oversight

Mortgage Financing: Fannie Mae and Freddie Mac's Multifamily Housing Activities Have Increased

Published by the Government Accountability Office on 2012-09-06.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States Government Accountability Office

GAO              Report to the Chairman, Committee on
                 Financial Services, House of
                 Representatives


September 2012
                 MORTGAGE
                 FINANCING
                 Fannie Mae and
                 Freddie Mac’s
                 Multifamily Housing
                 Activities Have
                 Increased




GAO-12-849
                                                September 2012

                                                MORTGAGE FINANCING
                                                Fannie Mae and Freddie Mac’s Multifamily Housing
                                                Activities Have Increased
Highlights of GAO-12-849, a report to the
Chairman, Committee on Financial Services,
House of Representatives




Why GAO Did This Study                          What GAO Found
Congress established the enterprises            From 1994 through 2011, the multifamily loan activities of Fannie Mae and
to provide stability in the secondary           Freddie Mac (the enterprises) generally increased. In this period, Fannie Mae
market for residential mortgages and            held a lower percentage of multifamily loans in its portfolio than Freddie Mac.
serve the mortgage credit needs of              While the enterprises’ multifamily business operations generally were profitable,
targeted groups. But in September               both enterprises reported losses in 2008 and 2009.
2008, FHFA placed the enterprises in
conservatorship out of concern that             In recent years, Fannie Mae and Freddie Mac played a larger role in the
their deteriorating financial condition         multifamily marketplace, and their multifamily activities contributed considerably
would destabilize the financial system.
                                                to meeting their affordable housing goals (set by their regulator for the purchase
As Congress and the Executive Branch
                                                of mortgages that serve targeted groups or areas). Before 2008, the enterprises
have explored options for restructuring
the enterprises, most of the discussion
                                                financed about 30 percent of multifamily loans (see figure). Their share increased
has focused on the single-family                to 86 percent in 2009, but decreased to 57 percent in 2011 as other participants
market. But the enterprises also play a         reentered the market. GAO’s analysis showed that multifamily activities greatly
large role in providing financing for           contributed to the enterprises’ ability to meet affordable housing goals. For
multifamily properties (those with five         example, the enterprises’ multifamily activities constituted 4.5 percent of their
or more units).                                 total business in 2008, but about a third of the units used to meet the goal of
                                                serving low- and moderate-income persons were multifamily units.
GAO was asked to describe (1) how
the enterprises’ multifamily loan               Financing of Multifamily Loans Originated, 2005-2011
activities have changed, (2) the
enterprises’ role in the multifamily
financing marketplace and how they
met affordable housing goals, and
(3) how the enterprises’ multifamily
delinquency rates compare with those
of other mortgage capital sources and
how they have managed their credit
risk.
To address these objectives, GAO
analyzed (1) loan-level data from 1994
(the earliest period for which loan-level
data were available) through 2011 from
the enterprises and (2) data from the           Note: Percentages may not add to 100 because of rounding.
Mortgage Bankers Association;
interviewed key multifamily housing             The enterprises have purchased multifamily loans that generally performed as
stakeholders; and reviewed FHFA                 well as or better than those of other market participants, but the Federal Housing
examination reports.                            Finance Agency (FHFA) has identified deficiencies in their credit risk
FHFA, Fannie Mae, and Freddie Mac               management. In 2005-2008, the enterprises’ serious delinquency rates (less than
provided technical comments, which              1 percent) were somewhat lower than the rates on multifamily loans made by
GAO incorporated where appropriate.             commercial banks and much lower than rates for multifamily loans funded by
                                                commercial mortgage-backed securities. FHFA, through its examination and
                                                oversight of the enterprises, identified a number of credit risk deficiencies over
                                                the past few years. For example, FHFA found deficiencies in Fannie Mae’s
                                                delegated underwriting and servicing program, risk-management practices, and
                                                information systems; and Freddie Mac’s management of its lower-performing
View GAO-12-849. For more information,          assets. Both enterprises have been taking steps to address these deficiencies.
contact William B. Shear at (202) 512-8678 or
shearw@gao.gov.

                                                                                              United States Government Accountability Office
Contents


Letter                                                                                       1
               Background                                                                    5
               The Enterprises’ Multifamily Loan Activities Generally Increased
                 and Delinquencies Remained Low                                              9
               Enterprises Increased Their Multifamily Market Share and
                 Generally Met Affordable Housing Goals                                    36
               Enterprises’ Purchased Multifamily Loans Have Performed
                 Relatively Well, but Regulators Identified Issues with Credit Risk
                 Management                                                                54
               Agency Comments and Our Evaluation                                          66

Appendix I     Objectives, Scope, and Methodology                                          68



Appendix II    Fannie Mae and Freddie Mac’s Multifamily Loan Purchases in the 25
               Largest Metropolitan Areas                                                  78



Appendix III   Additional Data on Fannie Mae and Freddie Mac’s Multifamily
               Activities                                                                  83



Appendix IV    Enterprises’ Multifamily Loan and Property Sizes Compared with Other
               Market Participants                                                  90



Appendix V     Data from Selected Housing Finance Agencies and Loan Consortiums            93



Appendix VI    GAO Contact and Staff Acknowledgments                                       96



Tables
               Table 1: Unpaid Principal Balance of Multifamily Loans That
                        Freddie Mac Held for Investment and Held for Sale, 2008-
                        2011                                                               13




               Page i                                  GAO-12-849 Multifamily Housing Financing
Table 2: Principal Balance of Multifamily Loans Purchased by the
         Enterprises and Multifamily Loans Originated by Life
         Insurance Companies and CMBS Lenders, 2005-2011                  40
Table 3: Enterprises’ Goal Targets and Performance, 2001-2009             51
Table 4: Enterprises’ Target and Performance for Special
         Affordable Multifamily Subgoal, 2001-2009                        52
Table 5: Multifamily Contributions to Enterprises’ Affordable
         Housing Goals, 2001-2009                                         53
Table 6: Enterprises’ Multifamily Goal Targets and Performance,
         2010-2011                                                        54
Table 7: Median Debt-Service Coverage and LTV Ratios for
         Multifamily Loans Financed by the Enterprises, CMBS
         Lenders, and Life Insurance Companies, 2005-2011                 56
Table 8: Percentage of Enterprise, CMBS, and FHA Multifamily
         Loans Financed in 2005-2010 That Were Seriously
         Delinquent as of December 31, 2011                               58
Table 9: Percentage of Outstanding Unpaid Principal Balances of
         Multifamily Loans That Were Seriously Delinquent for the
         Enterprises and FDIC Banks, Year End 2005-2011                   59
Table 10: Percentage of Outstanding Unpaid Principal Balances of
         Multifamily Loans That Were Seriously Delinquent for the
         Enterprises and Life Insurance Companies, Year End 2005-
         2011                                                             60
Table 11: Enterprises’ Multifamily Risk-Sharing Loans with FHA,
         1995-2011                                                        62
Table 12: Fannie Mae’s Multifamily Loan Purchases in the 25
         Largest Metropolitan Areas, 1994-2011 (Numbers in
         thousands)                                                       78
Table 13: Freddie Mac’s Multifamily Loan Purchases in the 25
         Largest Metropolitan Areas, 1994-2011 (Numbers in
         thousands)                                                       80
Table 14: Fannie Mae and Freddie Mac Multifamily Loan
         Acquisitions by State, 1994-2011                                 83
Table 15: Fannie Mae and Freddie Mac’s Serious Delinquency Rates
         for Multifamily Loans with Debt-Service Coverage Ratios
         Less Than 1.25                                                   85
Table 16: Fannie Mae and Freddie Mac’s Serious Delinquency Rates
         for Multifamily Loans with Debt-Service Coverage Ratios
         Greater Than or Equal to 1.25                                    86
Table 17: Fannie Mae and Freddie Mac’s Serious Delinquency Rates
         for Multifamily Loans with LTV Ratios Less Than or Equal
         to 80 Percent                                                    87



Page ii                               GAO-12-849 Multifamily Housing Financing
          Table 18: Fannie Mae and Freddie Mac’s Serious Delinquency Rates
                  for Multifamily Loans with LTV Ratios Greater Than 80
                  Percent                                                            88
          Table 19: Fannie Mae and Freddie Mac’s Multifamily
                  Administrative Costs, 2002-2011                                    89
          Table 20: Median Loan Size and Number of Units for Multifamily
                  Loans Financed by the Enterprises, Life Insurance
                  Companies, and CMBS Lenders, 2005-2011                             90
          Table 21: Median Loan Size and Number of Units for Loans
                  Originated by Selected Housing Finance Agencies, 2005-
                  2011                                                               91
          Table 22: Median Loan Size and Number of Units for Loans
                  Originated by Selected Loan Consortiums, 2005-2011                 92
          Table 23: Median Debt-Service Coverage and LTV Ratios for Loans
                  Financed by Selected Housing Finance Agencies, 2005-
                  2011                                                               93
          Table 24: Median Debt-Service Coverage Ratios and LTV Ratios for
                  Loans Financed by Selected Loan Consortiums, 2005-2011             94
          Table 25: Percentage of Selected Housing Finance Agencies’
                  Unpaid Principal Balances That Were Seriously Delinquent
                  as of December 2011, 2005-2011                                     95
          Table 26: Percentage of Loans Seriously Delinquent for Selected
                  Loan Consortiums, 2005-2011                                        95


Figures
          Figure 1: Enterprises’ Annual Multifamily Loan Purchases by
                   Number of Loans and Unpaid Principal Balance, 1994-
                   2011                                                              10
          Figure 2: Enterprises’ Annual Volume of Retained Multifamily
                   Loans, Securitized Multifamily Loans, and Multifamily
                   Bond Credit Enhancements, 1994-2011                               12
          Figure 3: Enterprises’ Multifamily Loan Purchases by Unit Size of
                   Properties, 1994-2011                                             15
          Figure 4: Enterprises’ Annual Multifamily Loan Purchases by Loan
                   Size at Acquisition, 1994-2011                                    17
          Figure 5: Fannie Mae’s Annual Purchases of Multifamily Loans in
                   25 Largest Metropolitan Areas, 1994-2011                          19
          Figure 6: Freddie Mac’s Annual Purchases of Multifamily Loans in
                   25 Largest Metropolitan Areas, 1994-2011                          21
          Figure 7: Fannie Mae and Freddie Mac Multifamily Loan Terms,
                   1994-2011                                                         23


          Page iii                               GAO-12-849 Multifamily Housing Financing
Figure 8: Enterprises’ Multifamily Loan Purchases by Asset Class,
         1994-2011                                                          25
Figure 9: Enterprises’ Annual Multifamily Loan Purchases by
         Interest Rate Type, 1994-2011                                      26
Figure 10: Fannie Mae’s Use of Various Multifamily Structuring
         Options                                                            28
Figure 11: Fannie Mae’s Annual Multifamily Loan Purchases by
         Type of Underwriting, 1994-2011                                    29
Figure 12: Unpaid Principal Balances of Enterprises’ Seriously
         Delinquent Multifamily Loans and Multifamily Portfolio
         Serious Delinquency Rates, 1994-2011                               31
Figure 13: Unpaid Principal Balances of Enterprises’ Multifamily
         REO Property and Multifamily REO Property as a
         Percentage of Multifamily Book of Business, 1995-2011              32
Figure 14: Net Income Attributable to Fannie Mae and Freddie
         Mac’s Multifamily Business, 2002-2011                              34
Figure 15: Net Charge-offs Attributable to Fannie Mae and Freddie
         Mac’s Multifamily Business, 2002-2011                              35
Figure 16: Multifamily Guarantee Fees Received by Fannie Mae and
         Freddie Mac, 2002-2011                                             36
Figure 17: Multifamily Mortgage Debt Outstanding, 2005-2011                 38
Figure 18: Financing of Multifamily Loans Originated, 2005-2011             39
Figure 19: Distribution of Rental Units by Building Size (Number of
         Units), 2010                                                       43
Figure 20: Enterprises’ Affordable Housing Goals Timeline, 1992-
         2012                                                               48




Abbreviations

ACLI                         American Council of Life Insurers
activity report              Annual Housing Activity Report
AMI                          area median income
ARM                          adjustable-rate mortgage
CMBS                         commercial mortgage-backed security
CREFC                        Commercial Real Estate Finance Council
DUS®                         Delegated Underwriting and Servicing
enterprise                   government-sponsored enterprise
Federal Reserve              Board of Governors of the Federal Reserve
                             System
FDIC                         Federal Deposit Insurance Corporation


Page iv                                 GAO-12-849 Multifamily Housing Financing
FHA                                 Federal Housing Administration
FHFA                                Federal Housing Finance Agency
HERA                                Housing and Economic Recovery Act of
                                    2008
HFA                                 housing finance agency
HUD                                 Department of Housing and Urban
                                    Development
LIHTC                               low-income housing tax credit
LTV                                 loan-to-value
MBA                                 Mortgage Bankers Association
MBS                                 mortgage-backed security
MSA                                 metropolitan statistical area
NAAHL                               National Association of Affordable Housing
                                    Lenders
NCSHA                               National Council of State Housing Agencies
NIBP                                New Issue Bond Program
OFHEO                               Office of Federal Housing Enterprise
                                    Oversight
REO                                 real estate-owned
RHS                                 Rural Housing Service
Safety and Soundness Act            Federal Housing Enterprises Financial
                                    Safety and Soundness Act of 1992
TCLF                                Temporary Credit and Liquidity Facilities
Treasury                            Department of the Treasury




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Page v                                           GAO-12-849 Multifamily Housing Financing
United States Government Accountability Office
Washington, DC 20548



                                   September 6, 2012

                                   The Honorable Spencer Bachus
                                   Chairman
                                   Committee on Financial Services
                                   House of Representatives

                                   Dear Chairman Bachus:

                                   On September 6, 2008, the Federal Housing Finance Agency (FHFA)
                                   placed Fannie Mae and Freddie Mac into conservatorship out of concern
                                   that the deteriorating financial condition of the two government-sponsored
                                   enterprises (the enterprises) threatened the stability of financial markets. 1
                                   While the conservatorships can remain in place indefinitely as efforts are
                                   undertaken to stabilize the enterprises and restore confidence in financial
                                   markets, FHFA has said that the conservatorships were not intended to
                                   be permanent. Most of the discussion about the future of the enterprises
                                   has focused on their role in supporting financing for single-family homes,
                                   but they have played a larger role in providing financing for multifamily
                                   properties (those with five or more units) since the financial crisis of 2007.

                                   Congress established Fannie Mae and Freddie Mac in 1968 and 1989,
                                   respectively, as for-profit, shareholder-owned corporations. 2 They share a
                                   primary mission that has been to stabilize and assist the U.S. secondary
                                   mortgage market and facilitate the flow of mortgage credit. To accomplish
                                   this goal, the enterprises issued debt and stock and used the proceeds to
                                   purchase conventional mortgages that met their underwriting




                                   1
                                    The Housing and Economic Recovery Act of 2008 (HERA), Pub. L. No. 110-289 (July 30,
                                   2008), established FHFA, which is responsible for the safety and soundness and housing
                                   mission oversight of Fannie Mae, Freddie Mac, and the other housing government-
                                   sponsored enterprise, the Federal Home Loan Bank System.
                                   2
                                    Congress initially chartered Fannie Mae in 1938 but did not establish it as a shareholder-
                                   owned corporation until 1968. Congress initially established Freddie Mac in 1970 as an
                                   entity within the Federal Home Loan Bank System and reestablished it as a shareholder-
                                   owned corporation in 1989.




                                   Page 1                                           GAO-12-849 Multifamily Housing Financing
standards from primary mortgage lenders such as banks or savings and
loan associations (thrifts). 3 In turn, banks and thrifts used the proceeds to
originate additional mortgages. The enterprises purchased mortgages
that they held in their portfolios or packaged into mortgage-backed
securities (MBS), which were sold to investors in the secondary mortgage
market. 4 In exchange for a fee (the guarantee fee), the enterprises
guaranteed the timely payment of interest and principal on MBS that they
issued. Both enterprises are required to provide assistance to the
secondary mortgage markets that includes purchases of mortgages that
serve low- and moderate-income families. In 1992, Congress required the
enterprises to meet numeric goals for the purchase of single- and
multifamily conventional mortgages that serve targeted groups. Through
2008, the Department of Housing and Urban Development (HUD) set the
goals for each year; FHFA currently does so. 5

Congress and the Executive Branch will face difficult decisions on how to
restructure the enterprises and promote housing opportunities while
limiting risks to taxpayers and the stability of financial markets. In this
context, you requested that we provide information on the history and
performance of the enterprises’ multifamily activities. Specifically, this
report discusses (1) how the enterprises’ multifamily loan activities,
products, and loan performance have changed over time, (2) the
enterprises’ role in the multifamily housing financing marketplace and the
extent to which they have met their affordable housing goals, and (3) how
the enterprises’ credit standards and delinquency rates compare with
those of other mortgage capital sources and how they have managed
credit risk associated with their multifamily housing activities.

To describe how the enterprises’ multifamily loan activities, products, and
performance have changed, we analyzed loan-level data from Fannie
Mae and Freddie Mac from 1994 (the earliest year for which data were
available) through 2011. For example, we analyzed the following for each
enterprise:


3
 Conventional mortgages do not carry government insurance or guarantees and are the
focus of this report.
4
Each enterprise also holds some MBS in retained portfolio.
5
 Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (Safety and
Soundness Act), Pub. L. No. 102-550, title XIII. HERA transferred HUD’s authorities and
responsibilities for the goals to FHFA (§§ 1122, 1128). See 12 U.S.C. §§ 4561-4566.




Page 2                                          GAO-12-849 Multifamily Housing Financing
•   loans that were held in portfolio and loans that were securitized;
•   loan purchases broken down by property and loan size, metropolitan
    area, and period of the loan;
•   maturity expectations for loans purchased; and
•   loan performance, including an analysis of annual serious delinquency
    rates.
We also analyzed aggregated data on real estate-owned, net income, net
charge-offs (debts an entity is unlikely to collect), and guarantee fees. To
assess data reliability, we interviewed Fannie Mae and Freddie Mac
representatives about how they collected data and helped ensure data
integrity and reviewed internal reports on data reliability. We also
compared selected enterprise data with information in public filings. In
addition, we conducted reasonableness checks on the data to identify any
missing, erroneous, or outlying figures. We determined that the data were
sufficiently reliable for our purposes.

To determine what is known about the enterprises’ role in the overall
multifamily marketplace, we reviewed reports and studies on how the
enterprises helped support the market. To show how the enterprises’
market share changed over the last 7 years, we analyzed flow of funds
data from the Board of Governors of the Federal Reserve System
(Federal Reserve) and market share data from the Mortgage Bankers
Association (MBA). We met with lender, commercial real estate, and life
insurance trade associations; affordable housing advocacy groups;
industry researchers; and representatives from FHFA, Fannie Mae, and
Freddie Mac to obtain their views on the enterprises’ role. To report on
the extent to which the enterprises met affordable housing goals, we used
HUD data on annual goal performance in 1993 through 2000, and
analyzed data on goal performance in Annual Housing Activity Reports
(activity report) provided by FHFA for 2001 through 2009. To determine
the extent to which the enterprises’ multifamily activities contributed to the
achievement of specific goals, we calculated multifamily purchases as a
percentage of total mortgage purchases under each goal using data from
the activity reports. 6 To assess the reliability of these data, we interviewed



6
 The Safety and Soundness Act required Fannie Mae and Freddie Mac each to meet
specific numeric goals for the purchase of mortgages serving targeted groups each year.
Specifically, it directed HUD to promulgate regulations setting goals for both enterprises
targeted at borrowers or renters who (1) have low and moderate incomes, (2) live in
underserved areas, and (3) have very low-income or have low-income and live in low-
income areas (known as the special affordable housing goal).




Page 3                                           GAO-12-849 Multifamily Housing Financing
FHFA officials and representatives at Fannie Mae and Freddie Mac about
how they collected and helped ensure the integrity of the information, and
reviewed internal reports. We determined that the data were sufficiently
reliable for our purposes.

To compare the enterprises’ credit standards and delinquency rates with
those of major mortgage capital sources, we analyzed loan-level data on
the enterprises’ loan-to-value (LTV) and debt-service coverage ratios and
delinquency rates. We compared these ratios and delinquency rates with
those of selected market players, including life insurance companies and
commercial mortgage-backed securities (CMBS) lenders. We interviewed
officials from HUD’s Federal Housing Administration (FHA), the
Department of Agriculture’s Rural Housing Service (RHS), the National
Council of State Housing Agencies (NCSHA), the National Association of
Affordable Housing Lenders, the Commercial Real Estate Finance
Council, and the American Council of Life Insurers (ACLI) to obtain
information on the key credit standards generally used by institutions they
represent and their loan performance. To determine the extent to which
the enterprises shared risk with FHA and RHS, we obtained data on the
number of loans in risk-sharing programs. We also reviewed documents
describing the programs and interviewed officials from Fannie Mae,
Freddie Mac, FHA, and RHS. To describe how the enterprises managed
credit risk associated with their multifamily activities, we reviewed FHFA’s
examination reports and Office of Federal Housing Enterprise Oversight
(OFHEO) and FHFA annual reports to Congress, which summarize credit
risk issues identified during annual examinations of the enterprises. 7 To
describe how the enterprises have addressed or will address these
issues, we reviewed the enterprises’ formal responses to FHFA’s
examination reports and any subsequent FHFA responses. Because
FHFA’s examination reports and the enterprises’ responses to them are
confidential, we limited our discussions of them to a summary. We also
made revisions based on concerns FHFA raised with our original
language summarizing supervisory concerns expressed in examination
reports.

