers should ensure 
the ongoing stewardship of resources that support the 
multifamily market, utilizing them to transition to a 
sustainable multifamily housing finance system. While the 
current state of the GSEs should not last indefinitely, the 
resources of the GSEs, as taxpayer assets, should be preserved 
to support an orderly transition to a new mortgage finance 
system. The value in the multifamily platforms should be 
preserved in order to ensure an orderly, stable transition that 
does not foreclose options for Congress. With the importance of 
liquidity, stability and affordability in the multifamily 
housing market, we believe that FHFA, the Administration and 
Congress should proceed with caution, avoiding risks that come 
with experimentation. Regulatory or legislative actions that 
could substantially jeopardize the viability and value of key 
resources within the GSEs' multifamily businesses should be 
avoided. Blunt or dramatic changes imposed in conservatorship, 
for example, would be highly disruptive, risk the loss of 
significant talent at the GSEs, and reduce the value of 
taxpayer assets. While policy makers should take steps to 
facilitate the transition forward, the do no harm principle 
should equally govern.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR COBURN
                        FROM E.J. BURKE

Q.1. In your written testimony, you supported privatizing the 
multifamily businesses of the GSEs. Please describe why you 
believe the Federal Government should not operate a 
securitization process in the multifamily sector.

A.1. MBA strongly supports an explicit Government guarantee for 
multifamily loans. We also support an overall approach that 
supports establishment of premiums paid into a Government-
administered FDIC-like insurance fund, oversight by the FMIC as 
a strong regulator, and recognition of the value and retention 
of the GSEs' multifamily executions (e.g., Delegated 
Underwriting and Servicing and Capital Markets Execution/K-
Deals).
    We believe, however, that the actual business of financing 
multifamily properties should be performed by private sector 
entities, and we would urge that the statutory language 
explicitly distinguish between the roles of the Government 
guarantor/regulator and new private sector multifamily 
entities. That is, the Federal Government agency should serve 
as regulator, guarantor and administrator of an insurance 
fund--but other roles should be performed by private sector 
businesses.
    Among other things, we believe that the Federal 
Government's footprint in housing finance should be reduced. 
Placing and operating the multifamily businesses within a 
Government agency would be counterproductive toward this 
objective.
    The nature of multifamily finance lends itself to private 
sector-driven activities. Multifamily loans have much larger 
balances than single-family mortgages, have heterogeneous 
collateral and involve in-depth property-specific underwriting. 
The staff resources and expertise necessary (e.g., 
underwriters, credit officers, asset managers) would be 
extensive and would be more efficiently executed by private 
sector participants, rather than through a large Federal 
workforce.
    Thus, privately capitalized secondary market entities would 
underwrite (directly and/or through delegation to originators), 
purchase multifamily mortgages, aggregate loans, manage and 
distribute credit risk, credit enhance, and structure and issue 
Government-backed MBS that support the multifamily market. 
These entities, of course, would be subject to comprehensive 
regulation by the Government agency/guarantor.
    Authorizing multiple secondary market entities--that pay 
guarantee fees to access the Government guarantee--would also 
foster competition among such entities and with other sources 
of capital in the multifamily finance market. By contrast, a 
Government-run multifamily finance operation would be less 
nimble and run a greater risk of either crowding out other 
sources of capital or having a diminished impact.
    Finally, the current multifamily platforms of the two GSEs 
could be transferred into new privately capitalized entities. 
Moving these businesses to the private sector (through a sale 
or public offering) with continued access to a Government 
guarantee would likely return substantial capital to the U.S. 
Treasury.
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
               CHAIRMAN JOHNSON FROM TERRI LUDWIG

Q.1. Can you share with us any recommendations you have 
regarding the multifamily housing provisions in S.1217?

