Fed’s Rosengren warns that Fannie, Freddie reform could roil commercial real-estate market
Dated: March 14 2018
Boston Fed President says lawmakers may question GSE’s large and growing footprint in multifamily market
Efforts to overhaul Fannie Mae and Freddie Mac could lead to “a potential and significant shock” to the commercial real-estate sector, said Boston Federal Reserve President Eric Rosengren on Tuesday.
The pair of mortgage-finance giants, which were bailed out by the U.S. government and placed in conservatorship in 2008 during the height of the financial crisis, have historically boasted outsize influence on the single-family mortgage market, but Rosengren expressed concern that the duo’s growing clout in the multifamily sector may pose a risks, as the government considers new structures for the entities, created in the wake of the Great Depression to help facilitate homeownership.
The Fed member pointed out that Fannie and Freddie earn a significant share of income from the multifamily segment of their business, and currently hold or guarantee 44% of multifamily loans, Rosengren said. That’s more than commercial banks.
There is escalating talk in Washington that the time may be appropriate to reform, or wind down, the government-sponsored enterprises, or GSEs, known as Fannie and Freddie. But those efforts have been complicated by the significance of the companies on the housing market and a cadre of investors who have bought stakes in the entities and demand a say in their future.
“A potential concern would be that with high and rising prices for multifamily commercial real estate, policymakers looking to reform the GSEs might look at the GSEs’ large and growing footprint in the market and ask whether this level of government-sponsored exposure is safe and whether that level of government support is appropriate,” Rosengren said.
“Whether, or how, future reform proposals will impact commercial real estate is unclear—but a potential and significant shock to this sector of the commercial real-estate market could occur if proposals require the GSEs to reduce their holdings of multifamily loans,” he added.
Rosengren has been expressing concern about “reach for yield” in the commercial real-estate market since late 2015, with interest rates at ultralow levels, highlighted by the benchmark 10-year Treasury note yield TMUBMUSD10Y, -0.96% at 2.41%.
Shares of Fannie Mae are up more than 10% over the past month, but have shed nearly a third of their values so far this year, according to FactSet data. Comparatively, the S&P 500 index SPX, -0.57% boasts a year-to-date gain of 7.1%, while the Dow Jones Industrial Average DJIA, -1.00% has climbed 6.2% over the same period.
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