We conducted this performance audit from November 2011 to September
2012 in accordance with generally accepted government auditing


7
 OFHEO was an independent agency in HUD responsible for the enterprises’ safety and
soundness. HERA created FHFA to oversee Fannie Mae and Freddie Mac and abolished
OFHEO.




Page 4                                       GAO-12-849 Multifamily Housing Financing
             standards. Those standards require that we plan and perform the audit to
             obtain sufficient, appropriate evidence to provide a reasonable basis for
             our findings and conclusions based on our audit objectives. We believe
             that the evidence obtained provides a reasonable basis for our findings
             and conclusions based on our audit objectives. Appendix I contains
             additional information on our scope and methodology.


             The multifamily housing finance market has three principal participants:
Background   (1) primary lenders, which originate mortgage loans; (2) secondary
             market institutions, which purchase mortgage loans from primary lenders;
             and (3) investors in securities issued by secondary market institutions that
             are backed by mortgage loans. 8 All three participants contribute to the
             flow of funds to the multifamily borrower. Lenders originate mortgages,
             which they may either retain as an income-earning asset (an approach
             called portfolio lending) or sell to a secondary market institution. The sale
             of these mortgages provides the lender with funds to make additional
             loans. A secondary market institution, in turn, purchases a mortgage and
             may retain it as a portfolio asset or use the individual loan or a pool of
             loans as collateral for a security. Investors then buy these securities from
             a lender or secondary market institution.

             Multifamily mortgages differ from single-family mortgages in several
             ways. A multifamily property is a cash-generating asset, with rental
             income used to pay the multifamily mortgage, while single-family
             properties are not generally cash-generating assets. Many single-family
             mortgages are 30-year, fully amortizing mortgages, while most multifamily
             loans have terms of 5, 7, or 10 years with a balloon payment due at
             maturity. 9 Most multifamily loans also include protection for the investor
             against borrower prepayment (using a prepayment premium or other
             limitation on prepayment), while single-family loans generally do not. In
             addition, multifamily mortgages have different risk characteristics. For
             example, it is harder to predict credit risk for multifamily mortgages than


             8
              Fannie Mae and Freddie Mac, the focus of this report, are secondary market institutions
             that purchase conventional loans and issue securities backed by those loans. Ginnie Mae
             guarantees the timely payment of principal and interest on securities issued by financial
             institutions and backed by pools of federally insured or guaranteed mortgage loans.
             9
              Multifamily loans are made to borrowers under varying terms, but the balance is
             generally amortized over a term that is significantly longer than the life of the loan. As a
             result, there is little amortization of principal, resulting in a balloon payment at maturity.




             Page 5                                              GAO-12-849 Multifamily Housing Financing
for single-family mortgages. Finally, securitizing multifamily loans (that is,
packaging them into mortgage pools to support MBS) is more challenging
because they are not as standardized as single-family loans. For
example, the multifamily loan pools that back MBS have varied loan
terms while single-family securities have historically been backed by 15-
year and 30-year mortgages.

Fannie Mae and Freddie Mac were established to provide liquidity,
stability, and affordability in the secondary market for both single- and
multifamily mortgages. Their charters do not allow them to operate in the
primary mortgage market by originating loans or lending money directly to
consumers. Rather, they purchase mortgages that meet their underwriting
standards from primary mortgage lenders, such as banks or thrifts, and
either hold the mortgages in their portfolios or package them into MBS.
Multifamily loans make up a small part of the enterprises’ total loan
purchases. According to FHFA’s 2011 Annual Report to Congress, the
enterprises purchased single-family mortgages with an unpaid principal
balance of $879.0 billion and multifamily mortgages totaling $44.6 billion
in 2011.

According to a 1998 article, Fannie Mae and Freddie Mac both entered
the conventional multifamily loan market in 1983 and were experiencing
significant losses by 1991. 10 For example, the article stated that in 1991,
Fannie Mae’s multifamily loans were 5.7 percent of all its loans, but
multifamily charge-offs were 30.2 percent of its total charge-offs. 11
Freddie Mac’s 1991 losses were even greater. According to the article, its
multifamily loans were 2.6 percent of all loans, but multifamily charge-offs
were 51.4 percent of its total charge-offs. 12 Due to these losses, Freddie
Mac exited the multifamily market for 3 years starting in 1991. 13 The same


10
  See Lawrence Goldberg and Charles A. Capone, Jr., “Multifamily Mortgage Credit Risk:
Lessons from Recent History,” Cityscape, 4, no. 1 (1998).
11
  The data on multifamily net charge-offs came from a Fannie Mae report prepared prior
to its 2004 restatement of earnings.
12
  The data on multifamily net charge-offs came from a Freddie Mac report prepared prior
to its 2003 restatement of earnings.
13
  In October 1991, we identified internal control weaknesses in Freddie Mac’s multifamily
program. We reported that in response to these weaknesses as well as to its financial
losses, Freddie Mac suspended purchases in its major multifamily program. See GAO,
Federal Home Loan Mortgage Corporation: Abuses in Multifamily Program Increase
Exposure to Financial Losses, GAO/RCED-92-6 (Washington, D.C.: Oct. 7, 1991).




Page 6                                          GAO-12-849 Multifamily Housing Financing
article noted that boom-and-bust cycles are common in the multifamily
housing market due to the relative ease of entry into the industry. During
periods of strong performance, new apartment supply increases, which
leads to overexpansion and high vacancy rates. According to the authors,
such a cycle contributed to the enterprises’ losses in the late 1980s.

Fannie Mae currently participates in the multifamily mortgage finance
market primarily through its Delegated Underwriting and Servicing (DUS®)
program. Under this program, which was initiated in 1988, Fannie Mae
approves lenders and delegates to them the authority to underwrite,
close, and sell loans to the enterprise without its prior review. 14 In
exchange for granting this authority, DUS lenders share the risk of loss
with Fannie Mae. The most common loss-sharing structures are standard
DUS loss sharing and pari passu. The standard model has a tiered loss
system, generally with the maximum lender loss capped at the first 20
percent of the original loan amount. Under the pari passu model, lenders
share all losses on a pro rata basis with Fannie Mae (the lender assumes
one-third of the loss and Fannie Mae two-thirds). A small portion of
Fannie Mae’s multifamily business comprises non-DUS deliveries, which
typically are small balance loans or pools of seasoned loans (loans that
have typically been in a financial institution’s portfolio for at least 1 year
and have a satisfactory repayment record). In 1994, Fannie Mae began
securitizing DUS loans by creating DUS MBS, each of which is backed by
a Fannie Mae guarantee to the investor of principal and interest.
Typically, each DUS MBS pool contains one DUS loan, but can
incorporate multiple DUS loans.

Freddie Mac participates in the multifamily market by underwriting all of
the loans it purchases. 15 It purchases loans from a network of approved
lenders, but completes the underwriting and credit reviews in-house.
Freddie Mac also conducts negotiated transactions or purchases of



14
 As of July 2012, Fannie Mae had 25 approved DUS lenders.
15
  According to Freddie Mac officials, from 2005 through 2009 underwriting on a small
segment of Freddie Mac’s business, its targeted affordable loans, was performed by the
targeted affordable seller/servicer on a delegated basis with risk shared by the
seller/servicer and Freddie Mac. Targeted affordable loans include mortgages on
properties subject to low-income housing tax credits, mortgages on properties that receive
federal subsidies, and transactions in which Freddie Mac will credit enhance a mortgage
that backs tax-exempt bonds, a trust certificate, or other instrument related to tax-exempt
bonds.




Page 7                                           GAO-12-849 Multifamily Housing Financing
seasoned loans. For a majority of its business, Freddie Mac sells a
significant amount of multifamily credit risk, as defined by expected
losses, to investors by issuing securities backed by its mortgages. In
general, these securities, known as K‐deals, are backed by pools of
newly originated mortgages underwritten by Freddie Mac. 16 Loss-sharing
arrangements such as Fannie Mae’s DUS program and Freddie Mac’s K-
deal program do not exist in either enterprise’s single-family business.

In addition to Fannie Mae and Freddie Mac, the following entities
participate in the multifamily housing financing marketplace:

•    Life insurance companies originate and hold in portfolio multifamily
     mortgages.
•    CMBS lenders originate multifamily loans that are packaged into
     CMBS, which are MBS backed by commercial rather than residential
     properties. Commercial properties include multifamily housing as well
     as retail, office, and industrial space.
•    Commercial banks and thrifts originate commercial and industrial
     loans, including loans secured by multifamily properties. They may
     retain these loans in their portfolios or sell them to the enterprises or
     other secondary market investors.
•    FHA insures multifamily loans originated by FHA-approved lenders for
     the construction, substantial rehabilitation, and acquisition and
     refinancing of apartments.
•    RHS has a guaranteed loan program for rural multifamily housing.
•    State and local housing finance agencies (HFA) are state or locally
     chartered authorities established to help meet the affordable housing
     needs of the residents of their states or localities. HFAs sell tax-
     exempt housing bonds, commonly known as Multifamily Housing
     Bonds, to investors to finance multifamily housing production.
•    Loan consortiums—which are organized by a group of commercial
     banks and savings institutions in a local housing market or at the state
     level to provide multifamily affordable construction and mortgage




16
  Under the K-deal program, which began in 2008, certain loans are sold to a third-party
depositor that deposits the loans into a third-party trust. The third-party trust issues
private-label securities backed by the loans. Freddie Mac purchases and guarantees
certain bonds issued by the third-party trust and securitizes these bonds through a
Freddie Mac trust. The resulting certificates guaranteed by Freddie Mac are publicly
offered. The third-party trust issues unguaranteed subordinate bonds that are privately
offered to investors.




Page 8                                          GAO-12-849 Multifamily Housing Financing
                               loans—are primary lenders for multifamily housing with less than 50
                               units.

                          From 1994 through 2011, the multifamily loan activities of Fannie Mae
The Enterprises’          and Freddie Mac generally increased, while delinquency rates remained
Multifamily Loan          relatively low. During this period, the number of loans they purchased
                          spiked in some years to meet goals for financing affordable housing.
Activities Generally      Fannie Mae has held a lower percentage of its loans in portfolio than
Increased and             Freddie Mac, but both enterprises have increased securitization activities
Delinquencies             in recent years partly in response to a mandate from the Department of
                          the Treasury (Treasury) to reduce retained portfolios. 17 Serious
Remained Low              delinquency rates for the enterprises’ multifamily loans were generally
                          less than 1 percent from 1994 through 2011, but the unpaid principal
                          balance on seriously delinquent loans rose considerably starting in 2008.
                          For all of the analyses of Fannie Mae and Freddie Mac’s purchases, we
                          adjusted the dollar amounts for inflation to 2012 dollars. As a result, the
                          numbers we present are unlikely to correspond to similar numbers
                          previously reported by the enterprises in their public disclosures.


Multifamily Loan          From 1994 through 2011, the enterprises’ multifamily loan activities
Purchases Peaked in       generally increased. As shown in figure 1, the enterprises’ annual
Recent Years, with Some   purchases of multifamily loans (in terms of unpaid principal balances)
                          dramatically increased starting in 2000, peaked in 2007 and 2008, and
Fluctuation Tied to       generally declined in the years following. 18 Fannie Mae’s purchases
Housing Goals             ranged from $6.3 billion in 1994 to $49.8 billion in 2007. Freddie Mac’s



                          17
                            FHFA, on behalf of the enterprises, entered into separate Senior Preferred Stock
                          Purchase Agreements with Treasury on September 7, 2008. The purchase agreements
                          prevented the loss of capital at the enterprises through a purchase of up to $100 billion of
                          senior preferred stock in each enterprise as necessary to avoid a negative net worth. In
                          2009, Treasury amended the agreements to increase the amount of support for each
                          enterprise to the greater of (1) $200 billion or (2) $200 billion plus the cumulative total of
                          deficiency amounts determined for calendar quarters in 2010, 2011, and 2012, less any
                          surplus amount determined as of December 31, 2012. In exchange for this support, the
                          purchase agreements, as amended, required the mortgage asset portfolios of the
                          enterprises to shrink by at least 10 percent (of the maximum amount they were permitted
                          to hold at the end of the previous calendar year) every year until each enterprise’s
                          holdings of mortgages reached a balance of $250 billion. Another amendment to the
                          agreements in August 2012 changed the amount to 15 percent. This included both single-
                          and multifamily mortgages.
                          18
                            Unpaid principal balance is the remaining outstanding balance on loans acquired and is
                          a key metric the multifamily industry uses to measure portfolio activity.




                          Page 9                                             GAO-12-849 Multifamily Housing Financing
                                        purchases ranged from $885.5 million in 1994 to $25.5 billion in 2008.
                                        The enterprises’ annual loan purchases increased dramatically in 2007
                                        and 2008 as other participants exited the market during the financial
                                        crisis.

Figure 1: Enterprises’ Annual Multifamily Loan Purchases by Number of Loans and Unpaid Principal Balance, 1994-2011




                                        Note: All dollar figures are in 2012 dollars.


                                        The enterprises’ multifamily activities (by number of loans acquired)
                                        varied over the period we reviewed, in some cases because the
                                        enterprises purchased additional loans to meet affordable housing goals.
                                        For example, Fannie Mae acquired a large number of loans in 2003 and
                                        2007, and Freddie Mac in 2003. According to Fannie Mae officials, the
                                        majority of these acquisitions were pools of seasoned multifamily loans
                                        purchased through negotiated transactions to meet affordable housing


                                        Page 10                                         GAO-12-849 Multifamily Housing Financing
                         goals for the purchase of mortgages that served targeted groups such as
                         low- and moderate-income households. Freddie Mac officials offered a
                         similar explanation for the increase in their 2003 purchases. From 2003
                         through 2007, affordable housing goals were set as the percentage of the
                         enterprises’ total (single-family and multifamily) mortgage purchases.
                         Increased activity in the single-family financing market in 2003 and 2007
                         (that is, more people buying and refinancing homes) meant that the
                         enterprise needed to acquire more mortgages to meet affordable housing
                         goals. As discussed in more detail later in this report, multifamily
                         mortgages had a disproportionate importance for the housing goals
                         because most multifamily housing serves targeted groups.


Fannie Mae Retained a    From 1994 through 2011, Fannie Mae retained a lower percentage of its
Lower Percentage of      annual multifamily loan purchases in portfolio at acquisition than Freddie
Multifamily Loans Than   Mac (see fig. 2). 19 From 1994 through 2003, the majority of Fannie Mae’s
                         multifamily loan purchases were packaged into MBS. The percentage of
Freddie Mac
                         unpaid principal balance associated with these MBS ranged from 53
                         percent ($3.3 billion) in 1994 to 86 percent ($14.3 billion) in 1998. From
                         2004 through 2008, this trend reversed, with the majority of the unpaid
                         principal balance of Fannie Mae’s loan acquisitions being held in portfolio
                         as whole loans. The percentages held in portfolio ranged from 50 percent
                         ($10.8 billion) in 2004 to 82 percent ($41 billion) in 2007. Following the
                         conservatorship, the majority of Fannie Mae’s loan purchases were again
                         packaged into MBS, with the 2011 data showing that 98.6 percent ($24.1
                         billion) of the unpaid principal balance of multifamily loans Fannie Mae
                         acquired that year was securitized. As previously discussed, Treasury
                         required the enterprises to reduce their retained portfolios each year
                         (starting in 2010) as a condition of agreements providing financial
                         support.




                         19
                           The enterprises’ multifamily portfolios also include various types of credit enhancements
                         for tax-exempt bonds issued by state and local HFAs to finance affordable rental housing.
                         Should the bonds default, the enterprises guarantee that they will provide supplemental
                         funds to permit the continued payment of principal and interest to bondholders. The
                         mortgages associated with these credit enhancements were included in the loan-level
                         data provided by both enterprises.




                         Page 11                                          GAO-12-849 Multifamily Housing Financing
Figure 2: Enterprises’ Annual Volume of Retained Multifamily Loans, Securitized Multifamily Loans, and Multifamily Bond
Credit Enhancements, 1994-2011




                                         Note: All dollar figures are in 2012 dollars. Starting in 2008, Freddie Mac’s retained multifamily loans
                                         were comprised of loans held for investment and loans held for sale. According to Freddie Mac
                                         officials, loans held for investment were those it planned to hold in its portfolio until maturity. Loans
                                         held for sale were those that Freddie Mac initially held in its portfolio but planned to include in a K-
                                         deal (that is, securitize) at a future time. (Table 1 shows the unpaid principal balance of loans held for
                                         investment and loans held for sale from 2008 through 2011.) This figure categorizes loans for 1994
                                         through 2011 based on whether they were retained in portfolio or securitized at acquisition.


                                         Prior to 2008, the majority of Freddie Mac’s multifamily business (in terms
                                         of unpaid principal balance) remained in its retained portfolio. Retained
                                         loans represented the majority of Freddie Mac’s multifamily business in
                                         every year from 1994 through 2007 except 2003. The percentage of
                                         unpaid principal balance retained ranged from 65 percent ($8.3 billion) in



                                         Page 12                                                  GAO-12-849 Multifamily Housing Financing
2002 to 93 percent ($13 billion) in 2006. In 2003, the percentage of
unpaid principal balance securitized was 51 percent ($9.3 billion), while
the percentage retained was 45 percent ($8.1 billion). Bond credit
enhancements constituted the remainder (4 percent) of its multifamily
business in 2003.

Separate and apart from the portfolio reduction requirement in the
preferred stock purchase agreement, Freddie Mac started a new program
in 2008, which it called K-certificates or K-deals, to securitize its loans
and sell a significant portion of the credit risk associated with the loans. 20
With the start of the K-deal program, Freddie Mac began categorizing
multifamily loans it held in portfolio at acquisition as loans held for
investment and loans held for sale. According to Freddie Mac officials,
loans held for investment were those it planned to hold in its portfolio until
maturity. Loans held for sale were those that Freddie Mac initially held in
its portfolio but planned to include in a K-deal (that is, securitize) at a
future time. According to officials, loans held for sale were almost always
securitized. Table 1 shows the unpaid principal balance of loans held for
investment and loans held for sale from 2008 through 2011. Loans held
for sale had become the predominant loan type by 2010.

Table 1: Unpaid Principal Balance of Multifamily Loans That Freddie Mac Held for
Investment and Held for Sale, 2008-2011

                                   Unpaid principal balance of      Unpaid principal balance of
 Acquisition                        loans held for investment               loans held for sale
 year                                     (dollars in millions)            (dollars in millions)
 2008                                                  $19,600                             $497
 2009                                                   11,840                             4,826
 2010                                                    2,988                           10,598
 2011                                                    2,391                           16,642
Source: GAO analysis of Freddie Mac data.

Note: All dollar figures are in 2012 dollars.


The enterprises may hold their own MBS in their retained portfolio. Fannie
Mae officials indicated that MBS it purchased were typically either resold
in their original state or resecuritized with the purpose of making them a
more suitable investment for a broader range of participants. They noted


20
  Freddie Mac piloted K-deals in 2006.




Page 13                                                  GAO-12-849 Multifamily Housing Financing
                                 that their goal was to hold MBS purchases temporarily and to operate in a
                                 manner that is consistent with the FHFA directive to reduce the size of the
                                 retained mortgage portfolio. Data on Fannie Mae’s multifamily MBS
                                 portfolio balance for 2010 through 2011 showed that its portfolio grew
                                 from $9.5 billion at the beginning of 2010 to $28.3 billion at the end of
                                 2011. The majority of this growth was due to the securitization of
                                 multifamily whole loans previously held in their portfolio with an unpaid
                                 principal balance of $18.7 billion. Fannie Mae started this initiative in the
                                 fourth quarter of 2010 in response to Treasury’s requirement to reduce its
                                 retained portfolio. Its sales and purchases of multifamily MBS in the
                                 secondary market were about the same. For example, during 2011 it
                                 purchased and sold MBS totaling about $11 billion. Data on Freddie
                                 Mac’s purchases of its own MBS in 2010 and 2011 show that the
                                 enterprise purchased $382 million and $472 million, respectively. These
                                 amounts were about 4 percent of the MBS issued each year.


Enterprises Generally
Financed Large
Multifamily Properties in
Large Metropolitan Areas

Size of Multifamily Properties   The majority of Fannie Mae and Freddie Mac’s purchases of multifamily
Financed                         loans, as measured by unpaid principal balance, were for properties with
                                 more than 50 units (see fig. 3). For example, from 1994 through 2011,
                                 Fannie Mae acquired $292.0 billion of multifamily loans for properties with
                                 more than 50 units, compared to $56.2 billion of loans for properties with
                                 5 to 50 units. Similarly, Freddie Mac acquired $199.1 billion of multifamily
                                 loans for properties with more than 50 units, compared to $15.4 billion of
                                 loans for properties with 5 to 50 units. While the majority of the unpaid
                                 principal balance was on loans for properties with more than 50 units, the
                                 enterprises acquired more loans for properties with 5 to 50 units over this
                                 period. For example, from 1994 through 2011 Fannie Mae purchased
                                 62,353 multifamily loans for properties with 5 to 50 units and 33,178 loans
                                 for properties with more than 50 units. Similarly, Freddie Mac purchased
                                 20,900 multifamily loans for properties with 5 to 50 units and 15,817 loans
                                 for properties with more than 50 units.




                                 Page 14                                  GAO-12-849 Multifamily Housing Financing
Figure 3: Enterprises’ Multifamily Loan Purchases by Unit Size of Properties, 1994-2011




                                         Note: All dollar figures are in 2012 dollars.