A.1. We are pleased that S.1217 preserves an explicit, limited 
and paid-for Government guarantee on qualifying multifamily 
mortgage-backed securities. That said, we have three serious 
concerns about the bill's impact on the multifamily market as 
currently written.
    First, as envisioned in the legislation, the Federal 
Mortgage Insurance Corporation (FMIC) is primarily an insurance 
and regulatory entity, with no apparent expertise in 
underwriting, purchasing or securitizing multifamily mortgages. 
The securitization business requires expertise in identifying 
and negotiating deals, an intimate knowledge of investor 
demands and the ability to respond to changes in the market--
which are not common characteristics of a typical Government 
agency. By simply transferring Fannie Mae's and Freddie Mac's 
current multifamily businesses into the FMIC, Congress would be 
putting those businesses at risk.
    That's why we recommend spinning off Fannie's and Freddie's 
multifamily businesses into private entities, eventually with 
the option of purchasing Government insurance on the securities 
they issue. My written testimony discusses this proposal in 
more detail.
    Second, we are concerned with S.1217's lack of 
affordability requirements for the multifamily securitization 
business. We believe that any issuer of Government-guaranteed 
multifamily securities must have a clear public purpose and be 
required to serve people across the rental market spectrum, 
including people in need of affordable housing. Without such a 
mandate, Congress could meaningfully reduce the availability of 
affordable rental housing at a time when supply is already 
dwindling nationwide.
    There are several ways to accomplish this goal, but none as 
clear and fair as a firm requirement. For example, for each 
issuer at least 60 percent of the units financed by FMIC-
insured multifamily securities should be affordable to 
households earning 80 percent of Area Median Income (AMI) or 
below. Such a requirement can be enforced efficiently through 
the annual approval and reporting process for all approved 
issuers without adding onerous property-level compliance 
requirements. Again, my written testimony discusses this 
proposal in more detail.
    Third, we are concerned with S.1217's lack of clear 
incentives to serve traditionally underserved segments of the 
rental market, including rural and Native American communities, 
subsidized affordable rentals and small multifamily properties. 
Today there is very little investment in these market segments 
beyond the GSEs, and without some sort of incentive or 
requirement, private capital is not likely to serve these 
markets.
    That's why we recommend establishing a third multifamily 
issuer that provides access to small banks and community banks, 
which are most likely to serve smaller and more underserved 
markets. We also recommend requiring each approved issuer to 
lay out a forward-looking strategy for serving each of these 
segments of the market, then report on the results at the end 
of the year.

Q.2. Can you discuss how Fannie Mae and Freddie Mac currently 
support/ending to affordable housing, including deals to 
preserve and improve existing affordable housing, and how these 
functions can be supported in your proposed new system?

A.2. Fannie and Freddie are critical partners in many of 
Enterprise's efforts to build and preserve affordable housing. 
For example, in our mortgage originations business, roughly 
half of our multifamily production in 2012 went to one of the 
two companies. Fannie and Freddie offer a range of financing 
options that make affordable deals possible, including both 
long-term, fixed-rate loans and shorter-term, floating-rate 
loans.
    In general terms, life insurance companies and CMBS 
conduits almost exclusively deal with Class A properties, and 
rarely touch deals that involve Government subsidy. So when 
financing is needed for those Class B or C properties that 
serve as ``workforce'' housing, or for properties involving the 
Low-Income Housing Tax Credit (also known as the Housing 
Credit), Section 8 or another form of subsidy, the GSEs and the 
FHA are often the only execution options.
    Nearly every unit of affordable housing created in the U.S. 
since the late 1980s has been financed through the Housing 
Credit. These deals involve a long mandatory affordability 
period, and the long-term, fixed-rate loans offered by the GSEs 
help make that possible. At the same time, the GSEs' shorter-
term, floating-rate loans are useful when a Housing Credit 
property reaches the end of its affordability period. They help 
keep the building affordable as the owner recapitalizes.
    In addition to their securitization businesses, Fannie and 
Freddie promote the creation and preservation of affordable 
housing through structured transactions, credit enhancements on 
bonds issued by State Housing Finance Agencies and equity 
investments. Because of their public mission, the companies 
have helped Enterprise and similar organizations invest in 
several underserved communities, including rural and Native 
American communities. Over the past two decades, Enterprise has 
partnered with Fannie to build or preserve nearly 700 
affordable homes on Native Lands, including in South Dakota and 
Idaho.
    Prior to conservatorship, Fannie and Freddie were also key 
equity investors in the Housing Credit--in addition to 
providing affordable, long-term debt to make the project pencil 
out. At one point the two companies accounted for 40 percent of 
annual Housing Credit investments.
    Our proposal maintains these core functions by preserving 
Fannie's and Freddie's current multifamily products. Both 
entities--as well as any other approved issuers in the future--
would also have a specific requirement to continue serving the 
affordable segment of the market. They will also be allowed to 
maintain a limited and carefully monitored investment portfolio 
for small multifamily loans, Housing Credit equity investments 
and other investments in affordable housing. My written 
testimony discusses each of these proposals in more detail.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                       FROM TERRI LUDWIG