                                         Both enterprises purchased the highest number of loans for properties
                                         with 5 to 50 units in 2003. According to FHFA officials, the enterprises
                                         purchased a large number of loans for smaller properties that year
                                         because they received “bonus points” toward meeting their affordable




                                         Page 15                                         GAO-12-849 Multifamily Housing Financing
                               housing goals when they purchased these mortgages. 21 Fannie Mae also
                               purchased a large number of loans for properties with 5 to 50 units in
                               2007. As noted previously, these purchases helped them meet their
                               affordable housing goals that year although the bonus points were no
                               longer in effect. Freddie Mac purchased the vast majority of its loans for
                               smaller properties in 2001 through 2003, when the bonus points were in
                               effect. Since 2005, Freddie Mac has purchased very few multifamily loans
                               for smaller properties. According to Freddie Mac officials, the enterprise is
                               not currently active in the small multifamily loan market in part because of
                               the credit characteristics of these loans. While they are considered by
                               definition to be "multifamily" properties because they have five or more
                               units, these transactions generally need to be underwritten more similarly
                               to single-family loans. Freddie Mac officials noted that because the cost
                               of underwriting is essentially the same for loans on larger and smaller
                               properties, purchasing loans on small income properties on an individual
                               loan basis is less cost-effective than the purchase of individual loans on
                               larger properties. We discuss the enterprises’ role in this market segment
                               in more detail later in this report.

Size of Multifamily Loans at   The majority of the multifamily loans that the enterprises purchased, as
Acquisition                    measured by unpaid principal balances, were for loans with balances at
                               acquisition of $5 million to less than $50 million (see fig. 4). From 1994
                               through 2011, Fannie Mae purchased $203.5 billion of multifamily loans in
                               this category, while Freddie Mac purchased $155.1 billion of multifamily
                               loans of this size.




                               21
                                 Specifically, in calculating goal performance each goal-qualifying unit financed in a 5 to
                               50 unit property counted as two units in the numerator, and one unit in the denominator.




                               Page 16                                           GAO-12-849 Multifamily Housing Financing
Figure 4: Enterprises’ Annual Multifamily Loan Purchases by Loan Size at Acquisition, 1994-2011




                                         Note: All dollar figures are in 2012 dollars.


                                         While the majority of the unpaid principal balance was on multifamily
                                         loans with balances at acquisition of $5 million to less than $50 million,
                                         the enterprises acquired more multifamily loans with balances at
                                         acquisition of less than $5 million. For example, from 1994 through 2011
                                         Fannie Mae purchased 81,156 multifamily loans with balances at
                                         acquisition of less than $5 million and 15,425 multifamily loans with larger
                                         loan balances. Similarly, Freddie Mac purchased 26,944 multifamily loans
                                         with balances at acquisition of less than $5 million and 10,202 multifamily
                                         loans with larger loan balances.




                                         Page 17                                         GAO-12-849 Multifamily Housing Financing
Geographic Location of   The majority of the multifamily loans that the enterprises purchased were
Multifamily Properties   loans for properties in the largest metropolitan areas. We used 2010 U.S.
Financed                 Census Bureau data to identify the 25 largest metropolitan statistical
                         areas (MSA) by population. 22 Data from the 2010 American Community
                         Survey show that 56.3 percent of the nation’s multifamily housing was
                         located in these 25 MSAs. For Fannie Mae, 69 percent of the unpaid
                         principal balance of multifamily loans it purchased from 1994 through
                         2011 was for properties located in these 25 MSAs (see fig. 5).




                         22
                           The Office of Management and Budget defines MSAs for use by federal statistical
                         agencies in collecting, tabulating, and publishing statistics. They contain a core urban area
                         with a population of 50,000 or more.




                         Page 18                                           GAO-12-849 Multifamily Housing Financing
Figure 5: Fannie Mae’s Annual Purchases of Multifamily Loans in 25 Largest Metropolitan Areas, 1994-2011

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                                                              Note: All dollar figures are in 2012 dollars. We included only those purchases where a single
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                                                              financing options that can result in one loan for multiple properties, multiple loans for multiple
                                                              properties, or multiple loans for one property.




                                                        Page 19                                                               GAO-12-849 Multifamily Housing Financing
Further, from 1994 through 2011, the loans that Freddie Mac purchased
for properties in the 25 largest MSAs constituted 68 percent of its unpaid
principal balance (see fig. 6). For information on both enterprises’
purchases by metropolitan area and state, see appendixes II and III,
respectively.




Page 20                                 GAO-12-849 Multifamily Housing Financing
Figure 6: Freddie Mac’s Annual Purchases of Multifamily Loans in 25 Largest Metropolitan Areas, 1994-2011

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                                                        Page 21                                                                GAO-12-849 Multifamily Housing Financing
Multifamily Loan Terms   In terms of unpaid principal balance, over half of the multifamily loans that
                         Fannie Mae purchased and almost half of the multifamily loans that
                         Freddie Mac purchased from 1994 through 2011 were loans with terms of
                         60, 84, and 120 months (5, 7, and 10 years). This is in contrast to single-
                         family mortgages purchased by the enterprises, many of which were 30-
                         year mortgages.

                         Figure 7 shows that with some exceptions the enterprises annually
                         purchased more multifamily loans with terms of 120 months than any
                         other category. The exceptions were 1994-1995 and 2003 for Fannie Mae
                         and 1994 and 2001-2007 for Freddie Mac. During these years, loans with
                         terms longer than 120 months generally constituted the largest category.
                         According to Fannie Mae officials, the enterprise has periodically
                         purchased pools of seasoned loans with loan terms greater than 120
                         months.




                         Page 22                                  GAO-12-849 Multifamily Housing Financing
Figure 7: Fannie Mae and Freddie Mac Multifamily Loan Terms, 1994-2011




                                       Note: All dollar figures are in 2012 dollars.



Multifamily Asset Class                The enterprises acquired multifamily loans for a variety of asset classes—
                                       traditional rental, student, senior, manufactured, and cooperative
                                       housing—but the majority of the multifamily properties that they financed




                                       Page 23                                         GAO-12-849 Multifamily Housing Financing
from 1994 through 2011 were traditional rental properties. 23 As shown in
figure 8, 87.7 percent of Fannie Mae’s multifamily mortgage purchases
during this period and 91.6 percent of Freddie Mac’s multifamily mortgage
purchases were loans for traditional rental housing. 24 The enterprises
explained this occurred because the majority of the multifamily mortgage
market is concentrated in traditional rental housing.




23
  Traditional multifamily rental housing is housing with five or more units that is not
student, senior, manufactured, or cooperative housing. Multifamily loans for student
housing are secured by properties in which college or graduate students make up at least
80 percent of the tenants, among other requirements. Multifamily loans for senior housing
are secured by properties intended to be for residents aged 55 or older and that provide
additional services for residents, such as group meals. Multifamily loans for manufactured
housing are secured by a residential development that consists of sites for manufactured
homes and includes infrastructure. A cooperative loan is a multifamily loan made to a
cooperative housing corporation and secured by a first or second subordinate lien on a
cooperative multifamily housing project that contains five or more units.
24
  According to Freddie Mac officials, they tend to report on their multifamily purchases as
either traditional rental housing loans or targeted affordable loans. Targeted affordable
loans include mortgages on properties subject to low-income housing tax credits,
mortgages on properties that receive federal subsidies, and transactions in which Freddie
Mac will credit enhance a mortgage that backs tax-exempt bonds, a trust certificate, or
other instrument related to tax-exempt bonds.




Page 24                                          GAO-12-849 Multifamily Housing Financing
Figure 8: Enterprises’ Multifamily Loan Purchases by Asset Class, 1994-2011




                                        Note: Manufactured housing is not reflected on the Freddie Mac pie chart because it only purchased
                                        two of these loans from 1994 through 2011.


Type of Interest Rate for               While the vast majority of the multifamily loans that the enterprises
Multifamily Loans                       purchased from 1994 through 2011 were fixed-rate loans, they also
                                        acquired a large number of adjustable-rate mortgages (ARM) in 2003 that
                                        coincided with the acquisition of seasoned loans to meet affordable
                                        housing goals described earlier (see fig. 9). From 1994 through 2011,
                                        Fannie Mae purchased $291.8 billion in fixed-rate mortgages and $87
                                        billion in ARMs, and Freddie Mac purchased $165.1 billion in fixed-rate
                                        mortgages and $48.6 billion in ARMs. During this period, yearly fixed-rate
                                        purchases typically represented 67 percent or more of all multifamily
                                        mortgage purchases (in terms of unpaid principal balances). However, in
                                        2003 Fannie Mae’s purchases of fixed-rate mortgages fell to 54 percent
                                        of all multifamily purchases and Freddie Mac’s to 47 percent. According
                                        to Fannie Mae officials, multifamily borrowers typically selected ARMs



                                        Page 25                                              GAO-12-849 Multifamily Housing Financing
                                         when they wanted to maintain greater prepayment flexibility and when the
                                         interest rate environment favored ARMs. According to Freddie Mac
                                         officials, the majority of ARMs that the enterprise has acquired are related
                                         to the affordable business described earlier in the report.

Figure 9: Enterprises’ Annual Multifamily Loan Purchases by Interest Rate Type, 1994-2011




                                         Note: During the first 4 years we analyzed, Freddie Mac purchased no ARM multifamily loans.



Structured Multifamily Finance           The enterprises exhibited some differences in their approaches to
and Fannie Mae’s DUS Program             purchasing multifamily loans from 1994 through 2011. For example, both
                                         enterprises provided a structuring option that allowed a borrower to
                                         arrange financing terms for a group of loans and properties, but Fannie




                                         Page 26                                              GAO-12-849 Multifamily Housing Financing
Mae much more so than Freddie Mac. 25 At Fannie Mae, these
transactions could involve multiple properties financed by one loan,
multiple properties financed by multiple loans, or one property financed by
multiple loans. For certain transactions, the number of loans and
properties can change over time as the borrower sells certain properties
and acquires new ones, and needs new infusions of capital to finance
these acquisitions. At Freddie Mac, such transactions could involve
multiple properties financed by one loan or one property financed by
multiple loans. Although most of Fannie Mae’s multifamily purchases
continued to involve one property financed by one loan, it started
engaging in these transactions in a significant way in the early 2000s (see
fig. 10). By 2007, 16 percent ($8 billion) of Fannie Mae’s loan acquisitions
occurred within transactions featuring multiple loans for multiple
properties. Also in 2007, 20 percent ($10 billion) of Fannie Mae’s loan
acquisitions occurred within transactions featuring one loan for multiple
properties. In contrast, from 1994 through 2011 Freddie Mac’s
transactions involving multiple loans or multiple properties represented
about 0.1 percent of the loans it purchased and about 1 percent of its
unpaid principal balance.




25
  Fannie Mae’s multifamily transactions involving multiple loans and multiple properties
may be characterized by cross-collateralized and cross-defaulted loans. Cross-
collateralization uses multiple properties to secure one loan. When such loans are also
cross-defaulted, a default on one loan triggers default on the rest. Similar transactions
undertaken by Freddie Mac are also characterized by a pool of cross-collateralized and
cross-defaulted loans.




Page 27                                          GAO-12-849 Multifamily Housing Financing
Figure 10: Fannie Mae’s Use of Various Multifamily Structuring Options




                                         Note: All dollar figures are in 2012 dollars.


                                         In contrast to Freddie Mac, which underwrites all the loans it purchases,
                                         Fannie Mae delegates the majority of its underwriting (based on unpaid
                                         principal balance) through its DUS program. From 1994 through 2011,
                                         loans purchased under the DUS program represented the majority of
                                         Fannie Mae’s multifamily loan purchases in terms of unpaid principal
                                         balance for every year except 1994, 1995, 2003, and 2007 (see fig. 11,
                                         left). A smaller portion of Fannie Mae’s multifamily business comprised
                                         non-DUS deliveries, which typically were small balance loans or pools of
                                         seasoned loans.




                                         Page 28                                         GAO-12-849 Multifamily Housing Financing
Figure 11: Fannie Mae’s Annual Multifamily Loan Purchases by Type of Underwriting, 1994-2011




                                        Note: All dollar figures are in 2012 dollars.


                                        However, based on total loan counts, non-DUS loans constituted the
                                        majority of multifamily loans in 10 of the 18 years we reviewed (see fig.
                                        11, right). In addition, some of the years in which non-DUS loans were the
                                        majority were the same years in which the enterprises acquired many
                                        more multifamily loans to meet housing goals. For example, in 2003
                                        Fannie Mae purchased 16,322 non-DUS loans (representing $19.8 billion
                                        in unpaid principal balance) and 1,995 DUS loans (representing $18.7
                                        billion), and in 2007 it purchased 11,819 non-DUS loans (representing
                                        $27.0 billion) and 2,552 DUS loans (representing $22.8 billion).




                                        Page 29                                         GAO-12-849 Multifamily Housing Financing
Enterprises’ Multifamily    From 1994 through 2011, Fannie Mae and Freddie Mac’s multifamily
Serious Delinquency Rates   serious delinquency rates, based on unpaid principal balances, were
Were Low                    below 1 percent with the exception of Fannie Mae in 1994 (see fig. 12). 26
                            However, starting in 2008 Fannie Mae’s serious delinquency rates and
                            the total unpaid principal balance of seriously delinquent loans increased.
                            For example, in 2008 the unpaid principal balance of seriously delinquent
                            loans was $500.9 million (0.29 percent), but rose to $1.3 billion (0.70
                            percent) in 2010 and dropped to $1.1 billion (0.58 percent) in 2011.
                            Freddie Mac also saw a rise in serious delinquency rates and the unpaid
                            principal balance of seriously delinquent loans starting in 2008. In that
                            year, the unpaid principal balance of delinquent loans was $31.5 million
                            (0.03 percent), but increased to $293.9 million (0.26 percent) in 2010 and
                            dropped to $259.7 million (0.22 percent) in 2011. These increases in
                            serious delinquency rates and seriously delinquent unpaid principal
                            balances in 2008 through 2011 could be attributable to loans purchased
                            in prior years. 27 However, past performance is not necessarily indicative
                            of future performance. As the enterprises continue to purchase
                            multifamily mortgages, the quality of such loans and economic conditions
                            will influence delinquency rates.




                            26
                              Fannie Mae and Freddie Mac classify multifamily loans as seriously delinquent when
                            payment is 60 days or more past due. Our analyses of delinquency rates are based on the
                            unpaid principal balance of outstanding loans at the end of each year. Later in this report,
                            we present the delinquency rates for loans acquired or guaranteed in particular years and
                            compare the enterprises’ delinquency rates with those of other major market participants.
                            27
                              As shown later in this report, Fannie Mae’s serious delinquency rates for multifamily
                            loans acquired in 2005 through 2010 were highest for 2007 and 2008. During the same
                            period, Freddie Mac’s serious delinquency rates were highest in 2006 and 2007.




                            Page 30                                          GAO-12-849 Multifamily Housing Financing
Figure 12: Unpaid Principal Balances of Enterprises’ Seriously Delinquent Multifamily Loans and Multifamily Portfolio Serious
Delinquency Rates, 1994-2011




                                         Note: For Freddie Mac, delinquency rates were 0 percent in 1994, 1995, 1997, 1998, and 2000.


                                         Similar to delinquencies, the unpaid principal balance of Fannie Mae and
                                         Freddie Mac’s multifamily loans associated with real estate-owned (REO)
                                         properties—those acquired through foreclosure—remained low overall
                                         but increased in recent years. From 2002 to 2011, Fannie Mae’s unpaid
                                         principal balance on REO properties ranged from $9 million in 2002 to
                                         $1.2 billion in 2010 (see fig. 13). Total end-of-year unpaid principal
                                         balance has increased substantially for Fannie Mae since 2007, which
                                         was the beginning of the financial crisis. After 1995, Freddie Mac’s
                                         portfolio of multifamily REO (by unpaid principal balance) remained low
                                         until 2010, increasing from $52 million in 2009 to $171 million in 2010.


                                         Page 31                                             GAO-12-849 Multifamily Housing Financing
Figure 13: Unpaid Principal Balances of Enterprises’ Multifamily REO Property and Multifamily REO Property as a Percentage
of Multifamily Book of Business, 1995-2011




                                        Note: Fannie Mae could not provide data before 2002 because this was prior to its restatement of
                                        earnings. Freddie Mac was not able to provide data for 1994.


                                        While the enterprises’ multifamily serious delinquency rates remained low
                                        from 1994 to 2011, many of their multifamily loans will mature in the next
                                        10 years. Specifically, a majority of the loans the enterprises currently
                                        hold are scheduled to mature by 2018. Between 2012 and 2018, 20,703
                                        of the loans that Fannie Mae purchased (52.5 percent of its multifamily


                                        Page 32                                               GAO-12-849 Multifamily Housing Financing
                           portfolio as of December 2011) are scheduled to mature. The unpaid
                           principal balance of these loans is $108 billion, or 58.4 percent of Fannie
                           Mae’s total multifamily unpaid principal balance as of December 2011.
                           Between 2012 and 2018, 5,975 of the loans that Freddie Mac purchased
                           (57.2 percent of its portfolio as of December 2011) are scheduled to
                           mature. This represents $69.7 billion, or 60.1 percent of Freddie Mac’s
                           unpaid principal balance as of December 2011.


Enterprises’ Multifamily   From 2002 through 2011, Fannie Mae and Freddie Mac’s multifamily
Activity Generally Was     business operations generally were profitable, except for losses both
Profitable                 enterprises reported for 2008 and 2009. We reviewed three measures
                           affecting profitability: net income, net charge-offs, and guarantee fees. 28

Multifamily Net Income     Due to differences in the business structures of the enterprises, net
                           income figures cannot be directly compared between enterprises. 29
                           Fannie Mae’s multifamily business reported positive net income every
                           year from 2002 through 2011 except for 2008 and 2009 (see fig. 14). In
                           those years, it lost $2.2 billion and $9 billion, respectively. Fannie Mae
                           had to write off low-income housing tax credit (LIHTC) investments, which
                           constituted the majority of the loss reported for 2009. 30 Freddie Mac’s
                           multifamily business reported positive net income every year from 2005 to
                           2011 except for 2008 and 2009. In those years, it lost $57 million and $3
                           billion, respectively. Similar to Fannie Mae, the loss Freddie Mac reported
                           for 2009 was primarily due to LIHTC write-offs.




                           28
                            For Freddie Mac, we also discuss gain on sales of mortgages.
                           29
                             For example, Fannie Mae’s net income figures do not include net income from its capital
                           markets division, which buys and sells multifamily and single-family MBS. Freddie Mac’s
                           net income figures are for its entire multifamily business.
                           30
                             LIHTC is the primary program for the creation and preservation of rental housing that is
                           affordable for low- and very low-income households. In February 2010, FHFA determined
                           that the sale of any LIHTC investments made by the enterprises would require the consent
                           of Treasury under the terms of the preferred stock purchase agreements. After FHFA
                           consulted with Treasury, it decided that the enterprises could not sell or transfer the
                           assets and required them to write down the value of the LIHTC investments to zero,
                           causing substantial losses for the enterprises. This decision was reflected in the 2009
                           year-end financial statements, which were published in March 2010.




                           Page 33                                         GAO-12-849 Multifamily Housing Financing
Figure 14: Net Income Attributable to Fannie Mae and Freddie Mac’s Multifamily Business, 2002-2011




                                        Note: Fannie Mae data were not available before 2002, and Freddie Mac data were not available
                                        before 2005.


Multifamily Net Charge-offs             Net multifamily charge-offs increased in recent years, mirroring the rise in
                                        serious delinquencies shown earlier. 31 From 2002 to 2008, net charge-
                                        offs in Fannie Mae’s multifamily business segment remained at or below
                                        $34 million annually (see fig. 15). Since 2008, annual net charge-offs
                                        have risen dramatically, peaking at $446 million (a loss rate of 0.61
                                        percent) in 2010. From 2002 to 2008, annual net charge-offs in Freddie
                                        Mac’s multifamily business segment remained at or below $8 million, with
                                        one year during that period resulting in a net gain. However, since 2008,
                                        annual net charge-offs have risen, including a net charge-off of $103
                                        million (a loss rate of 0.10 percent) in 2010.




                                        31
                                          Fannie Mae and Freddie Mac define net multifamily charge-offs as the realization of
                                        losses on loans that have been deemed uncollectible, typically due to foreclosure.




                                        Page 34                                             GAO-12-849 Multifamily Housing Financing
Figure 15: Net Charge-offs Attributable to Fannie Mae and Freddie Mac’s Multifamily Business, 2002-2011




                                         Note: Fannie Mae data were not available before 2002, and Freddie Mac data were not available
                                         before 1997.


Multifamily Guarantee Fees               Multifamily guarantee fees for both enterprises grew from 2002 to 2011.
                                         Fannie Mae’s guarantee fees are compensation received for assuming
                                         and managing credit risk on the mortgage loans underlying its MBS,
                                         multifamily loans held in its portfolio, and other mortgage-related
                                         securities. From 2002 through 2011, Fannie Mae’s multifamily business
                                         received between $271 million and $884 million in guarantee fees
                                         annually, as shown in figure 16. Guarantee fees—which are charged to
                                         investors for guaranteeing the payment of principal and interest on
                                         multifamily mortgage-related securities and mortgages underlying
                                         multifamily housing revenue bonds—are a relatively small source of
                                         revenue for Freddie Mac. From 2002 through 2011, Freddie Mac’s
                                         multifamily business received between $38 million and $127 million in
                                         guarantee fees annually.




                                         Page 35                                             GAO-12-849 Multifamily Housing Financing
Figure 16: Multifamily Guarantee Fees Received by Fannie Mae and Freddie Mac, 2002-2011




                                       Note: Fannie Mae data were not available before 2002, and Freddie Mac data were not available
                                       before 2001.

                                       According to Freddie Mac officials, the gains (or losses) on mortgages
                                       held for sale have become a bigger driver of net income than guarantee
                                       fees. Freddie Mac’s total gain on loans held for securitization is
                                       represented by both the gains it receives while the loans are held in
                                       portfolio awaiting securitization and gains it receives upon securitizing the
                                       loans. With the expansion of its securitization business, or K-deal
                                       program, combined gains on the sale of mortgages have increased from
                                       $14 million in 2008 to $300 million in 2011.