Q.1. According to a September 2012 GAO report, multifamily 
housing programs played a large role in helping Fannie Mae and 
Freddie Mac achieve their annual affordable housing goals. As 
the report states, ``multifamily mortgages had a 
disproportionate importance for the housing goals because most 
multifamily housing serves targeted groups.'' Meanwhile, the 
delinquency rates on the GSEs' multifamily mortgages were 
extremely low. Even during the height of the housing crisis, 
less than 1 percent of the GSEs' multifamily mortgages were 
delinquent. Does this demonstrate that a Government-backed 
multifamily housing program can pursue affordable housing goals 
without creating excessive risk of delinquency or default?

A.1. Yes. For nearly two decades, Fannie and Freddie have shown 
that private investors can provide financing to affordable 
rental housing safely, effectively, and profitably--
particularly for people with incomes in the 50-80 percent of 
AMI range. However, we cannot assume that purely private 
companies will be willing to serve this segment of the market 
on their own. We must make it a firm requirement.
    The GSE multifamily businesses are able to limit risks to 
taxpayers through strong underwriting and a high degree of 
accountability through risk sharing with private investors. 
Freddie Mac's K-Series deals typically require private 
investors to cover the first 15 percent of losses in a pool 
without a guarantee. Fannie Mae holds licensed lenders at risk 
on a pari passu basis, sometimes with first-loss requirements. 
Under both models, private capital takes a significant loss 
before either company has to pay out of pocket. And under the 
Fannie model, lenders have significant skin in the game, which 
promotes careful underwriting and servicing of each loan.
    Enterprise believes that the Government guarantee can be 
structured in a way that poses very little risk to taxpayers. 
That starts with preserving the Fannie and Freddie multifamily 
businesses as they are today. These models have proven to be 
safe, effective, and sustainable.
    Specifically, any Government guarantee should be limited 
(with private capital at risk before taxpayers) and paid for 
through an actuarially sound insurance fee. The Government's 
multifamily insurance fund should only be tapped when the 
issuer of the insured security fails and all private at-risk 
capital is wiped out. In other words, only the security would 
be backed by the Government, not the institution that issues 
it.
    Under the current ``affordable housing goals'' system, 
Fannie and Freddie are expected to finance a certain number of 
affordable multifamily units each year, as established by their 
regulator. We recommend tweaking that system in the future, 
making it a firm requirement for any issuer to maintain their 
approved status. Each year, each issuer must show that a 
certain percentage of all multifamily units financed through 
insured securities are affordable to families earning 80 
percent of AMI or below. My written testimony discusses this 
proposal in more detail.

Q.2. Could you describe what the multifamily housing market 
would have looked like--before, during, and after the crisis--
if the GSEs had not had affordable housing goals?