                                       Fannie Mae and Freddie Mac have played an increasingly large role in
Enterprises Increased                  the multifamily marketplace since the beginning of the financial crisis in
Their Multifamily                      2007, as evidenced by the increase in their market share. Although
                                       empirical research on the enterprises’ role in multifamily housing
Market Share and                       financing is limited, the literature we reviewed generally stated that the
Generally Met                          enterprises have provided liquidity and market stability. The enterprises
Affordable Housing                     met their affordable housing goals in most years, with multifamily
                                       activities greatly contributing to their fulfillment.
Goals


                                       Page 36                                             GAO-12-849 Multifamily Housing Financing
Enterprises’ Multifamily     Although the enterprises historically have played a smaller role in
Market Share Has Grown       financing multifamily housing than single-family housing, their role in the
Since the Financial Crisis   multifamily housing financing marketplace has grown since the financial
                             crisis began in 2007, as evidenced by the increase in their market share.
                             We relied on two sources of data on market share in the multifamily
                             housing financing marketplace from 2005 through 2011: (1) data from the
                             Federal Reserve on all multifamily mortgage debt outstanding and (2)
                             MBA data on sources of financing for mortgages originated in a given
                             year. Our analysis of Federal Reserve data shows that as of the end of
                             2011, the enterprises held or guaranteed almost 34 percent of the
                             outstanding multifamily mortgage debt compared to about 24 percent in
                             2005 (see fig. 17).




                             Page 37                                 GAO-12-849 Multifamily Housing Financing
Figure 17: Multifamily Mortgage Debt Outstanding, 2005-2011




a
 Includes multifamily mortgages held by the Farmers Home Administration (currently the Department
of Agriculture’s Rural Economic and Community Development Service), FHA, the Department of
Veterans Affairs, and the Federal Deposit Insurance Corporation.
b
 Other holders include foreign banking offices in the United States, private pension funds, and real
estate investment trusts.
c
 Includes retirement funds.
d
    Includes enterprise-backed mortgage pools.


According to MBA data on the financing of loans by investor type, the
enterprises financed less than 30 percent of annual multifamily loans
originated before 2008 (see fig. 18). Their share of the multifamily market
increased to 86 percent in 2009, but decreased to about 57 percent in
2011 as other participants reentered the market. These data are based



Page 38                                                GAO-12-849 Multifamily Housing Financing
on MBA’s annual survey of large institutional lenders, which it defines as
firms with a dedicated commercial/multifamily origination platform. 32

Figure 18: Financing of Multifamily Loans Originated, 2005-2011




Note: According to MBA, institutional lenders do not include small banks and thrifts. Percentages may
not add to 100 because of rounding.

Finally, our analysis of data from the enterprises and two major
participants in the multifamily housing financing marketplace—life
insurance companies and CMBS lenders—illustrates how these
participants’ multifamily activities have changed over time. While the



32
  Ninety-nine firms participated in MBA’s 2011 origination survey, including life insurance
companies, conduits for CMBS, lenders that sell loans to Fannie Mae and Freddie Mac,
FHA lenders, and other lender groups. The survey did not include small banks and thrifts
because they tend to operate as a separate market, according to MBA. Although not
comprehensive, the survey data from MBA are the data most often cited when discussing
the enterprises’ share of the multifamily housing financing marketplace.




Page 39                                               GAO-12-849 Multifamily Housing Financing
                                          enterprises’ role in the multifamily housing finance marketplace was about
                                          equal to that of the combined total of originations for life insurance
                                          companies and CMBS lenders before the financial crisis (2005 through
                                          2006), Fannie Mae and Freddie Mac dominated the marketplace during
                                          the height of the crisis (2008 through 2009) as life insurance companies
                                          and CMBS lenders significantly reduced their presence in the market.
                                          Data from the enterprises, ACLI, and Trepp show that by 2008, the
                                          enterprises’ combined purchases were almost $60 billion compared with
                                          almost $4 billion for life insurance companies and CMBS lenders
                                          combined (see table 2). 33 The data from ACLI and Trepp also showed
                                          that life insurance companies and CMBS lenders started reentering the
                                          market in 2010.

Table 2: Principal Balance of Multifamily Loans Purchased by the Enterprises and Multifamily Loans Originated by Life
Insurance Companies and CMBS Lenders, 2005-2011

Acquisition or     Fannie Mae (dollars Freddie Mac (dollars                   Life insurance companies                    CMBS lenders (dollars in
                                      a                     a                                             b                                       b
origination year          in millions)         in millions)                          (dollars in millions)                              millions)
2005                           $22,844                    $10,768                                          $7,636                           $21,837
2006                            22,233                      12,669                                         11,167                            27,399
2007                            46,297                      22,644                                           9,709                           32,750
2008                            34,691                      24,165                                           2,872                            1,087
2009                            19,537                      17,063                                             564                                 0
2010                            16,832                      14,508                                           4,651                              380
2011                            24,177                      19,993                                         11,136                             1,319
                                          Sources: GAO analysis of Fannie Mae and Freddie Mac data; ACLI; and Trepp.
                                          a
                                           The amounts for Fannie Mae and Freddie Mac are the unpaid principal balance on loans acquired
                                          each year and are not adjusted for inflation.
                                          b
                                           The amounts for life insurance companies and CMBS lenders are the original principal balance on
                                          loans originated each year and are not adjusted for inflation.




                                          33
                                            Trepp is a provider of CMBS analytics, data, consulting, and software to the securities
                                          and investment management industry.




                                          Page 40                                                            GAO-12-849 Multifamily Housing Financing
Few Studies Examined     Based on our reviews of existing literature and interviews with
Enterprises’ Role in     stakeholders, the enterprises have provided access to multifamily
Multifamily Market but   financing although some view their role in the small-loan market segment
                         as limited. Our review of the available literature on the role the enterprises
Most Noted Positive      have played in the secondary market for multifamily housing revealed few
Effects                  studies on this issue, partly due to the long-standing emphasis on Fannie
                         Mae and Freddie Mac’s single-family portfolios. Additionally, the studies
                         we found generally lacked both empirical research and a balanced
                         analysis of the benefits and costs of the enterprises. This was driven, in
                         part, by the lack of publicly available data on the enterprises’ multifamily
                         activities and on the multifamily housing finance marketplace as a whole.

                         However, the available literature we reviewed included statements that
                         the enterprises have provided liquidity, stability, and affordability. 34 For
                         example, five of the seven studies we reviewed stated that the
                         enterprises have helped ensure a robust financing system for multifamily
                         housing by providing vital liquidity and counter-cyclical stability, but did
                         not include empirical evidence supporting these statements. 35 According
                         to these studies, Fannie Mae and Freddie Mac have provided capital to
                         the secondary mortgage market for multifamily financing during all
                         economic climates, including times of credit market stress. One study
                         cited certain instances in which the enterprises had provided liquidity (in
                         the wake of the currency crisis in 1998, after the 2001 recession, and in
                         2007 through 2008 when purely private sources withdrew or charged
                         untenable interest rates). 36



                         34
                           To a lesser extent, the literature also noted that Fannie Mae and Freddie Mac have
                         helped set underwriting standards in the multifamily market.
                         35
                           See Mortgage Finance Working Group’s Multifamily Subcommittee, Center for American
                         Progress, A Responsible Market for Rental Housing Finance: Envisioning the Future of
                         the U.S. Secondary Market for Multifamily Residential Rental Mortgages (October 2010);
                         Denise DiPasquale, “Rental Housing: Current Market Conditions and the Role of Federal
                         Policy,” Cityscape, 13, no. 2 (2011); Ingrid Gould Ellen, John Napier Tye, and Mark A.
                         Willis, Improving U.S. Housing Finance through Reform of Fannie Mae and Freddie Mac:
                         Assessing the Options (NYU Furman Center for Real Estate and Urban Policy: May
                         2010); Joint Center for Housing Studies, Harvard University, Meeting Multifamily Housing
                         Finance Needs During and After the Credit Crisis (2009); and Ethan Handelman, David A.
                         Smith, and Todd Trehubenko, Government-Sponsored Enterprises and Multifamily
                         Housing Finance: Refocusing on Core Functions, report prepared for the National Housing
                         Conference (October 2010).
                         36
                           Joint Center for Housing Studies, Harvard University, Meeting Multifamily Housing
                         Finance Needs During and After the Credit Crisis (2009).




                         Page 41                                         GAO-12-849 Multifamily Housing Financing
Most mortgage finance and housing policy groups with whom we spoke
generally agreed that the enterprises had provided liquidity and counter-
cyclical stability. They agreed that the enterprises were a major source of
funding for multifamily projects during the recent financial crisis.
According to one group, the flight of traditional providers of private capital
(such as banks and life insurance companies) would have been more
devastating to renters had it not been for the enterprises’ presence.

The five studies we cited previously also stated that the enterprises
generally promoted access to affordable rental housing. As discussed in
more detail later in this report, the enterprises must meet affordable
housing goals for targeted groups such as low- and moderate-income
households. One study stated, “the government’s involvement in ensuring
that capital is available during times of credit contraction is a critical factor
in mitigating fluctuations in the supply of market-rate and affordably priced
rental housing.” 37 All five studies discussed the role the enterprises have
played in the LIHTC program. For example, one housing policy group
wrote that the enterprises have acted both as equity investors and
purchasers of mortgages for affordable housing developments financed
by the LIHTC program. 38 It noted that through their loan purchases, the
enterprises facilitated 15-year, fixed-rate mortgages that were essential
for these tax credits to be attractive to LIHTC investors. However, the
studies also noted that with no income tax liability to shelter, Fannie Mae
and Freddie Mac have withdrawn from the LIHTC investment market.
According to FHFA, it instructed the enterprises to withdraw from the
LIHTC market. Although it is no longer an active equity investor, Freddie
Mac officials noted that the enterprise continues to purchase and
guarantee mortgages that support LIHTC programs.

While representatives of most of the groups we interviewed stated that
Fannie Mae and Freddie Mac generally had played a role in providing
access to affordable rental housing, they emphasized that the enterprises
could do more. For example, one association told us that the affordable
housing goal levels are generally set too low. In its comment letter on


37
  Mortgage Finance Working Group’s Multifamily Subcommittee, Center for American
Progress, A Responsible Market for Rental Housing Finance: Envisioning the Future of
the U.S. Secondary Market for Multifamily Residential Rental Mortgages (October 2010).
38
  Mortgage Finance Working Group’s Multifamily Subcommittee, Center for American
Progress, A Responsible Market for Rental Housing Finance: Envisioning the Future of
the U.S. Secondary Market for Multifamily Residential Rental Mortgages (October 2010).




Page 42                                        GAO-12-849 Multifamily Housing Financing
FHFA’s proposed rule on the 2010 and 2011 affordable housing goals, it
wrote that Fannie Mae and Freddie Mac actually had been doing even
less to finance what it called legitimate, affordable rental housing since
conservatorship. The association provided as an example the experience
of one of its members, a lending consortium whose funds came from a
pool of 45 investors. One of the enterprises had been an investor since
1993, but recently had been the only major investor to not renew its
commitment. According to this enterprise, FHFA has directed it to cease
making certain types of investments and loans.

In addition, our literature review and interviews indicated that the
enterprises have played a limited role in financing small multifamily
properties, which tend to have lower rents than larger properties.
According to the 2010 American Community Survey, almost one-third of
renters live in structures with 5 to 49 units (see fig. 19).

Figure 19: Distribution of Rental Units by Building Size (Number of Units), 2010




Note: The American Community Survey data used do not include unoccupied rental units.



Representatives from trade associations, housing policy groups, industry
researchers, and a consumer advocacy group generally agreed on the
limited role that Fannie Mae and Freddie Mac played in the small-loan
market segment. For example, two trade associations stated that
enterprise financing generally has not flowed outside major metropolitan



Page 43                                            GAO-12-849 Multifamily Housing Financing
areas, where there is a need for small-loan financing. In its comment
letter on FHFA’s proposed rule on the 2010 and 2011 affordable housing
goals, one of these trade associations stated that smaller-sized properties
that are affordable to low- and moderate-income persons are the most
underserved segment of the multifamily market, in large part because of
low levels of enterprise activity in this market segment.

As previously noted, small loans (those for properties with 5 to 50 units)
make up a small percentage of the loans that the enterprises have
purchased. 39 According to Fannie Mae’s 2011 activity report, 22,382 of
the 390,526 multifamily units that Fannie Mae financed (5.7 percent) were
through small loans. Of these multifamily units, 76 percent were low-
income or very low-income rental units. 40 According to Freddie Mac’s
2011 activity report, the enterprise’s units financed through small loans
comprised 0.7 percent of the multifamily units it financed (2,173 of
290,116 units). About 35 percent of these units were low-income or very
low-income rental units. Although well below the enterprises’ participation
in the larger property market, officials at FHFA, Fannie Mae, and Freddie
Mac contend that the enterprises’ small-loan activity levels are noteworthy
because this segment of the market has been dominated by banks and
thrifts—institutions that have greater familiarity with local needs. (For
information on how the size of the loans that the enterprises purchased
compares with the size of loans financed by other major participants in
the multifamily housing financing marketplace, see app. IV.)

While most studies we reviewed and individuals we interviewed stated
that the enterprises played an important role in multifamily housing
finance, two studies stated that private capital should play a larger role.
The first study concluded that without the enterprises over the past 20
years, “a fully functioning, private debt financing market for multifamily
housing would have existed, in the same way that fully private debt




39
  While the American Community Survey reports on properties with 5 to 49 units as small,
FHFA and the enterprises define small multifamily loans as those financing properties with
5 to 50 units.
40
  Low-income rental units are those affordable to households with income below 80
percent of area median income. Very low-income rental units are those affordable to
households with incomes below 50 percent of area median income.




Page 44                                         GAO-12-849 Multifamily Housing Financing
financing markets exist for office, retail, and industrial properties.” 41
According to the study, the multifamily market is dependent on the
enterprises because of a lack of competition among other lenders,
derived from the enterprises’ unfair pricing advantages. Similarly, the
second study stated that before the enterprises’ involvement, life
insurance companies, pension funds, and banks supported a robust
conventional multifamily lending market. 42 According to the study, once
the enterprises entered the multifamily market, the private sector had an
increasingly difficult time competing with the enterprises because their
charter provided them with certain advantages, such as pricing. The
authors of the first study and other stakeholders we interviewed stated
that the benefits conferred on Fannie Mae and Freddie Mac by their
status as government-sponsored entities created a competitive
advantage over other market participants, temporarily crowding them out
of the market.

In February 2012, FHFA released a strategic plan for the enterprises’
single- and multifamily operations during the next phase of
conservatorship. In the plan, FHFA asked Fannie Mae and Freddie Mac
to conduct a market analysis of the viability of their multifamily operations
without government guarantees. FHFA also released a draft strategic
plan for 2013 through 2017, which includes the strategic plan for
conservatorship. This plan noted that the enterprises would be working to
further standardize the process for securitizing mortgages. 43 According to
Fannie Mae and Freddie Mac officials, both enterprises have begun their
market analyses and expect to meet FHFA’s deadline of December 31,
2012.




41
  Tom White and Charlie Wilkins, No Federal Guaranty for Multifamily and Other Ideas for
Multifamily Housing Finance Reform, paper presented at an American Enterprise Institute-
hosted event entitled “A New Lease on Loans: Ideas for Multifamily Housing Reform”
(Washington, D.C.: Nov. 16, 2011).
42
 Peter J. Wallison, Alex J. Pollock, and Edward J. Pinto, Taking the Government Out of
Housing Finance: Principles for Reforming the Housing Finance Market, an American
Enterprise Institute Policy White Paper (Mar. 24, 2011).
43
  According to FHFA officials, the focus of this initiative is single-family mortgages.
Securitization for single-family mortgages has been more standardized than for multifamily
mortgages, which also has employed a different process. For example, the typical
multifamily MBS that Fannie Mae issues is backed by a single multifamily loan, while its
single-family MBS are backed by numerous single-family loans.




Page 45                                         GAO-12-849 Multifamily Housing Financing
                              Currently, the enterprises compose the largest share of the multifamily
                              market as they and other federal entities compose most of the single-
                              family market. While markets are expected to eventually recover from the
                              financial crisis, the future role of the enterprises is unknown due to a
                              number of factors. However, our analysis of multifamily funding activity
                              over time provides insight into the role the enterprises have played in the
                              marketplace during periods in which the markets were relatively stable.
                              For example, prior to the financial crisis, our analysis revealed that the
                              enterprises generally financed about 30 percent of multifamily mortgages.

Enterprises’ Multifamily      Beginning in 2010, FHFA implemented the Housing and Economic
Activities Are Important to   Recovery Act of 2008 (HERA) by making significant changes to the
Meeting Affordable            housing goal framework, including establishing separate goals for the
                              purchases of single- and multifamily mortgages.
Housing Goal
Requirements

HUD and FHFA Roles and        The Safety and Soundness Act required the enterprises to meet annual
Responsibilities              numeric goals for the purchase of mortgages serving targeted groups. 44
                              Specifically, the act established three broad affordable housing goals for
                              Fannie Mae and Freddie Mac: (1) a broad low- and moderate-income
                              goal for families earning less than the area median income (AMI); (2) a
                              geographically targeted goal for housing located in underserved areas,
                              such as central cities and rural areas; and (3) a special affordable
                              housing goal, which targets housing that is affordable to very low-income
                              families and low-income families living in low-income areas. In HUD’s first
                              rulemaking on the affordable housing goals, it defined underserved areas
                              as census tracts with median income at or below 90 percent of AMI in
                              metropolitan areas and 95 percent of AMI in nonmetropolitan areas, or
                              high-minority areas (metropolitan census tracts in which at least 30
                              percent of households are minority and the tract median income does not
                              exceed 120 percent of AMI). 45 The special affordable goal targeted



                              44
                                Federal Housing Enterprises Financial Safety and Soundness Act of 1992, Pub. L. No.
                              102-550, §§ 1331-1334.
                              45
                                A similar definition, based on counties, was employed for high-minority areas in
                              nonmetropolitan areas. The income definitions were revised over time. For example, for
                              2005 through 2008 HUD revised the underserved areas goal to target households residing
                              in (1) census tracts with median income at or below 80 percent of AMI in metropolitan
                              areas, or (2) high-minority areas with tract median income at no more than 100 percent of
                              AMI.




                              Page 46                                         GAO-12-849 Multifamily Housing Financing
borrowers or renters earning no more than 60 percent of AMI or earning
no more than 80 percent of AMI and residing in census tracts with median
income at or below 80 percent of AMI.

The Safety and Soundness Act required HUD to consider several factors
in establishing these housing goals, including: (1) national housing needs;
(2) economic, housing, and demographic conditions; (3) past
performance on each goal; (4) the size of the corresponding primary
mortgage market; (5) the ability of the enterprises to lead the industry,
and (6) the need to maintain the sound financial condition of the
enterprises. For the period 1993 through 2008, HUD considered past
performance and the size of the corresponding primary market as the two
primary factors when setting the goals. 46

The enterprises could purchase both single- and multifamily mortgages to
satisfy these goals. Starting in 1996, HUD established a dollar-based
special affordable multifamily subgoal related to purchases of multifamily
mortgages for properties affordable to very low-income tenants (no more
than 60 percent of AMI) or in low-income neighborhoods and affordable to
low-income tenants. See figure 20 for information on changes made to
the affordable housing goals since they were first set in 1992.




46
  According to a November 2010 paper by John C. Weicher (former Assistant Secretary
for Housing at HUD from 2001 through 2005), the goals that HUD set did not ask the
enterprises to lead the market; rather, the targets were consistently set so that they could
be met. See Weicher, The Affordable Housing Goals, Homeownership and Risk: Some
Lessons from Past Efforts to Regulate the GSEs, paper presented at a Federal Reserve
Bank of St. Louis conference entitled “The Past, Present, and Future of the Government-
Sponsored Enterprises” (St. Louis, Mo.: Nov. 17, 2010).




Page 47                                           GAO-12-849 Multifamily Housing Financing
Figure 20: Enterprises’ Affordable Housing Goals Timeline, 1992-2012




                                        HUD oversaw the enterprises’ compliance with the housing goals through
                                        2008. On July 30, 2008, HERA transferred the housing goal oversight
                                        function to FHFA. 47 The Safety and Soundness Act, as amended by
                                        HERA, requires FHFA to consider the following when setting multifamily
                                        goals: national multifamily mortgage credit needs and the ability of the
                                        enterprises in making mortgage credit available to provide additional
                                        liquidity and stability for the multifamily mortgage market; the performance
                                        and effort of the enterprises in making mortgage credit available for
                                        multifamily housing in previous years; the size of the multifamily mortgage
                                        market for housing affordable to low-income and very low-income


                                        47
                                          See Pub. L. No. 110-289, Sec. 1128 (12 U.S.C. 4561).




                                        Page 48                                       GAO-12-849 Multifamily Housing Financing
families; the ability of the enterprises to lead the market in making
multifamily mortgage credit available; the availability of public subsidies;
and the need to maintain the sound financial conditions of the
enterprises. 48

In establishing affordable housing goals under HERA, FHFA focused
more on the role of the enterprises in the multifamily market given current
market conditions and competitors’ roles and less on past performance.
In August 2009, FHFA issued a final rule that kept many of the existing
housing goals provisions, but revised the levels of the existing affordable
housing goals downward in light of current market conditions. 49 Beginning
in 2010, FHFA, implementing HERA, made significant changes to the
goals framework, such as separating the goals for multifamily and single-
family mortgage purchases. 50 In its final rule on the affordable housing
goals for 2010 and 2011, the agency also redefined the goal targets to
reach lower-income groups and required the enterprises to report on their
acquisition of mortgages involving low-income units in small (5 to 50 unit)
multifamily properties. 51 Further, FHFA prohibited the enterprises from
crediting purchases of private-label securities, including CMBS, toward
housing goals. On June 11, 2012, FHFA issued a proposed rule on the
affordable housing goals for 2012 through 2014. 52 FHFA is proposing to
continue the existing structure, with revised single-family and multifamily
housing goal benchmark levels for 2012, 2013, and 2014.

The Safety and Soundness Act (as amended by HERA) also requires
FHFA’s director to annually determine the performance of each enterprise
in meeting the housing goals, and determine the feasibility (given current
market conditions) of any housing goals and subgoals that an enterprise
failed to meet. 53 The enterprises submit quarterly reports to FHFA on goal



48
 See Section 1333(a)(4) of the Safety and Soundness Act, as amended by HERA (12
U.S.C. 4563(a)(4)).
49
 See 74 Fed. Reg. 39873 (Aug. 10, 2009).
50
  The new affordable housing goals include four single-family goals and one single-family
subgoal as well as one multifamily goal and one multifamily subgoal.
51
 See 75 Fed. Reg. 55892 (September 14, 2010).
52
 See 77 Fed. Reg. 34263 (June 11, 2012) (proposed rule).
53
 See 12 U.S.C. §§ 4544, 4566.




Page 49                                         GAO-12-849 Multifamily Housing Financing
                                performance that include loan-level data, as well as an annual report at
                                the end of each year. 54 FHFA uses these data to determine official goal
                                performance. If an enterprise fails to attain a goal, the FHFA director may
                                require submission of a housing plan describing the specific action that
                                the enterprise will take to achieve the goal for the next year. 55

Enterprises’ Goal Performance   The enterprises generally have met their affordable housing goals.
                                According to HUD documents, the enterprises generally exceeded their
                                affordable housing goals from 1993 through 2000, with their performance
                                generally increasing during that time period. 56 Official reports on goal
                                performance for 2001 through 2009 show that Fannie Mae and Freddie
                                Mac exceeded their goals from 2001 through 2007, but failed to meet
                                some of the goals in 2008 and 2009 (see table 3). FHFA determined that
                                the two goals both enterprises failed to meet in 2008 (the low- and
                                moderate-income and special affordable goals) were infeasible due to
                                structural changes in the market from 2006 through 2008, which were not
                                anticipated in 2004 when HUD established the goals. Specifically, FHFA
                                took into consideration such factors as tightened underwriting standards
                                in the mortgage industry, the decreased availability of private mortgage
                                insurance in the primary market, the increase in the share of single-family
                                mortgages insured by FHA, and the fall in the issuance of goals-
                                qualifying, private-label securities. Freddie Mac also did not meet the
                                underserved areas goal in 2008. Although FHFA determined that the
                                market conditions that made the other two goals infeasible made meeting
                                the underserved areas goal more difficult for Freddie Mac, it did not
                                declare this goal to be infeasible for Freddie Mac. But based on Freddie
                                Mac's financial condition in 2008, FHFA did not require Freddie Mac to
                                submit a housing plan.




                                54
                                 See 12 C.F.R. §§ 1282.62 and 1282.63.
                                55
                                 See 12 U.S.C. § 4566.
                                56
                                  See, for example, HUD, Office of Policy Development and Research, Summary of U.S.
                                Housing Market Conditions (Washington, D.C.: Summer 1998). We relied on these reports
                                to determine whether the enterprises met their goals in 1993 through 2000 because FHFA
                                was unable to provide official annual reports from HUD showing each year’s goals and the
                                enterprises’ performance relative to their goals.




                                Page 50                                        GAO-12-849 Multifamily Housing Financing
Table 3: Enterprises’ Goal Targets and Performance, 2001-2009

            Low- and moderate-income goal                 Special affordable goal                      Underserved areas goal
                         Fannie     Freddie                         Fannie        Freddie                        Fannie        Freddie
Year         Goal (%)      Mae         Mac              Goal (%)      Mae            Mac           Goal (%)        Mae            Mac
2001               50      51.5        53.2                  20        21.6           22.6                31           32.6         31.7
2002               50      51.8        50.3                  20        21.4           20.5                31           32.8              31
2003               50      52.3        51.2                  20        21.2           21.4                31           32.1         32.7
2004               50      53.4        51.6                  20        23.6           22.7                31           33.5         32.3
2005               52      55.1             54               22        26.3           24.3                37           41.4         42.3
2006               53      56.9        55.9                  23        27.8           26.4                38           43.6         42.7
2007               55      55.5        56.1                  25        26.8           25.8                38           43.4         43.1
       a
2008               56      53.7        51.5                  27        26.4           23.1                39           39.4         37.7
       b
2009               43      47.6        44.7                  18        20.7           17.7                32           28.8         26.8
                                        Source: FHFA.
                                        a
                                         For 2008, FHFA declared the low- and moderate-income and special affordable goals infeasible.
                                        b
                                         For 2009, FHFA determined that the underserved areas goal was not feasible.


                                        FHFA also declared that the underserved areas goal that both enterprises
                                        failed to meet in 2009 was infeasible. In making this determination, FHFA
                                        considered the same factors it took into account the previous year.
                                        Freddie Mac also did not meet the special affordable goal in 2009. FHFA
                                        determined that this goal was feasible for Freddie Mac, but in light of the
                                        near achievement of the goal, did not require a housing plan.

                                        As noted previously, both enterprises also had to meet a special
                                        affordable multifamily subgoal in 2001 through 2009. Fannie Mae and
                                        Freddie Mac exceeded this subgoal in each year except for 2009 (see
                                        table 4). FHFA declared each enterprise’s subgoal for that year to be
                                        infeasible after considering the collapse of the CMBS market and the
                                        financial condition of the enterprises. 57




                                        57
                                          According to FHFA officials, Freddie Mac, and to a lesser extent Fannie Mae, depended
                                        heavily on CMBS purchases to attain the special affordable multifamily subgoal from 2006
                                        to 2008.




                                        Page 51                                              GAO-12-849 Multifamily Housing Financing
Table 4: Enterprises’ Target and Performance for Special Affordable Multifamily
Subgoal, 2001-2009

                         Fannie Mae                              Freddie Mac
                                 Performance                               Performance
                Goal (dollars      (dollars in          Goal (dollars        (dollars in
Year              in billions)        billions)           in billions)          billions)
2001                    $2.85            $7.36                  $2.11              $4.65
2002                     2.85             7.57                   2.11               5.22
2003                     2.85            12.23                   2.11               8.79
2004                     2.85             7.32                   2.11               7.77
2005                     5.49            10.39                   3.92              12.35
2006                     5.49            13.31                   3.92              13.58
2007                     5.49            19.84                   3.92              15.12
2008                     5.49            13.31                   3.92               7.49
2009                     6.56             6.42                   4.60               3.69
Source: FHFA.




When the single-family and multifamily goals were combined, the
enterprises’ multifamily activities were “goal rich,” meaning that
purchasing multifamily mortgages had a disproportionate importance for
the housing goals because most multifamily rental units are occupied by
households with low and moderate incomes. For example, in 2008 the
enterprises’ multifamily business, which represented 4.5 percent of the
enterprises’ total unpaid principal balance financed, accounted for 32
percent of the units that met the low- and moderate-income goal, 27
percent of the units that met the underserved areas goal, and 39 percent
of the units that met the special affordable goal (see table 5). 58




58
  To determine the enterprises’ total business and multifamily business, we considered
purchases of mortgages and mortgage-related securities (MBS and mortgage revenue
bonds).




Page 52                                           GAO-12-849 Multifamily Housing Financing
Table 5: Multifamily Contributions to Enterprises’ Affordable Housing Goals, 2001-
2009

                                           Percentage of units that qualified for each goal
                                            that were financed by multifamily mortgages
                     Percentage of
                 enterprises’ total             Low- and
                business that was              moderate-     Underserved            Special
 Year         multifamily business           income goal       areas goal    affordable goal
 2001                               2.0%             23%              19%               32%
 2002                                1.5               18               15                24
 2003                                1.7               22               22                29
 2004                                3.0               21               17                29
 2005                                3.6               22               18                31
 2006                                4.8               27               22                38
 2007                                7.2               33               27                41
 2008                                4.5               32               27                39
 2009                                2.8               18               17                22
Source: GAO analysis of FHFA data




For 2010, FHFA established two specific multifamily goals. The low-
income multifamily goal was targeted at rental units in multifamily
properties affordable to families with incomes no greater than 80 percent
of AMI, and the very low-income multifamily subgoal was for units
affordable to families with incomes no greater than 50 percent of AMI.
Both enterprises’ performance levels exceeded the two multifamily goal
targets in 2010 and 2011 (see table 6).




Page 53                                               GAO-12-849 Multifamily Housing Financing
Table 6: Enterprises’ Multifamily Goal Targets and Performance, 2010-2011

                         Low-income multifamily goal (units)                           Very low-income multifamily goal (units)
                        Fannie Mae                    Freddie Mac                       Fannie Mae                  Freddie Mac
Year                  Goal   Performance            Goal       Performance             Goal Performance           Goal Performance
2010               177,750        214,997       161,250               161,500         42,750        53,908      21,000           29,656
2011               177,750        301,224       161,250               229,001         42,750        84,244      21,000           35,471
                                        Sources: FHFA, Fannie Mae, and Freddie Mac.


                                        Note: The numbers for 2011 are preliminary figures reported by Fannie Mae and Freddie Mac in their
                                        March 2012 activity reports. FHFA has yet to publish the official numbers for 2011.




                                        The enterprises have purchased multifamily loans that have underwriting
Enterprises’                            standards and loan performance that compared favorably with those of
Purchased                               other market participants. For example, from 2005 through 2010, the
                                        enterprises experienced lower default rates than the other major
Multifamily Loans                       mortgage capital sources, with the exception of life insurance companies.
Have Performed                          To help offset some of their credit risks and increase the supply of
Relatively Well, but                    affordable multifamily housing, the enterprises have risk-sharing
                                        programs with FHA and RHS. 59 However, these programs involve
Regulators Identified                   relatively few loans. OFHEO and FHFA, through their examination and
Issues with Credit                      oversight of the enterprises, identified a number of credit risk deficiencies
                                        since 2006. For example, they found deficiencies in Fannie Mae’s
Risk Management                         delegated underwriting and servicing program, its risk-management
                                        reorganization, and information systems; and Freddie Mac’s management
                                        of its lower-performing assets. Both enterprises are taking steps to
                                        address these deficiencies.




                                        59
                                          These programs are in addition to the enterprises’ sharing of risk with lenders and
                                        investors, as discussed previously in the background section of this report.




                                        Page 54                                                GAO-12-849 Multifamily Housing Financing
Enterprises’ Multifamily   Based on underwriting standards and loan performance, the loans the
Underwriting Standards     enterprises purchased generally performed as well as and oftentimes
and Serious Delinquency    better than other major sources of financing for multifamily housing. The
                           major sources include life insurance companies, CMBS lenders, banks
Rates Compared Favorably   and thrifts, and FHA and RHS lenders. 60 We compared the enterprises’
with Those of Other        credit standards to those of CMBS lenders and life insurance companies,
Sources of Multifamily     two major participants in the multifamily housing financing marketplace. 61
Credit                     From 2005 through 2011, the enterprises’ underwriting standards—as
                           measured by median debt-service coverage and LTV ratios—were
                           generally stricter than CMBS lenders. 62 Higher debt-service coverage
                           ratios and lower LTV ratios indicate lower risk. For example, from 2005
                           through 2011, the enterprises’ median debt-service coverage ratios were
                           always higher than those of CMBS lenders, with the exception of Fannie
                           Mae in 2007 (see table 7). Also, over this period, Fannie Mae’s LTV ratios
                           were lower than those of CMBS lenders for every year except 2010, while
                           Freddie Mac’s LTV ratios were lower than those of CMBS lenders in 3
                           years. When compared with life insurance company ratios, Fannie Mae’s
                           median debt-service coverage ratios were lower for every year from 2005
                           through 2011, except for 2009. In contrast, Freddie Mac had higher
                           median debt-service coverage ratios than life insurance companies for 3
                           of the 7 years. In addition, Fannie Mae had lower LTV ratios than life
                           insurance companies for all years except 2008 and 2011, while Freddie
                           Mac had higher LTV ratios than life insurance companies in all years from
                           2005 through 2011.




                           60
                            We also obtained data on credit standards and loan performance from a small number of
                           participants that provide multifamily affordable housing loans: state and local HFAs and
                           nonprofit loan consortiums (funded by a pool of local banks and thrifts).
                           61
                             Aggregate data on the credit standards of banks and thrifts and FHA and RHS lenders
                           are not readily available.
                           62
                             The debt-service coverage ratio is an indicator of future credit performance for
                           multifamily loans; the ratio estimates a multifamily borrower’s ability to service its
                           mortgage obligation using the secured property’s cash flow, after deducting nonmortgage
                           expenses from income. The higher the ratio, the more likely a multifamily borrower will be
                           able to continue servicing its mortgage obligation. The LTV ratio is the ratio of the unpaid
                           principal amount of a mortgage loan to the value of the property that serves as collateral
                           for the loan, expressed as a percentage. Loans with high LTV ratios generally tend to
                           have a higher risk of default and, if a default occurs, a greater risk that the amount of the
                           gross loss will be high compared to loans with lower LTV ratios.




                           Page 55                                           GAO-12-849 Multifamily Housing Financing
Table 7: Median Debt-Service Coverage and LTV Ratios for Multifamily Loans Financed by the Enterprises, CMBS Lenders,
and Life Insurance Companies, 2005-2011

Acquisition            Median debt-service coverage ratio                                                        Median LTV ratio
or
origination                   Freddie          CMBS       Life insurance                     Fannie          Freddie        CMBS    Life insurance
year           Fannie Mae        Mac         lenders          companies                        Mae              Mac       lenders       companies
2005                  1.40       1.55           1.33                     1.55                  62.00             75.00      74.80           69.53
2006                  1.35       1.48           1.25                     1.37                  60.00             70.91      73.90           68.49
2007                  1.22       1.39           1.25                     1.36                  55.00             72.00      74.87           67.48
2008                  1.35       1.45           1.22                     1.57                  64.00             71.84      75.00           59.59
2009                  1.36       1.57           N/A                      1.34                  65.00             70.00       N/A            66.75
2010                  1.44       1.55           1.41                     1.56                  65.00             71.69      63.94           66.32
2011                  1.42       1.63           1.40                     1.66                  65.00             70.23      69.60           63.65

                                        Sources: GAO analysis of Fannie Mae and Freddie Mac data; ACLI; and Trepp.


                                        Note: For Fannie Mae and Freddie Mac, the year represents the year the loan was acquired. For
                                        CMBS lenders and life insurance companies, the year is the year the loan was originated. CMBS
                                        lenders did not originate any multifamily loans in 2009. According to ACLI, the vast majority of loans
                                        that life insurance companies originate are fixed-interest amortizing loans. It noted that other types of
                                        multifamily loans may have better debt-service coverage and LTV ratios even though they may be
                                        riskier debt.


                                        We also obtained data on credit standards from six HFAs and three loan
                                        consortiums. The median debt-service coverage ratios for five of the
                                        HFAs were generally lower than those of the enterprises. 63 For example,
                                        from 2005 through 2011, the median debt-service coverage ratios for the
                                        five HFAs ranged from 0.92 to 1.72. Likewise, the median debt-service
                                        coverage ratios for the three loan consortiums were lower than the ratios
                                        for both of the enterprises over this same period. When we compared the
                                        median LTV ratios of the six HFAs and the enterprises, we found that
                                        three HFAs generally had lower LTV ratios than both of the enterprises
                                        for all years from 2005 through 2011, two had LTV ratios that varied
                                        compared with those of the enterprises, and one HFA had LTV ratios that
                                        were higher than the enterprises. Data from two of the loan consortiums
                                        showed that one had median LTV ratios that were lower than those of
                                        both enterprises for all years from 2005 through 2011. 64 The second had
                                        ratios that were higher than Fannie Mae, but lower than Freddie Mac in 3



                                        63
                                          One of the HFAs in our sample did not provide data on debt-service coverage ratios.
                                        64
                                          The third loan consortium in our sample did not provide data on median LTV ratios.




                                        Page 56                                                            GAO-12-849 Multifamily Housing Financing
of the 7 years. For more information on the credit standards of these
HFAs and loan consortiums, see appendix V.

When comparing the performance of multifamily loans financed by Fannie
Mae and Freddie Mac with those financed by other major sources of
multifamily credit, we were not always able to make direct comparisons
because market participants track delinquencies in different ways. We
generally found that from 2005 through 2010, the enterprises experienced
lower default rates than the other major mortgage capital sources, with
the exception of life insurance companies in some cases. For example,
as of December 31, 2011, Fannie Mae’s serious delinquency rates (loans
60 days or more delinquent) for only those loans acquired or guaranteed
in 2005 through 2007 ranged from 0.66 to 0.89 percent (see table 8). As
of the same date, Freddie Mac’s serious delinquency rates for loans
acquired or guaranteed during this period ranged from 0.20 to 0.74
percent. These rates are considerably lower than the serious delinquency
rates for loans originated by CMBS lenders in 2005 through 2007, which
peaked at about 24 percent for loans originated in 2007. 65 Starting in
2008, the serious delinquency rates for loans originated each year by
CMBS lenders dropped considerably. FHA’s serious delinquency rates for
loans originated in 2005 through 2010 were much higher than either of
the enterprises for three of the six years. FHA’s highest delinquency rate
was for 2009, with loans originated that year having a serious
delinquency rate of more than 5 percent, compared to a negligible
delinquency rate for the enterprises’ loans acquired that year.




65
  According to Trepp, these high delinquency rates were mainly attributable to a few large
loans in New York City involving rent-controlled properties and several large developers in
other parts of the country that had cash flow problems that largely have been resolved.
Additionally, CMBS lenders relaxed their credit standards before the financial crisis,
according to Trepp.




Page 57                                          GAO-12-849 Multifamily Housing Financing
Table 8: Percentage of Enterprise, CMBS, and FHA Multifamily Loans Financed in
2005-2010 That Were Seriously Delinquent as of December 31, 2011

 Acquisition or
 origination year                       Fannie Mae         Freddie Mac CMBS lenders FHA lenders
 2005                                           0.73%           0.20%           5.60%          1.19%
 2006                                               0.66          0.25           13.63           0.66
 2007                                               0.89          0.74           23.94           0.54
 2008                                               1.12          0.09            4.68           2.74
 2009                                               0.05          0.00             N/A           5.15
 2010                                               0.04          0.00            0.00           0.02
Sources: Fannie Mae, Freddie Mac, Trepp, and FHA.


Note: Fannie Mae, Freddie Mac, and CMBS and FHA lenders consider loans to be seriously
delinquent when they are 60 days or more delinquent. For Fannie Mae and Freddie Mac, the year
represents the year the loan was acquired. For CMBS and FHA lenders, the year is the year the loan
was originated. CMBS lenders did not originate any multifamily loans in 2009.


The enterprises also performed better than commercial banks and thrifts
insured by the Federal Deposit Insurance Corporation (FDIC). FDIC’s
Quarterly Banking Profile provides information on the multifamily loan
performance of insured commercial banks and thrifts based on their total
outstanding portfolios at the end of each quarter. Specifically, the profile
provides data on loans that are 90 days or more delinquent. 66 As shown
in table 9, with the exception of 2005 for Fannie Mae, for the period 2005
through 2011 the percentage of the enterprises’ multifamily loans that
were delinquent for 60 days or more was always lower than the
percentage of bank and thrift loans that were delinquent for 90 days or
more. This was the case even though the 60-day delinquency rate is a
stricter measure of delinquency than the 90-day rate.




66
  Loans that were 90 days or more delinquent include loans in nonaccrual status, which
are nonperforming loans that are not generating the stated interest rate because of
nonpayment from the borrower, typically due to financial difficulties.




Page 58                                                       GAO-12-849 Multifamily Housing Financing
Table 9: Percentage of Outstanding Unpaid Principal Balances of Multifamily Loans
That Were Seriously Delinquent for the Enterprises and FDIC Banks, Year End 2005-
2011

                                                                                       90 days or more
                                                                                                       a
                              60 days or more delinquent                                    delinquent
                                                                                           FDIC-insured
    Year end                     Fannie Mae                Freddie Mac                      institutions
    2005                                 0.32%                      0.00%                          0.25%
    2006                                    0.08                       0.06                         0.53
    2007                                    0.08                       0.02                         0.76
    2008                                    0.29                       0.03                         1.77
    2009                                    0.62                       0.20                         4.43
    2010                                    0.70                       0.26                         3.78
    2011                                    0.58                       0.22                         2.53
Sources: GAO analysis of Fannie Mae and Freddie Mac data, and FDIC data.

Note: All of the percentages in the table are based on unpaid principal balance.
a
 Represents the percentage of loans that are past due 90 days or more or that are in nonaccrual
status.


The life insurance companies generally performed better than Fannie
Mae, while Freddie Mac’s performance was generally comparable to that
of life insurance companies. As shown in table 10, for life insurance
companies, the percentage of unpaid principal balance on multifamily
loans that was 60 days or more delinquent ranged from 0 to 0.21 percent
from 2005 through 2011. Fannie Mae had higher multifamily serious
delinquency rates for all the years in the period, while Freddie Mac had
rates closer to those of life insurance companies until 2010 and 2011. 67




67
  According to Freddie Mac officials, life insurance companies tend to actively sell loans
before they become delinquent. We confirmed with an ACLI official that insurance
companies actively manage their portfolios of commercial mortgages, which sometimes
involves selling potential problem loans and delinquent mortgages in order to minimize
losses.