A.2. By way of background, more than two-thirds of the units 
financed by the GSEs in recent years were affordable to tenants 
earning 80 percent of AMI or below, according to our analysis. 
Between 10 and 15 percent of GSE multifamily units were 
affordable to people earning less than 50 percent of AMI.
    We don't have data on the GSEs' overall share of the 
affordable market or the affordability of units financed 
through the purely private execution channels. However, we know 
that life companies, banks and thrifts primarily deal with 
Class A properties in first-tier housing markets, and they 
rarely finance properties that require Government subsidy, such 
as the Housing Credit or Section 8.
    It is unclear how much of this lending activity was due 
directly to affordable housing goals. That said, there is 
absolutely no indication that any entity on their own would be 
willing to finance affordable housing without some additional 
incentive or an explicit requirement. Indeed, recent analyses 
from Fannie Mae, Freddie Mac and outside consultants found 
that, without affordability requirements and access to a 
Government guarantee on their multifamily businesses, lending 
for affordable housing at the GSEs would decrease dramatically.
    In the absence of specific data, the following is our view 
on what the market would have potentially looked like without 
the affordable housing goals:
    Before the crisis: In the run-up to the most recent housing 
crisis, some private investors were willing to enter the 
affordable segments of the multifamily market, mostly banks, 
thrifts, and conduits of commercial mortgage-backed securities. 
However, these investors did not offer the same long-term, 
fixed-rate products or risk protections as the GSEs (in part 
because of the affordable housing goals), which eventually led 
to significantly higher default rates. So we might have seen 
investment in affordable housing without the goals, but under 
riskier terms.
    During the crisis: Starting in 2008, purely private capital 
all but abandoned the multifamily mortgage market, as investors 
were leery of any mortgage debt without a Government guarantee. 
Even in the midst of the worst housing crisis since the Great 
Depression, a significant portion of Fannie's and Freddie's 
multifamily business was affordable to low-income and very low-
income families--and there's reason to believe that the 
affordable housing goals played a role in those business 
decisions.
    After the crisis: Banks, thrifts, and life companies have 
mostly returned to the multifamily market, but they are less 
likely to invest in affordable deals. In contrast, the GSEs in 
2012 alone financed 675,000 multifamily units that were 
affordable to people earning 80 percent of AMI or below, and 
169,000 units that were affordable to people with incomes at 50 
percent of AMI or below. It's reasonable to assume that many of 
the 80 percent of AMI units, and most of the 50 percent of AMI 
units were pursued at least in part because of the affordable 
housing goals.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR COBURN
                       FROM TERRI LUDWIG

Q.1. In your written testimony, you supported new funding for 
the National Housing Trust Fund and the Capital Magnet Fund by 
placing a 5-10 basis point tax on all FMIC-insured multifamily 
securities. However, a number of Federal programs and tax 
expenditures already target affordable housing. Would you agree 
adding a new funding stream from a tax on FMIC insured 
multifamily securities would duplicate tens of billions of 
dollars in existing Federal resources supporting affordable 
housing?

A.1. While other meaningful Federal programs exist, the 
resources available fall well short of the need. By one 
estimate, only a quarter of eligible low-income families 
receive rental assistance today, resulting in decade-long 
waiting lists and sometimes even lotteries for rare openings. 
In the wealthiest country in the world, people shouldn't have 
to win the lottery to have an affordable home.
    In fact, it's never been harder for working families to 
find one. According to the Harvard Joint Center for Housing 
Studies, 27 percent of renters--nearly 11 million renter 
households--pay more than half their income on housing, often 
leaving them one paycheck away from losing their home. That's 
an all-time high. Meanwhile, in housing markets across the 
country, annual increases in rent are far outpacing increases 
in wages.
    This is especially true for families living in poverty. The 
number of very low-income renters in the U.S. increased by 17 
percent since the crisis began, while the supply of affordable 
units available to them actually decreased.
    The Housing Trust Fund and Capital Magnet Fund focus 
specifically on serving low-income renters in affordable 
apartments, which often require some sort of outside subsidy to 
cover operating costs. They do so by leveraging private 
capital, which is a cost-effective way to deliver affordable 
units without deep taxpayer subsidies.
    The issuer of an insured security benefits in several ways 
from the Government guarantee, so it is fair to impose a very 
modest fee to achieve a broader public purpose. It's also worth 
noting that both the Housing Trust Fund and the Capital Magnet 
Fund were created by Congress years ago. As originally 
envisioned, both funds should have received funding through 
fees on the GSEs' ongoing business, but those obligations were 
suspended when Fannie and Freddie were put into 
conservatorship. So in a way, we're simply proposing that 
future issuers of insured securities make good on that 
requirement. The initial fee was set up as 4.2 basis points on 
ongoing business. We're increasing it slightly to 5 to 10 basis 
points.