Page 59                                                            GAO-12-849 Multifamily Housing Financing
                              Table 10: Percentage of Outstanding Unpaid Principal Balances of Multifamily
                              Loans That Were Seriously Delinquent for the Enterprises and Life Insurance
                              Companies, Year End 2005-2011

                                                                              60 days or more delinquent
                                                                                                                       Life insurance
                               Year end                       Fannie Mae                    Freddie Mac                    companies
                               2005                                   0.32%                           0.00%                    0.02%
                               2006                                      0.08                           0.06                     0.02
                               2007                                      0.08                           0.02                     0.00
                               2008                                      0.29                           0.03                     0.02
                               2009                                      0.62                           0.20                     0.21
                               2010                                      0.70                           0.26                     0.01
                               2011                                      0.58                           0.22                     0.13
                              Sources: GAO analysis of Fannie Mae and Freddie Mac data, and ACLI.

                              Note: All of the percentages in the table are based on unpaid principal balance.


                              Smaller participants in the multifamily marketplace generally experienced
                              fewer delinquencies. From 2005 through 2011, only 1 of 401 loans
                              guaranteed or financed by RHS was delinquent for 60 days or more.
                              Further, only one of the six HFAs and one of the three loan consortiums
                              reported delinquencies (60 days or more delinquent). Both reported
                              delinquencies in 2005 and 2006.


Enterprises’ Participation    Fannie Mae and Freddie Mac have entered into risk-sharing agreements
in Multifamily Risk-Sharing   with FHA and RHS to increase the supply of affordable multifamily
Programs Has Been             housing and help offset some of their credit risk, but these programs have
                              involved relatively few loans. The enterprises participate in two risk-
Limited                       sharing programs with FHA. The first of these programs, known as the
                              “standard” FHA risk-sharing program, started in 1994. Under the program,
                              the enterprises acquire loans for eligible affordable multifamily housing
                              projects (either new construction or rehabilitation). 68 The loans generally
                              are not to exceed $50 million and the term of the mortgage is for 15 years


                              68
                                Affordable multifamily housing projects are those in which (1) 20 percent or more of the
                              rental units are both rent-restricted and occupied by families whose incomes are 50
                              percent or less of AMI, with adjustments for household size, or (2) 40 percent (25 percent
                              in New York City) or more of the rental units are both rent-restricted and occupied by
                              families whose incomes are 60 percent or less of AMI, with adjustments for household
                              size.




                              Page 60                                                               GAO-12-849 Multifamily Housing Financing
or more. In the event of a loss on a loan, the enterprises assume the
primary risk of loss and FHA reimburses them for 50 percent of the loss.
In exchange for reimbursing the enterprises, FHA charges them an
annual risk-sharing premium of 25 basis points (.25 percent) of the
average unpaid principal balance. The second of these programs, the
Green Refinance Plus program, was established in 2011 to preserve and
improve existing affordable housing by providing financing to renovate or
retrofit properties. 69 No less than 5 percent of the principal balance must
be used for renovation or energy or water retrofitting, and the term of the
loans must be for no less than 10 years. Under the program, HUD
assumes the first loss in an amount equal to 4.35 percent of the unpaid
principal balance on a defaulted loan plus 50 percent of the balance of
the loss on an equal basis with the enterprises. FHA charges the
enterprises an annual risk-sharing premium of 40 basis points (.40
percent) of the average unpaid principal balance for loans with terms of
15 years or more. 70

Since the inception of the risk-sharing programs with FHA, the enterprises
have participated in a small number of risk-sharing loans relative to their
overall multifamily housing business. As shown in table 11, from 1995
through 2011, Fannie Mae collaborated with FHA on 157 loans with
unpaid principal balances of about $750 million. Over this period, Fannie
Mae purchased or guaranteed more than 95,000 loans with unpaid
principal balances of $373 billion. According to Fannie Mae, the decline in
the use of this program in recent years is due to the drop off in new
LIHTC financings after Fannie Mae and Freddie Mac ceased investing in
projects eligible for LIHTCs. As of July 2012, Fannie Mae lenders had
closed two Green mortgage loans with unpaid principal balances of $23
million. 71 From 2005 through 2011, Freddie Mac collaborated with FHA on
59 loans or credit-enhanced bonds with unpaid principal balances of $298


69
  According to Fannie Mae, the enterprise will decrease its standard debt-service
coverage requirement by 5 basis points (for example, from 1.20 to 1.15) and increase its
standard LTV ratio (for example, from 80 to 85 percent), thereby generating between 4
and 5 percent additional proceeds to cover some of the costs of the renovations or
retrofitting.
70
  If the term of the loan is 10-15 years and there is no amortization reserve, the risk-
sharing premium is 50 basis points (.50 percent).
71
  According to Fannie Mae officials, HUD has been considering changes that Fannie Mae
suggested to the execution of this program that would make it more attractive to the
owners of existing affordable multifamily properties.




Page 61                                           GAO-12-849 Multifamily Housing Financing
million. Over this period, Freddie Mac purchased or guaranteed more
than 9,000 loans with unpaid principal balances of $129 billion.

Table 11: Enterprises’ Multifamily Risk-Sharing Loans with FHA, 1995-2011

                                    Fannie Mae                                   Freddie Mac
                                  Unpaid                                       Unpaid
                                principal                                    principal
                                 balance                                      balance
 Acquisition                   (dollars in         Number of                (dollars in       Number of
 year                            millions)            loans                   millions)          loans
 1995                                     $8                  1           not available      not available
 1996                                       8                 2           not available      not available
 1997                                     12                  4           not available      not available
 1998                                     28                  7           not available      not available
 1999                                     33                  7           not available      not available
 2000                                     41                  8           not available      not available
 2001                                     43                  7           not available      not available
 2002                                    111                  24          not available      not available
 2003                                     82                  20          not available      not available
 2004                                     80                  24          not available      not available
 2005                                     63                  21                   $42                  8
 2006                                     45                  12                    77                 15
 2007                                     12                  3                      3                  1
 2008                                     16                  5                      2                  1
 2009                                       5                 2                     67                 15
 2010                                       8                 2                     24                  7
 2011                                    157                  8                     83                 12
 Total                                 $752                  157                 $298                  59
Sources: GAO analysis of Fannie Mae data, and Freddie Mac.

Note: Fannie Mae’s data only represent loans that are currently on the books. Freddie Mac’s data
represent loans and credit-enhanced bonds with HUD/FHA risk sharing.


The enterprises also have entered into risk-sharing agreements with
RHS, but to a lesser extent than with FHA. Under the enterprises’ risk-
sharing agreement with the RHS loan guarantee program (known as 538
loans), RHS will guarantee up to 90 percent of the loan. According to
RHS, the only risk to the enterprises would be due to nonperformance by
the lender. From 2004 through 2011, Fannie Mae purchased and
securitized four loans under the RHS program, with unpaid principal
balances of more than $7 million. From 2001 through 2011, Freddie Mac



Page 62                                                            GAO-12-849 Multifamily Housing Financing
                             purchased and securitized three loans or bonds with RHS, with unpaid
                             principal balances of $6 million as of the end of 2011.

                             As noted previously, the enterprises also have supported state and local
                             HFAs by providing credit enhancements to tax-exempt bonds used to
                             finance affordable multifamily housing. We interviewed selected state and
                             local HFAs and in general, they viewed the enterprises as important
                             players in providing liquidity for affordable multifamily properties. For
                             example, officials from a large local HFA told us that the enterprises have
                             played a critical role in providing liquidity and long-term credit
                             enhancement to affordable and market-rate developments. According to
                             an official from a small state HFA, before 2008 Fannie Mae was an active
                             and highly valued buyer of their small tax-exempt private activity bonds.
                             The official added that the ability to sell bonds under $5 million on a direct
                             placement basis to Fannie Mae was extremely helpful and has been
                             missed. Allowing Fannie Mae and Freddie Mac to reenter the bond
                             market with private placements would be a significant benefit, and would
                             allow the HFA to provide reliable and dependable financing options to
                             their multifamily affordable housing projects, according to this HFA
                             official. The enterprises have also participated in two temporary Treasury
                             HFA initiatives: (1) the Temporary Credit and Liquidity Facilities (TCLF)
                             program and (2) the New Issue Bond Program (NIBP). TCLF, which
                             provides replacement credit enhancement and liquidity support to
                             outstanding HFA variable-rate demand bonds, is set to expire in 2015.
                             The multifamily NIBP was established to facilitate the purchase of newly
                             issued HFA bonds, the proceeds of which would be used to finance
                             multifamily projects under each participating HFA’s program. In general,
                             Treasury sets the pricing parameters and agrees to take the first loss of
                             principal up to 35 percent. The enterprises participate in the program on a
                             50-50 loss-sharing basis with each other after the top loss coverage by
                             Treasury.


Regulators Have Identified   From 2006 through 2011, FHFA and its predecessor, OFHEO, identified
a Number of Deficiencies     deficiencies in management of credit risk at the enterprises. FHFA
in Multifamily Credit Risk   oversees the enterprises’ credit risk management through on-site
                             examinations and off-site monitoring. As part of its annual on-site
Management                   examination of the safety and soundness of the enterprises, FHFA
                             assesses their enterprise risk, which includes credit, market, and




                             Page 63                                   GAO-12-849 Multifamily Housing Financing
                           operational risk. 72 The written report that FHFA submits to Congress by
                           June 15 of each year describes the financial safety and soundness of
                           each enterprise, including the results and conclusions from annual
                           examinations. 73 FHFA also can conduct targeted examinations, which are
                           in-depth, focused evaluations of a specific risk or risk-management
                           system. Throughout the year, FHFA conducts ongoing supervision of the
                           enterprises that includes on-site and off-site monitoring and analyzing of
                           each enterprise’s overall business profile, including trends or emerging
                           risks. FHFA’s Division of Enterprise Regulation prepares quarterly risk
                           assessments that inform an Interim Supervisory Assessment Letter,
                           which provides FHFA’s view of the condition of the enterprise midway
                           through the examination cycle. FHFA documents deficiencies identified in
                           examinations or ongoing supervision in a conclusion letter that
                           communicates findings, conclusions, and the assigned supervisory
                           rating. 74 FHFA is to follow up on deficiencies to ensure that the
                           enterprise’s response is appropriate, timely, and effective.

Fannie Mae’s Multifamily   Since 2006, OFHEO and FHFA have identified a number of deficiencies
Credit Risk Challenges     with Fannie Mae’s management of multifamily credit risk, including
                           several weaknesses in oversight of its DUS program. 75 Specifically, in
                           OFHEO’s 2006 Annual Report to Congress, the agency reported that
                           Fannie Mae’s underwriting standards needed updating because of the
                           volume of waivers granted to DUS lenders. According to OFHEO, the
                           high waiver rate was indicative of a policy that was too restrictive, lending


                           72
                             These annual examinations are required by Section 1317 of the Safety and Soundness
                           Act as amended (12 U.S.C. § 4517). Credit risk arises from an obligor’s failure to meet the
                           term of any financial contract with the enterprise or other failure to fulfill a financial
                           commitment. Credit risk is found in activities in which success depends on counterparty,
                           issuer, or borrower performance. The risk arises any time enterprise funds are extended,
                           committed, invested, or otherwise exposed through actual or implied contractual
                           agreements.
                           73
                             These annual reports are required by Section 1319B of the Safety and Soundness Act,
                           as amended (12 U.S.C. § 4521).
                           74
                            The supervisory rating in the conclusion letter describes how well risks are identified,
                           measured, monitored, controlled, and managed. The rating uses the following terms: no or
                           minimal concerns, limited concerns, significant concerns, and critical concerns.
                           75
                              We reviewed OFHEO’s annual reports to Congress from 1997 through 2008. OFHEO
                           reported deficiencies in Fannie Mae’s multifamily activities in 2006, 2007, and 2008. While
                           OFHEO and FHFA’s annual reports to Congress are public documents, the results of
                           individual FHFA reviews are confidential. Therefore, we limit our discussions of the
                           findings to a summary.




                           Page 64                                          GAO-12-849 Multifamily Housing Financing
practices that were too liberal, or a policy that was not current relative to
market conditions. And while Fannie Mae authorized DUS lenders to
review and approve waivers, the enterprise had not established a strong
and comprehensive quality control process. In 2011, FHFA
communicated supervisory concerns related to Fannie Mae’s DUS
program. Fannie Mae reported that it was taking several steps to address
these deficiencies, including training its credit underwriting staff,
conducting due diligence and credit analysis for DUS transactions, and
expanding its monitoring of multiple loans with the same entity. FHFA
noted that the steps Fannie Mae planned to take appeared reasonable
but indicated that the enterprise must show that it had implemented these
changes and that they could be sustained.

In addition to deficiencies in the DUS program, OFHEO and FHFA
identified deficiencies with Fannie Mae’s multifamily quality control
function, asset management (that is, how it manages loans it acquires),
underwriting practices, and information systems supporting credit risk
management:

•   OFHEO reported in 2006 that Fannie Mae faced deficiencies with its
    quality control function because Fannie Mae’s oversight focused on
    reviewing documents rather than analyzing and assessing credit
    information. OFHEO noted that credit information was incomplete or
    not readily available. In 2007, OFHEO reported that the multifamily
    quality-control process was improved and expanded to provide better
    coverage of multifamily loans.
•   In 2008, OFHEO reported that Fannie Mae had begun to address
    deficiencies in asset management. Further, in 2010 FHFA reported
    that Fannie Mae was identifying problem assets earlier, developing
    workout strategies for problem loans, and managing delinquencies
    and foreclosed properties to improve the amount recovered on sales
    of property in markets and minimize losses.
•   In 2011, FHFA found that Fannie Mae needed to improve its risk-
    management practices for multifamily loans. To address this issue,
    Fannie Mae stated that it planned to review its existing risk-
    management processes and controls.
•   In 2011, FHFA reviewed certain loans and advised Fannie Mae to
    strengthen its underwriting and quality control practices related to
    appraisals and verification of financial information. Fannie Mae stated
    that it would review its procedures and consult with FHFA as it
    proceeded.
•   Additionally, in 2011 Fannie Mae agreed to respond to supervisory
    concerns relating to waiver and exception monitoring and reporting.



Page 65                                  GAO-12-849 Multifamily Housing Financing
                                 Fannie Mae stated that it would analyze the loans that had been
                                 granted waivers or extensions to determine if there were correlations
                                 between waivers and subsequent loan performance.
                            •    OFHEO reported in 2008 that Fannie Mae’s credit review function was
                                 understaffed and that information system deficiencies or inefficiencies
                                 compromised the enterprises’ ability to manage risks. FHFA also
                                 identified deficiencies with Fannie Mae’s information systems in 2009
                                 and 2010. According to FHFA, Fannie Mae has begun a
                                 transformation initiative to centralize data sources and improve data
                                 integrity.

Freddie Mac’s Multifamily   We reviewed OFHEO’s annual reports to Congress from 1997 through
Credit Risk Challenges      2008. During this 12-year period, OFHEO did not report any credit risk
                            deficiencies in Freddie Mac’s multifamily housing activities. However,
                            since 2009 FHFA has identified deficiencies in Freddie Mac’s multifamily
                            asset-management function. For example, FHFA reported in its 2009
                            Annual Report to Congress that a targeted examination of Freddie Mac’s
                            asset-management function had found that the function needed to be
                            strengthened. FHFA noted that the multifamily business unit had begun to
                            address some of the issues identified. In its 2010 Annual Report to
                            Congress, FHFA continued to report on deficiencies with Freddie Mac’s
                            asset-management function, including that it was poorly managed and
                            lacked the necessary process and controls to identify, evaluate, and
                            control problem assets. Additionally, the 2010 report noted problems with
                            the multifamily division’s management of the problem loan watch list. 76 In
                            this report, FHFA noted that while risk management for multifamily asset
                            management was unsatisfactory, management had corrected or was
                            addressing these issues. According to FHFA officials, these deficiencies
                            have since been addressed and closed.


                            We provided a draft of this report to FHFA, and it provided copies to
Agency Comments             Fannie Mae and Freddie Mac. FHFA, Fannie Mae, and Freddie Mac
and Our Evaluation          provided technical comments, which we incorporated into the report
                            where appropriate.




                            76
                              The watch list is a list of high-risk loans that receives ongoing oversight by Freddie Mac.
                            Freddie Mac has various criteria for placing a loan on the watch list, including low debt-
                            service coverage ratios, high LTV ratios, and loans that have gone delinquent.




                            Page 66                                           GAO-12-849 Multifamily Housing Financing
As agreed with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from the
report date. At that time, we will send copies to the Acting Director of
FHFA and interested committees. In addition, the report will be available
at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions concerning this report, please
contact me at (202) 512-8678 or shearw@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. Key contributors to this report are listed in
appendix VI.

Sincerely yours,




William B. Shear
Director, Financial Markets and
 Community Investment




Page 67                                  GAO-12-849 Multifamily Housing Financing
Appendix I: Objectives, Scope, and
              Appendix I: Objectives, Scope, and
              Methodology



Methodology

              Our objectives were to determine (1) how Fannie Mae and Freddie Mac’s
              (the enterprises) multifamily loan activities, products, and loan
              performance have changed over time; (2) the enterprises’ role in the
              multifamily housing financing marketplace and the extent to which they
              have met their affordable housing goals; and (3) how the enterprises’
              credit standards and delinquency rates compare with those of other
              mortgage capital sources and how they have managed credit risk
              associated with their multifamily housing activities.

              To describe how the enterprises’ multifamily loan activities, products, and
              performance have changed, we analyzed loan-level data from Fannie
              Mae and Freddie Mac for 1994 (the earliest year for which data were
              available) through 2011. Each enterprise provided data on the
              characteristics (at acquisition) of the multifamily loans they purchased and
              data on the performance of loans over time. We used the data to
              determine how many loans each enterprise purchased each year from
              1994 through 2011 and the unpaid principal balance of those loans at the
              time of acquisition. 1 Because certain Fannie Mae multifamily loan
              products roll over periodically (which creates a new loan number but does
              not represent a new acquisition), we used a new acquisition indicator
              provided by Fannie Mae to identify its acquisitions each year. 2 When
              fluctuations in purchase volume were identified, we interviewed Fannie
              Mae and Freddie Mac officials to determine the reasons for these
              fluctuations. We also analyzed data on each enterprise’s annual
              purchases of multifamily loans to determine the unpaid principal balance
              of (1) loans that the enterprise expected to hold in portfolio; (2) loans that
              it expected to securitize (that is, packaging them into mortgage pools to
              support mortgage-backed securities (MBS)); and (3) bond credit
              enhancements. 3 For Fannie Mae, securitized loans included MBS and



              1
               Unpaid principal balance is the remaining outstanding balance on loans acquired and is a
              key metric the multifamily industry uses to measure portfolio activity.
              2
               For example, Fannie Mae’s discount mortgage-backed securities—which are short-term
              securities—roll over every 30, 60, or 90 days until the maturity date of the underlying loan.
              New loan numbers get assigned after each security rollover, but the issuance of the new
              security does not represent new financing.
              3
               The enterprises’ multifamily portfolios include various types of credit enhancements for
              tax-exempt bonds issued by state and local housing finance agencies to finance
              affordable rental housing. Should the bonds default, the enterprises guarantee that they
              will provide supplemental funds to permit the continued payment of principal and interest
              to bondholders.




              Page 68                                           GAO-12-849 Multifamily Housing Financing
Appendix I: Objectives, Scope, and
Methodology




discount MBS. Freddie Mac’s securitized portfolio included participation
certificates, tax-exempt bond securitization, and K-deals. 4 Because we
were unable to use the loan-level data provided by the two enterprises to
determine how much of the multifamily MBS they issued were held in
portfolio or sold to investors, we asked both enterprises to provide
additional information on MBS held in portfolio. Both enterprises were
able to provide data on purchases of their own MBS in 2010 and 2011.

In addition, we analyzed each enterprise’s annual multifamily loan
purchases from 1994 through 2011 as follows:

•   Size of properties financed—We determined the number and unpaid
    principal balance of loans purchased each year that financed
    properties with 5 to 50 units and properties with 51 or more units.
•   Loan size—We determined the number and unpaid principal balance
    of loans purchased each year that fell into the following four
    categories: $0 to less than $5 million, $5 million to less than $50
    million, $50 million to less than $100 million, and $100 million or
    greater.
•   Geography—We determined the unpaid principal balance of loans
    acquired each year in the 25 largest metropolitan statistical areas. 5
    For Fannie Mae, we limited our analysis to single loans associated
    with a single property. 6 To determine the percentage of the nation’s
    multifamily stock that was located in these 25 metropolitan areas, we
    analyzed data from the 2010 American Community Survey. In addition
    to focusing on the 25 largest metropolitan areas, we also determined
    the unpaid principal balance of loans acquired in each state
    (excluding loans associated with multiple properties as described
    above).


4
 Participation certificates are securities that represent undivided beneficial ownership
interests in, and receive payments from, pools of multifamily residential mortgages that
are held in trust for investors. In a tax-exempt bond securitization, pools of unenhanced
tax-exempt and taxable multifamily housing revenue bonds support fully guaranteed tax-
exempt and taxable securities. K-deals are securities that are generally backed by pools
of newly purchased mortgages underwritten by Freddie Mac.
5
 Metropolitan statistical areas are geographic entities the Office of Management and
Budget defined for use by federal statistical agencies in collecting, tabulating, and
publishing federal statistics. They contain a core urban area with a population of 50,000 or
more.
6
 Financing options offered by Fannie Mae can result in one loan for multiple properties,
multiple loans for multiple properties, or multiple loans for one property.




Page 69                                          GAO-12-849 Multifamily Housing Financing
Appendix I: Objectives, Scope, and
Methodology




•    Period of the loan—We determined the number and unpaid principal
     balance of loans purchased each year that fell into the following four
     categories: 60 months or fewer, greater than 60 months to less than
     120 months, 120 months, and more than 120 months.
•    Asset class—We determined the percentage of loans purchased
     during the 18-year period (based on unpaid principal balance) in the
     following five asset classes: traditional rental, student, senior,
     manufactured, and cooperative housing. 7
•    Type of interest rate—We determined the percentage of loans
     purchased each year (based on unpaid principal balance) that were
     fixed- and adjustable-rate mortgages.
•    Structured finance—We determined the percentage of unpaid
     principal balance acquired each year that was associated with
     transactions involving multiple loans or multiple properties. 8
•    Fannie Mae’s Delegated Underwriting and Servicing (DUS®)
     Program—We determined the number and unpaid principal balance of
     loans that were purchased under the DUS program each year. 9

For all of the analyses of the enterprises’ multifamily loan purchases, we
adjusted the dollar amounts for inflation. In addition, for each analysis we
did not include loans with missing values. 10

We also analyzed data on the performance of multifamily loans each
enterprise purchased from 1994 to 2011 as follows:


7
 Traditional multifamily rental housing is housing with five or more units that is not student,
senior, manufactured, or cooperative housing. Multifamily loans for student housing are
secured by properties in which college or graduate students make up at least 80 percent
of the tenants, among other requirements. Multifamily loans for senior housing are
secured by properties intended to be for residents aged 55 or older and that provide
additional services for residents, such as group meals. Multifamily loans for manufactured
housing are secured by a residential development that consists of sites for manufactured
homes and includes infrastructure. A cooperative loan is a multifamily loan made to a
cooperative housing corporation and secured by a first or second subordinate lien on a
cooperative multifamily housing project that contains five or more units.
8
 At Fannie Mae, transactions can involve multiple properties financed by one loan,
multiple properties financed by multiple loans, or one property financed by multiple loans.
At Freddie Mac, transactions can involve multiple properties financed by one loan or one
property financed by multiple loans.
9
 Under the DUS model, Fannie Mae approves lenders and delegates to them the authority
to underwrite, close, and sell loans to the enterprise without its prior review.
10
  The number of loans with missing values generally represented less than 5 percent of
each enterprise’s unpaid principal balance.




Page 70                                            GAO-12-849 Multifamily Housing Financing
Appendix I: Objectives, Scope, and
Methodology




•    Serious delinquency rates—We calculated annual serious
     delinquency rates by dividing the current unpaid principal balance of
     loans that were 60 or more days delinquent as of the end of the year
     by the total outstanding unpaid principal balance as of the end of the
     year. 11 We also determined the amount of each enterprise’s
     outstanding unpaid principal balance that was 60 or more days
     delinquent at the end of each year.
•    Loan maturity—We determined the number and unpaid principal
     balance of loans that were going to mature within the next 10 years.
•    Serious delinquency rates for loans with varying debt-service
     coverage and loan-to-value (LTV) ratios—We determined the serious
     delinquency rates for loans with debt-service coverage ratios above
     and below 1.25 and for loans with LTV ratios above and below 80
     percent.

For the loan maturity analysis, we adjusted the dollar amounts for
inflation. For each analysis, we did not include loans with missing
values. 12

We also analyzed aggregated multifamily data that both Fannie Mae and
Freddie Mac provided on the following:

•    real estate-owned (REO) properties from 2002 through 2011 for
     Fannie Mae and from 1995 through 2011 for Freddie Mac;
•    net income from 2002 through 2011 for Fannie Mae and from 2005
     through 2011 for Freddie Mac;
•    net charge-offs (debts an entity is unlikely to collect) from 2002
     through 2011; 13
•    guarantee fees collected from 2002 through 2011; and




11
  When reporting delinquency rates, Fannie Mae typically divides the delinquent unpaid
principal balance by the total outstanding unpaid principal balance. Because we did not
have data on the delinquent unpaid principal, we used the current unpaid principal
balance.
12
  The number of loans with missing values generally represented less than 5 percent of
each enterprise’s unpaid principal balance.
13
  Fannie Mae and Freddie Mac define net multifamily charge-offs as the realization of
losses on loans that have been deemed uncollectible, typically due to foreclosure.




Page 71                                         GAO-12-849 Multifamily Housing Financing
Appendix I: Objectives, Scope, and
Methodology




•    administrative costs from 2002 through 2011 for Fannie Mae and from
     2005 through 2011 for Freddie Mac. 14

To assess the reliability of these data, we interviewed Fannie Mae and
Freddie Mac representatives about how they collected data and helped
ensure data integrity, and reviewed internal reports on data reliability. We
also compared selected enterprise data with information in public filings.
In addition, we conducted reasonableness checks on the data to identify
any missing, erroneous, or outlying figures. We determined that the data
were sufficiently reliable for our purposes.

To determine what information is available about the enterprises’ role in
the multifamily housing financing marketplace, we analyzed data on
Fannie Mae and Freddie Mac’s share of the multifamily housing market
from 2005 through 2011. 15 First, we analyzed Flow of Funds data (Table
L.219, published on June 7, 2012) from the Board of Governors of the
Federal Reserve System (Federal Reserve) on multifamily mortgage debt
outstanding to determine the enterprises’ share of debt holdings. 16
Second, we analyzed data on the financing of multifamily loans originated
by large institutional lenders that the Mortgage Bankers Association
(MBA) published. MBA gathers these multifamily origination data through
a survey and publishes the data in its Annual Commercial/Multifamily
Mortgage Bankers Origination Summation. In 2011, 99 firms participated
in MBA’s survey, including life insurance companies, commercial
mortgage-backed securities (CMBS) lenders, lenders that sell loans to
Fannie Mae and Freddie Mac, FHA lenders, and other lender groups. The
survey did not include small banks and savings and loan associations
(thrifts) because they tend to operate as a separate market, according to
MBA. Although not comprehensive, the survey data from MBA are the
data most often cited when discussing the enterprises’ share of the
multifamily housing financing marketplace. We assessed the reliability of
both types of data—mortgage debt outstanding and multifamily origination


14
  Aggregate data for earlier years were not available. We also requested aggregated data
on capital costs, capital reserves, and loan servicing fees, but the enterprises were not
able to provide data specific to their multifamily business.
15
  We reviewed data for 2005 through 2011 so that we could determine the enterprises’
share of the multifamily housing financing marketplace before and after the financial crisis
of 2007.
16
 Board of Governors of the Federal Reserve System, Flow of Funds Accounts of the
United States, Z.1 Statistical Release, Table L.219 (June 7, 2012).




Page 72                                           GAO-12-849 Multifamily Housing Financing
Appendix I: Objectives, Scope, and
Methodology




data—by interviewing Federal Reserve and MBA representatives,
respectively, about the methods they used to collect and help ensure the
integrity of the information. We determined that the data were sufficiently
reliable for our purposes. We also compared data from the enterprises
and two major participants in the multifamily housing financing
marketplace—life insurance companies and CMBS lenders—to illustrate
how these participants’ multifamily activities have changed over time.
Specifically, we compared data obtained from the American Council of
Life Insurers (ACLI) and Trepp on loans originated from 2005 through
2011 with our analysis of data from Fannie Mae and Freddie Mac on
loans purchased during those years. 17 We assessed the reliability of the
ACLI and Trepp data by sending them a set of standard data reliability
questions and obtaining their written responses. We followed up with
them when we had questions on the data or their responses to our data
reliability questions. Where possible, we also compared the data they
provided to us with published data. We determined that the data were
sufficiently reliable for our purposes.

To identify reports on the enterprises’ role in the multifamily housing
financing marketplace, we conducted a search of literature published
since 1995 but found few studies that focused on the enterprises’
multifamily activities. Ultimately, we identified seven studies that provided
varying viewpoints on the role that Fannie Mae and Freddie Mac have
played in multifamily housing finance. 18 Although we found that these


17
  Trepp is a provider of CMBS analytics, data, consulting, and software to the securities
and investment management industry.
18
  See Mortgage Finance Working Group’s Multifamily Subcommittee, Center for American
Progress, A Responsible Market for Rental Housing Finance: Envisioning the Future of
the U.S. Secondary Market for Multifamily Residential Rental Mortgages (October 2010);
Denise DiPasquale, “Rental Housing: Current Market Conditions and the Role of Federal
Policy,” Cityscape, 13, no. 2 (2011); Ingrid Gould Ellen, John Napier Tye, and Mark A.
Willis, Improving U.S. Housing Finance through Reform of Fannie Mae and Freddie Mac:
Assessing the Options (NYU Furman Center for Real Estate and Urban Policy: May
2010); Joint Center for Housing Studies, Harvard University, Meeting Multifamily Housing
Finance Needs During and After the Credit Crisis (2009); Ethan Handelman, David A.
Smith, and Todd Trehubenko, Government-Sponsored Enterprises and Multifamily
Housing Finance: Refocusing on Core Functions, report prepared for the National Housing
Conference (October 2010); Peter J. Wallison, Alex J. Pollock, and Edward J. Pinto,
Taking the Government Out of Housing Finance: Principles for Reforming the Housing
Finance Market, an American Enterprise Institute Policy White Paper (Mar. 24, 2011); and
Tom White and Charlie Wilkins, No Federal Guaranty for Multifamily and Other Ideas for
Multifamily Housing Finance Reform, paper presented at an American Enterprise Institute-
hosted event entitled “A New Lease on Loans: Ideas for Multifamily Housing Reform”
(Washington, D.C.: Nov. 16, 2011).




Page 73                                          GAO-12-849 Multifamily Housing Financing
Appendix I: Objectives, Scope, and
Methodology




studies lacked empirical research, we determined that they were
sufficiently reliable for our purposes (identifying literature and authors’
conclusions and the limitations of the studies). To obtain additional views
on the enterprises’ role in multifamily housing financing, we met with the
authors of two of these studies and with researchers who have
knowledge about housing finance and the operations of the enterprises.
We also discussed the enterprises’ role with representatives from the
Federal Housing Finance Agency (FHFA); Fannie Mae; Freddie Mac;
other participants in the multifamily housing financing marketplace such
as ACLI, the Commercial Real Estate Finance Council (CREFC), the
Federal Housing Administration (FHA), MBA, the National Association of
Affordable Housing Lenders (NAAHL), the National Council of State
Housing Agencies (NCSHA), and the Department of Agriculture’s Rural
Housing Service (RHS); the National Multi Housing Council; and the
Consumer Federation of America. To comment on the enterprises’ role in
financing loans for small properties (5 to 50 units), we analyzed data from
the 2010 American Community Survey on the percentage of renters who
live in small multifamily structures and data from the enterprises’ 2011
Annual Housing Activity Reports on their purchases of loans for such
properties. We reviewed information on the American Community Survey
data we used and determined that the data were sufficiently reliable for
the purposes of our report.

To report on the extent to which the enterprises have met their affordable
housing goals, we reviewed the laws and regulations establishing the
goals from 1992 to the present. We also reviewed reports on the
affordable housing goals, including GAO reports and reports from the
Department of Housing and Urban Development (HUD), FHFA, the Office
of Federal Housing Enterprise Oversight (OFHEO), and independent
researchers. 19 We relied on HUD documents to assess the enterprises’
annual goal performance from 1993 through 2000. 20 For 2001 through



19
  See, for example, John C. Weicher, The Affordable Housing Goals, Homeownership
and Risk: Some Lessons from Past Efforts to Regulate the GSEs, paper presented at a
Federal Reserve Bank of St. Louis conference entitled “The Past, Present, and Future of
the Government-Sponsored Enterprises” (St. Louis, Mo.: Nov. 17, 2010).
20
  See, for example, HUD, Office of Policy Development and Research, Summary of U.S.
Housing Market Conditions (Washington, D.C.: Summer 1998). We relied on these reports
to determine whether the enterprises met their goals in 1993 through 2000 because FHFA
was unable to provide official annual reports from HUD showing each year’s goals and the
enterprises’ performance relative to their goals.




Page 74                                        GAO-12-849 Multifamily Housing Financing
Appendix I: Objectives, Scope, and
Methodology




2009, we analyzed data in Annual Housing Activity Reports (activity
report) provided by FHFA. To assess the contribution of the enterprises’
multifamily activities to achievement of the affordable housing goals from
2001 through 2009, we calculated multifamily purchases as a percentage
of the total mortgage purchases used to meet each goal using data from
the activity reports. We assessed the reliability of the data used to
document goal performance by interviewing FHFA officials and
representatives at Fannie Mae and Freddie Mac about the methods they
use to collect and help ensure the integrity of the information. We also
reviewed internal reports that the enterprises completed related to data
reliability. We determined that the data were sufficiently reliable for our
purposes.

To compare the enterprises’ credit standards and delinquency rates with
those of major mortgage capital sources, we analyzed loan-level data on
the enterprises’ median debt-service coverage and LTV ratios and
delinquency rates. We compared these ratios and delinquency rates with
those of selected market players:

•    For life insurance companies, ACLI provided us with data from 2005
     through 2011 on median debt-service coverage ratios, median LTV
     ratios, the percentage of the outstanding unpaid principal balance that
     was 60 days or more delinquent as of the end of each year, median
     loan size, and median number of units per property.
•    For CMBS lenders, we obtained data from Trepp for 2005 through
     2011 on median debt-service coverage ratios, median LTV ratios,
     median loan size, median number of units per property, and the
     percentage of loans 60 days or more delinquent—based on unpaid
     principal balance—for only those loans originated from 2005 through
     2010.
•    We obtained data from FHA on the percentage of loans 60 days or
     more delinquent—based on unpaid principal balance—for only those
     loans originated from 2005 through 2010.
•    We obtained data from RHS for 2005 through 2011 on the number of
     loans 60 days or more delinquent, the average loan size, and the
     average units per property.
•    For state and local housing finance agencies (HFA), NCSHA helped
     us obtain data from four state and two local HFAs. 21 Specifically, we


21
  According to NCSHA officials, they recommended these state and local HFAs based on
the large size of their multifamily programs and because they provided diversity in
geography and size.




Page 75                                      GAO-12-849 Multifamily Housing Financing
Appendix I: Objectives, Scope, and
Methodology




      obtained data on median debt-service coverage ratios, median LTV
      ratios, percentage of outstanding unpaid principal balances that were
      60 days or more delinquent, median loan size, and median number of
      units per property. 22
•     For loan consortiums, NAAHL helped us obtain data from three
      consortiums. 23 Specifically, we obtained data for 2005 through 2011
      on median debt-service coverage ratios, median LTV ratios, and the
      percentage of loans 60 days or more delinquent. 24 Additionally, two of
      the three loan consortiums provided us with data on median loan size
      and the median number of units per property.

We assessed the reliability of the data provided by these data sources by
sending them a set of standard data reliability questions and obtaining
their written responses. We followed up with the specific sources of data
when we had questions about the data or their responses to our data
reliability questions. Where possible, we also compared the data they
provided to us with published data. We determined that the data were
sufficiently reliable for our purposes. We also interviewed officials from
ACLI, CREFC, FHA, RHS, NCSHA, and NAAHL.

To determine the extent to which the enterprises shared risk with FHA
and RHS, we obtained loan-level and aggregated data from the
enterprises on the number of loans in risk-sharing programs with FHA
and RHS. As discussed earlier, we took a number of steps to assess the
reliability of the loan-level and aggregated data and determined that the
data were sufficiently reliable for our purposes. To help us understand
how these risk-sharing programs operate, we reviewed documents
describing the programs, including memorandums of understanding
between the enterprises and FHA and RHS. We reviewed documentation
on the enterprises’ efforts to support state and local HFAs, including the
Department of the Treasury’s temporary HFA initiative. We also
interviewed officials from Fannie Mae, Freddie Mac, FHA, RHS, NCSHA,
and selected state and local HFAs to obtain information on their
experiences with these programs.



22
    One HFA was unable to provide us with median debt-service coverage ratios.
23
    These were the only three consortiums that responded to our request for data.
24
  One loan consortium was unable to provide us with data on median LTV ratios, median
loan sizes, and median number of units per property.




Page 76                                           GAO-12-849 Multifamily Housing Financing
Appendix I: Objectives, Scope, and
Methodology




To describe how the enterprises managed credit risk associated with their
multifamily activities, we reviewed FHFA’s examination reports and
OFHEO and FHFA annual reports to Congress, which summarize credit
risk issues identified during annual examinations of the enterprises. We
also interviewed FHFA officials to obtain information on current credit risk
issues. To describe how the enterprises have addressed or will address
these issues, we reviewed the enterprises’ formal responses to FHFA’s
examination reports and any subsequent FHFA responses. Because
FHFA’s examination reports and the enterprises’ responses are
confidential, we limited our discussions of them to a summary. We also
made revisions based on concerns FHFA raised with our original
language summarizing supervisory concerns expressed in examination
reports.

We conducted this performance audit from November 2011 to September
2012 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for
our findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




Page 77                                  GAO-12-849 Multifamily Housing Financing
Appendix II: Fannie Mae and Freddie Mac’s Multifamily Loan
Purchases in the 25 Largest Metropolitan Areas
This appendix provides the data that support the interactive maps in this report (figs. 5 and 6). Specifically, table 12 shows Fannie Mae’s multifamily
loan purchases in the 25 largest metropolitan statistical areas (MSA) from 1994 through 2011. 1

Table 12: Fannie Mae’s Multifamily Loan Purchases in the 25 Largest Metropolitan Areas, 1994-2011 (Numbers in thousands)

MSA                                      1994        1995         1996       1997         1998         1999       2000         2001         2002         2003         2004         2005         2006         2007         2008         2009         2010         2011

New York-Northern New Jersey-
Long Island, NY-NJ-PA                 $744,141   $316,137    $1,045,773   $966,751   $1,379,102   $1,247,888   $779,314   $2,377,162   $3,192,993   $5,733,621   $4,303,917   $3,877,184   $4,023,909   $5,456,795   $3,331,178   $1,642,534   $1,602,823   $2,107,160

Los Angeles-Long Beach-Santa Ana,
CA                                     193,155   1,090,211     443,937     427,237    2,728,972     882,790     591,222    2,190,293    3,227,513    7,474,893    2,253,669    3,812,396    2,947,757    5,006,683    4,693,595    2,246,120    2,503,525    1,688,719

Chicago-Joliet-Naperville, IL-IN-WI    159,606    304,689      261,066     202,107     335,301      280,243     248,369     536,809      258,059      553,946      312,787      410,657      405,133      661,342      908,570      445,993      362,785      611,549

Dallas-Fort Worth-Arlington, TX        260,535    283,680      648,148     554,908     559,759      513,918     519,902     797,390      392,798      276,426      349,067      450,081      444,041      678,853     1,068,544     423,324      534,187     1,098,665

Philadelphia-Camden-Wilmington,
PA-NJ-DE-MD                             90,359     99,101      237,716      90,612     456,009       95,860     153,163     383,988      337,505      655,283      386,825      677,978      531,173      654,429      738,626      434,437      438,469      367,251

Houston-Sugar Land-Baytown, TX         189,002    157,105      191,885     221,139     211,003      292,489     207,980     678,698      474,419      656,017      310,041      320,471      347,096      635,106      695,509      386,099      188,618      447,744

Washington-Arlington-Alexandria,
DC-VA-MD-WV                            487,909    111,477      260,086     815,911     434,551      369,827     681,352    1,062,119     688,892      675,196      759,981      854,436      666,393      604,191      978,292      837,503     1,224,012    1,368,551

Miami-Fort Lauderdale-Pompano
Beach, FL                              161,563    187,811      103,843      88,851     165,871      253,629     258,201     539,022      378,649      473,447      248,655      125,296      254,791      305,189      360,493      291,370      349,543      488,996

Atlanta-Sandy Springs-Marietta, GA     207,721    505,419      277,673     198,247     248,780      374,844     542,991     503,549      297,358      333,497      224,567      318,887      307,769      269,413      495,317      180,582      192,989      331,364

Boston-Cambridge-Quincy, MA-NH          25,067    121,465      284,170      83,351     187,234      202,243     111,179     215,387      257,189      552,591      207,520      227,707      355,990      296,435      493,423      223,776      162,777      323,548

San Francisco-Oakland-Fremont, CA      183,764    383,417      204,306      79,335     758,383      337,698     290,418    1,197,640    1,385,614    3,025,069     929,912     1,010,337     703,834     1,902,171     668,051      542,974      670,690      745,012

Detroit-Warren-Livonia, MI             110,677     78,557      187,459      81,634     118,438      187,072     253,395     334,847      216,139      313,633      180,732      183,639      261,046      205,137      306,178       39,272       18,176      122,245

Riverside-San Bernardino-Ontario,
CA                                      57,507     56,322       77,402      65,831     101,698      144,180     140,042     512,921      479,780      599,849      408,861      507,096      215,590      519,422      453,819      383,742      209,733      429,682

Phoenix-Mesa-Glendale, AZ              210,975    132,133      209,013     187,861     329,813      180,843     243,343     291,264      185,562      237,146      239,265      304,002      262,805      276,380      340,706      236,112      265,024      334,577

Seattle-Tacoma, Bellevue, WA           130,902     47,826      284,131     337,617     477,519      461,248     264,806     710,523      445,676      963,368      473,119      795,925      775,228     1,087,787     690,980      503,675      507,754      755,478

Minneapolis-St. Paul-Bloomington,
MN-WI                                   46,588     78,893       93,671      69,360     144,920       93,722     161,660     293,075      338,210      391,891      207,332      339,476      222,441      344,418      232,052      261,294      151,538      267,636




1
 Metropolitan statistical areas are geographic entities the Office of Management and Budget defined for use by federal statistical agencies in collecting, tabulating, and publishing
federal statistics. They contain a core urban area with a population of 50,000 or more.