Q.2. You noted in your written testimony rental units for very 
low-income renters require outside subsidies. To better utilize 
Federal resources to support affordable, would you support 
stronger targeting requirements in the Low-Income Housing Tax 
Credit (LIHTC) program? Tax-exempt rental housing bonds? The 
Community Development Block Grant (CDBG) program? Please 
identify other existing Federal programs or tax expenditures 
you believe could be more adequately targeted or consolidated 
to streamline Federal assistance for very and extremely low-
income borrowers.

A.2. The Housing Credit reaches people who really need it. A 
recent New York University study on Housing Credit tenant 
incomes makes clear that 80 percent of households served by 
these properties are very low income, earning 50 percent or 
less of Area Median Income (AMI)--and a majority of Housing 
Credit properties serve households earning less than 40-percent 
AMI (which is roughly $21,000 on a national basis).
    In addition, the National Housing Trust Fund, which was 
established under the 2008 Housing and Economic Recovery Act, 
has yet to be funded. It is designed to provide safe, decent 
and affordable housing for very low- and extremely low-income 
families through supporting the production, preservation, 
rehabilitation, and operation of rental homes. Under statute, a 
minimum of 75 percent of the funds must be dedicated to the 
needs of extremely low-income families.

Q.3. Enterprise Community Partners is a strong supporter of 
affordable housing projects. A key component of the company's 
investments includes Low-Income Housing Tax Credits (LIHTC). An 
analysis by the Government Accountability Office (GAO) found 
the LIHTC program to be more expensive per multifamily housing 
unit than the Section 8 voucher program. Do you agree with 
GAO's analysis?

A.3. Both the Housing Credit and Section 8 programs are 
absolutely essential to building and maintaining stable, 
affordable homes for low-income families. However, the two 
programs serve different purposes in that effort and often 
support very different populations. There are several factors 
that complicate a direct comparison of their per-unit costs.
    That said, we find that the Housing Credit is not ``more 
expensive per multifamily housing unit than the Section 8 
voucher program'' for the following reasons.
    First, the GAO study focuses on the all-in cost of building 
and maintaining a rental unit through each program, not the 
ultimate cost to taxpayers. Even if the overall costs were 
higher for Housing Credit-supported units, Federal dollars 
usually cover a much smaller percentage of those costs compared 
to Section 8. In fact, the same report found that the Housing 
Credit program typically costs taxpayers less per unit than the 
voucher program. Of all the programs analyzed, the Housing 
Credit had the lowest Federal share of costs.
    Second, we have some methodological concerns with the GAO 
study. The study assumes that tenants of LIHTC and Section 8 
units have the same income, which is not the case. In fact, 
elsewhere in the report the authors acknowledge that voucher 
recipients' incomes were roughly two-thirds that of Housing 
Credit residents. That assumption likely inflates the cost to 
taxpayers of the Housing Credit program while underestimating 
the cost of the Section 8 program.
    That income disparity remains true today. A recent study by 
the Furman Center for Real Estate and Urban Policy found that 
43 percent of Housing Credit apartments provide housing for 
extremely low-income households, compared to 75 percent of 
Section 8 apartments.
              Additional Material Supplied for the Record
         STATEMENT OF THE NATIONAL ASSOCIATION OF HOME BUILDERS


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



 PRINCIPLES FOR MULTIFAMILY HOUSING FINANCE REFORM AND THE GOVERNMENT 
                         SPONSORED ENTERPRISES


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