                                                                Page 78                                                      GAO-12-849 Multifamily Housing Financing
        Appendix II: Fannie Mae and Freddie Mac’s Multifamily Loan Purchases in the 25 Largest Metropolitan Areas




MSA                                       1994         1995         1996         1997          1998         1999         2000          2001          2002          2003          2004          2005          2006          2007          2008          2009          2010          2011

San Diego-Carlsbad-San Marcos,
CA                                     115,646      284,867       96,833       89,659       545,440      199,398      338,029       619,180       576,425      1,875,615      354,079       698,159       387,975       914,426       780,067       464,152       364,279       547,635

St. Louis, MO-IL                        30,975       61,940       60,222      100,904       123,889       74,390       22,742        50,442       178,155       168,635        65,811       129,096       172,531       214,876       184,667        44,648       118,723       138,239

Tampa-St. Petersburg-Clearwater,
FL                                      43,636       67,424       54,090       19,133        54,360      132,055      153,703       175,091       197,644       182,369       223,621       358,157       177,865       281,639       185,247       115,731       106,910       218,834

Baltimore-Towson, MD                    52,195       86,834      292,355      215,217       225,269       85,167      201,038       246,974       385,717       749,660       463,337       323,491       407,868       483,970       206,235       233,707       193,216       352,232

Denver-Aurora-Broomfield, CO           144,852      130,556      108,356      108,655       293,959      200,359      375,825       301,975       378,944       362,331        94,183       195,868       116,886       296,874       326,176       361,348       408,563       504,864

Pittsburgh, PA                          11,258        7,749       11,528       22,065        56,284       21,741       21,628        30,573        28,328        12,452        19,103        62,112        37,662        43,533        88,682        37,857       102,438        44,072

Portland-Vancouver-Hillsboro, OR-
WA                                     130,061       21,876       64,558       88,133       181,140      142,531       92,721       317,825       147,658       577,599       192,460       209,527        74,645       276,476       284,889       187,602       299,319       363,801

Sacramento-Arden-Arcade-Roseville,
CA                                      58,535      114,800       62,391       99,771       208,988      207,552      242,558       590,909       624,506      1,100,782      189,908       342,004       309,785       446,056       282,184       256,999       234,986       414,916

San Antonio-New Braunfels, TX          114,363       33,425       69,728       62,327       158,068       53,103       84,178       146,315       124,249       103,795       146,853       213,202       101,279       188,455       184,899       137,262        90,626       334,612

Total                                $3,960,990   $4,763,715   $5,630,336   $5,276,615   $10,484,750   $7,034,787   $6,979,756   $15,103,971   $15,197,980   $28,049,113   $13,545,606   $16,747,181   $14,511,489   $22,050,054   $18,978,378   $10,918,113   $11,301,703   $14,407,381

                                                                     Source: GAO analysis of Fannie Mae data.

                                                                     Note: All dollar figures are in 2012 dollars. We included only those purchases where a single loan was associated with a single property. As discussed
                                                                     earlier in this report, Fannie Mae offers financing options that can result in one loan for multiple properties, multiple loans for multiple properties, or
                                                                     multiple loans for one property.


Table 13 shows Freddie Mac’s multifamily loan purchases in the 25 largest MSAs from 1994 through 2011.




                                                                  Page 79                                                            GAO-12-849 Multifamily Housing Financing
      Appendix II: Fannie Mae and Freddie Mac’s Multifamily Loan Purchases in the 25 Largest Metropolitan Areas




Table 13: Freddie Mac’s Multifamily Loan Purchases in the 25 Largest Metropolitan Areas, 1994-2011 (Numbers in thousands)

MSA                 1994       1995       1996       1997       1998       1999         2000         2001        2002         2003         2004         2005         2006         2007         2008         2009         2010         2011

New York-
Northern New
Jersey-Long
Island, NY-NJ-
PA                $98,688   $236,343   $400,449   $308,555   $595,265   $954,772   $1,144,572   $1,236,949   $916,149    $1,634,769   $1,179,272   $1,148,238   $1,457,941   $1,539,477   $1,940,288   $2,464,723   $1,589,207   $1,440,366

Los Angeles-
Long Beach-
Santa Ana, CA      92,853      9,192     45,635     55,712    336,592    808,919     570,388     1,069,601   1,738,336    4,560,043    1,639,905     489,965     1,013,025    1,452,313    1,581,290    2,080,086     878,087     1,323,208

Chicago-Joliet-
Naperville, IL-
IN-WI               6,609     55,753    113,224     43,343    121,094    424,976     307,711      206,089     523,214     1,110,551     379,521      293,569      396,899      617,956      788,486      357,806      504,584      393,335

Dallas-Fort
Worth-
Arlington, TX      63,800     49,735    112,891     54,673      8,659    381,015     141,791      542,542     658,402      380,499      761,447      876,955      696,385     1,301,356    1,431,090     809,458      566,460      946,068

Philadelphia-
Camden-
Wilmington,
PA-NJ-DE-MD        38,257     83,317    237,688    118,309    164,235    128,289     125,509      120,192     213,443      196,386      462,110      331,806      326,157      370,700      581,694      225,782      368,133      261,067

Houston-
Sugar Land-
Baytown, TX        32,742     18,585     37,707    169,185     74,981    219,197     172,053      249,732     482,589      313,643      183,060      306,875      280,425      777,784      918,692      731,871      581,965      878,911

Washington-
Arlington-
Alexandria,
DC-VA-MD-
WV                 86,414     61,926     69,220    189,667    200,386    700,749     555,173      513,366     662,132      547,724      702,160      430,358     1,306,965    1,713,566    1,786,065    1,464,062    1,481,161    1,885,826

Miami-Fort
Lauderdale-
Pompano
Beach, FL          37,303     75,615     84,048     68,594    273,059    339,779     141,099      208,012     215,487      286,767      109,039      234,294      216,749      408,907      474,604      402,362      381,621      248,882

Atlanta-Sandy
Springs-
Marietta, GA       13,283    114,478     65,812    140,079    159,881    377,732     451,907      631,652     461,872      473,488      587,299      730,248      675,899     1,140,981    1,432,816     679,148      560,696      769,227




                                                        Page 80                                                  GAO-12-849 Multifamily Housing Financing
      Appendix II: Fannie Mae and Freddie Mac’s Multifamily Loan Purchases in the 25 Largest Metropolitan Areas




MSA               1994     1995     1996      1997      1998      1999      2000      2001        2002        2003      2004      2005      2006      2007      2008      2009      2010      2011

Boston-
Cambridge-
Quincy, MA-
NH               20,051   16,352   45,657     4,055   110,820   108,227   104,446   272,540    254,871     116,971    238,104   139,834   139,101   543,756   402,123   455,982   180,823   237,770

San
Francisco-
Oakland-
Fremont, CA          0     9,713    3,451   225,249    40,157   461,416    50,408   420,231   1,064,658   1,637,145   625,352   357,881   124,221   767,933   776,039   427,612   396,735   309,341

Detroit-
Warren-
Livonia, MI      11,756   21,515   79,618    34,719    53,895    68,582    82,242    73,900     55,217      84,801     46,662   150,160   105,028    62,979   130,205    12,350    14,850   116,037

Riverside-San
Bernardino-
Ontario, CA          0    10,284    8,970    18,099    16,785    71,381   117,135   227,688    183,831     216,068    462,983   236,340   140,611   348,845   374,126   173,119   305,109   368,436

Phoenix-
Mesa-
Glendale, AZ      3,713   29,776   37,681    20,145    58,423   198,004   205,551   210,905    255,305      81,503    264,117   270,732   190,400   293,416   478,233   526,070   401,121   515,286

Seattle-
Tacoma,
Bellevue, WA      6,895   42,784   23,012    78,277   116,133   129,580   129,410   300,944    168,384     222,966    303,461   351,033   176,285   824,566   696,973   529,817   300,879   687,120

Minneapolis-
St. Paul-
Bloomington,
MN-WI            20,424   40,764   43,306    32,595   165,266   281,567    62,932   135,550    228,673     163,454    268,450   259,826   107,813   253,714   385,799   155,550   134,649    77,345

San Diego-
Carlsbad-San
Marcos, CA       41,136   33,147   29,559    92,727   144,321   208,700   125,447   514,197    630,942     961,244    587,888   170,079   165,347   475,320   606,983   316,492   311,837   321,595

St. Louis, MO-
IL                   0        0    23,466     2,781     6,036     7,222    19,077    84,467     71,250      63,706     26,963    98,264   126,030   288,571    72,309   104,701    42,068    87,124

Tampa-St.
Petersburg-
Clearwater, FL    3,517    5,505   30,306    24,768   125,093   132,318    90,305   113,869    107,194      71,493     96,610   216,877   110,984   131,451   228,801   250,012   267,510   407,552

Baltimore-
Towson, MD       48,712   10,243   68,499    33,501   141,717   286,844   279,298   186,492    187,662     355,031    458,447   444,548   616,001   708,209   350,448   172,733   132,564   386,512

Denver-
Aurora-
Broomfield,
CO                1,351   88,349   69,331    11,883   151,222   184,073   113,067   353,487    244,802     136,900     90,690   120,637   261,103   461,569   522,927   553,949   346,467   578,150


                                                 Page 81                                          GAO-12-849 Multifamily Housing Financing
        Appendix II: Fannie Mae and Freddie Mac’s Multifamily Loan Purchases in the 25 Largest Metropolitan Areas




MSA                 1994         1995         1996         1997          1998         1999         2000          2001         2002          2003         2004         2005         2006          2007          2008          2009          2010          2011

Pittsburgh, PA         0       14,218       21,176       22,789        65,060       17,374        9,568         32,603      40,276        40,932       34,751       22,881       12,318        30,552        57,104        26,531       126,040        38,624

Portland-
Vancouver-
Hillsboro, OR-
WA                   581       22,716       54,429       62,793        35,803       60,689       21,274         36,559      58,778       132,516       50,846      167,700       60,128       275,651       221,758       197,850        42,448       182,175

Sacramento-
Arden-Arcade-
Roseville, CA      10,717           0        1,386            0        17,029       63,913             0       206,922     175,913       363,087      296,622       71,267      208,880       221,769       257,972       136,910        76,619       116,336

San Antonio-
New
Braunfels, TX      14,598      48,793        2,416        1,131        12,522       42,036       14,618         82,959      77,081        82,143       62,554       71,098      113,136       270,253       316,262       174,258       168,043       290,701

Total            $653,399   $1,099,101   $1,708,935   $1,813,629   $3,194,434   $6,657,354   $5,034,980    $8,031,447    $9,676,461   $14,233,830   $9,918,313   $7,991,464   $9,027,830   $15,281,594   $16,813,086   $13,429,231   $10,159,674   $12,866,994

                                                                   Source: GAO analysis of Freddie Mac data.

                                                                   Note: All dollar figures are in 2012 dollars.




                                                              Page 82                                                         GAO-12-849 Multifamily Housing Financing
Appendix III: Additional Data on Fannie Mae
                     Appendix III: Additional Data on Fannie Mae
                     and Freddie Mac’s Multifamily Activities



and Freddie Mac’s Multifamily Activities

                     In this appendix, we present additional analyses of loan-level data and
                     aggregated data provided by Fannie Mae and Freddie Mac. Specifically,
                     we analyzed multifamily loan-level data for 1994 through 2011 from both
                     enterprises to determine (1) the unpaid principal balance of loans
                     purchased in each state and (2) the delinquency rates of loans with
                     various debt-service coverage and loan-to-value (LTV) ratios. In addition,
                     we asked both enterprises to provide aggregated multifamily data on their
                     administrative costs.


Multifamily Loan     Table 14 contains data on the unpaid principal balance of multifamily
Purchases by State   loans Fannie Mae and Freddie Mac acquired in the 50 states, the District
                     of Columbia, Puerto Rico, and the U.S. Virgin Islands from 1994 through
                     2011.

                     Table 14: Fannie Mae and Freddie Mac Multifamily Loan Acquisitions by State,
                     1994-2011

                                                     Fannie Mae                   Freddie Mac
                                                      (dollars in    Fannie         (dollars in    Freddie
                     State                              millions)   Mae rank          millions)   Mac rank
                     Alabama                               $1,988         28            $1,910           23
                     Alaska                                   240         46                 0           51
                     Arizona                                6,866         12             4,672           14
                     Arkansas                                 796         38               484           37
                     California                            97,281          1            47,630            1
                     Colorado                               6,445         13             5,267           13
                     Connecticut                            1,790         29             1,759           25
                     Delaware                                 966         36               347           41
                     District of Columbia                   2,100         27             1,749           26
                     Florida                               15,397          4            13,580            4
                     Georgia                                7,307         10            10,105            6
                     Hawaii                                   734         40               361           39
                     Idaho                                    412         43               111           45
                     Illinois                               7,652          9             6,775            8
                     Indiana                                2,644         24             1,659           28
                     Iowa                                     761         39               467           38
                     Kansas                                 1,486         32             1,684           27
                     Kentucky                               1,044         35               833           33
                     Louisiana                              2,932         22             1,378           29
                     Maine                                    230         47                97           46




                     Page 83                                        GAO-12-849 Multifamily Housing Financing
Appendix III: Additional Data on Fannie Mae
and Freddie Mac’s Multifamily Activities




                                            Fannie Mae                        Freddie Mac
                                             (dollars in         Fannie         (dollars in    Freddie
 State                                         millions)        Mae rank          millions)   Mac rank
 Maryland                                          11,039              6             9,966            7
 Massachusetts                                       4,933            17             3,647           15
 Michigan                                            5,362            15             2,370           20
 Minnesota                                           4,035            20             3,017           17
 Mississippi                                            722           41               706           36
 Missouri                                            2,754            23             2,079           21
 Montana                                                269           45                60           48
 Nebraska                                            1,045            34             1,076           30
 Nevada                                              5,943            14             2,915           19
 New Hampshire                                          806           37               338           42
 New Jersey                                          7,228            11             5,886           10
 New Mexico                                          1,115            33               723           35
 New York                                          40,653              2            17,923            3
 North Carolina                                      4,897            18             5,713           11
 North Dakota                                           219           48               272           43
 Ohio                                                5,302            16             3,506           16
 Oklahoma                                            2,275            26               812           34
 Oregon                                              4,446            19             1,887           24
 Pennsylvania                                        7,869             8             5,379           12
 Puerto Rico                                              10          53                 0           52
 Rhode Island                                           480           42               360           40
 South Carolina                                      1,695            30             1,995           22
 South Dakota                                           280           44               126           44
 Tennessee                                           3,178            21             2,916           18
 Texas                                             24,748              3            22,462            2
 Utah                                                2,308            25               970           32
 Vermont                                                  41          51                 7           50
 Virginia                                            8,179             7            10,928            5
 Virgin Islands                                           13          52                 0           53
 Washington                                        12,298              5             6,517            9
 West Virginia                                          100           50                94           47
 Wisconsin                                           1,625            31             1,064           31
 Wyoming                                                130           49                31           49
Source: GAO analysis of data from Fannie Mae and Freddie Mac.

Note: All dollar figures are in 2012 dollars. For Fannie Mae, we included only those purchases where
a single loan was associated with a single property, or about 99 percent of the loans Fannie Mae
acquired during the period reviewed and about 85 percent of the unpaid principal balance.




Page 84                                                         GAO-12-849 Multifamily Housing Financing
                                        Appendix III: Additional Data on Fannie Mae
                                        and Freddie Mac’s Multifamily Activities




Serious Delinquency Rates               Serious delinquency rates for multifamily loans varied by underwriting
for Multifamily Loans with              characteristic. Table 15 contains loan counts and serious delinquency
Various Underwriting                    rates (based on unpaid principal balance) for multifamily loans with
                                        original debt-service coverage ratios less than 1.25 purchased from 1994
Characteristics                         through 2011.

Table 15: Fannie Mae and Freddie Mac’s Serious Delinquency Rates for Multifamily Loans with Debt-Service Coverage Ratios
Less Than 1.25

                             Fannie Mae                                                                    Freddie Mac
                                    Percentage of multifamily                                               Percentage of multifamily
           Number of multifamily unpaid principal balance with                     Number of multifamily unpaid principal balance with
          loans with debt-service debt-service coverage ratios                    loans with debt-service debt-service coverage ratios
             coverage ratios less   less than 1.25 that was 60                       coverage ratios less   less than 1.25 that was 60
Year                    than 1.25     days or more delinquent                                   than 1.25     days or more delinquent
1994                         N/A                                     N/A                                    15                           0.00%
1995                         373                                     0.00                                   25                             0.00
1996                         118                                     0.00                                   31                             0.00
1997                         200                                     0.00                                   35                             0.00
1998                         878                                     0.09                                   36                             0.00
1999                         936                                     0.12                                   48                             0.00
2000                       1,033                                     0.00                                   55                             0.00
2001                       1,131                                     0.52                                   62                             0.00
2002                       1,420                                     0.01                                  195                             0.00
2003                       1,568                                     0.50                                  193                             0.00
2004                       1,829                                     0.21                                  244                             0.00
2005                       2,658                                     0.10                                  340                             0.00
2006                       3,231                                     0.07                                  436                             0.00
2007                      10,459                                     0.06                                  908                             0.00
2008                      11,367                                     0.29                                1,294                             0.08
2009                      11,200                                     0.82                                1,400                             0.82
2010                      10,710                                     0.77                                1,421                             0.82
2011                      10,019                                     0.82                                1,405                             0.76
                                        Source: GAO analysis of data from Fannie Mae and Freddie Mac.

                                        N/A = not applicable
                                        Note: Fannie Mae’s underwriting standards for traditional rental housing loans typically require a debt-
                                        service coverage ratio of 1.25. However, for certain asset classes, the ratio may be less than 1.25.


                                        Table 16 contains loan counts and delinquency rates (based on unpaid
                                        principal balance) for multifamily loans with original debt-service coverage
                                        ratios greater than or equal to 1.25 purchased from 1994 through 2011.



                                        Page 85                                                         GAO-12-849 Multifamily Housing Financing
                                          Appendix III: Additional Data on Fannie Mae
                                          and Freddie Mac’s Multifamily Activities




Table 16: Fannie Mae and Freddie Mac’s Serious Delinquency Rates for Multifamily Loans with Debt-Service Coverage Ratios
Greater Than or Equal to 1.25

                             Fannie Mae                                                                      Freddie Mac
                                       Percentage of multifamily                                                       Percentage of multifamily
                                        unpaid principal balance                                                        unpaid principal balance
           Number of multifamily     with debt-service coverage                         Number of multifamily        with debt-service coverage
          loans with debt-service    ratios greater than or equal                      loans with debt-service       ratios greater than or equal
          coverage ratios greater     to 1.25 that was 60 days or                      coverage ratios greater        to 1.25 that was 60 days or
Year         than or equal to 1.25               more delinquent                          than or equal to 1.25                  more delinquent
1994                          N/A                                   N/A                                        107                         0.00%
1995                          628                                  0.00                                        329                           0.00
1996                        1,106                                  0.09                                        700                           0.04
1997                        2,102                                  0.12                                      1,015                           0.00
1998                        4,921                                  0.04                                      1,585                           0.00
1999                        6,071                                  0.01                                      2,232                           0.09
2000                        6,900                                  0.08                                      2,647                           0.00
2001                        9,216                                  0.29                                      3,318                           0.19
2002                       16,336                                  0.05                                      4,408                           0.14
2003                       32,114                                  0.29                                      4,886                           0.06
2004                       31,499                                  0.10                                      5,244                           0.08
2005                       32,353                                  0.35                                      5,385                           0.00
2006                       24,893                                  0.08                                      5,397                           0.06
2007                       25,492                                  0.08                                      6,005                           0.02
2008                       28,034                                  0.30                                      6,914                           0.02
2009                       28,594                                  0.52                                      7,636                           0.08
2010                       28,804                                  0.67                                      8,110                           0.17
2011                       28,211                                  0.48                                      8,515                           0.12
                                          Source: GAO analysis of data from Fannie Mae and Freddie Mac.

                                          N/A = not applicable


                                          Table 17 contains loan counts and delinquency rates (based on unpaid
                                          principal balance) for multifamily loans with original loan-to-value (LTV)
                                          ratios less than or equal to 80 percent purchased from 1994 through
                                          2011.




                                          Page 86                                                         GAO-12-849 Multifamily Housing Financing
                                        Appendix III: Additional Data on Fannie Mae
                                        and Freddie Mac’s Multifamily Activities




Table 17: Fannie Mae and Freddie Mac’s Serious Delinquency Rates for Multifamily Loans with LTV Ratios Less Than or
Equal to 80 Percent

                             Fannie Mae                                                                     Freddie Mac
                                      Percentage of multifamily                                                 Percentage of multifamily
                                   unpaid principal balance with                       Number of multifamily     unpaid principal balance
           Number of multifamily LTV ratios less than or equal                          loans with LTV ratios with LTV ratios less than or
        loans with LTV ratios less    to 80 percent that was 60                      less than or equal to 80 equal to 80 percent that was
Year   than or equal to 80 percent     days or more delinquent                                       percent 60 days or more delinquent
1994                            2                                  0.00%                                    122                          0.00%
1995                          974                                     0.00                                  355                            0.00
1996                        1,128                                     0.09                                  732                            0.04
1997                        2,122                                     0.12                                 1,048                           0.00
1998                        5,561                                     0.04                                 1,613                           0.00
1999                        6,613                                     0.01                                 2,262                           0.09
2000                        7,468                                     0.08                                 2,682                           0.00
2001                        9,773                                     0.30                                 3,355                           0.19
2002                       16,784                                     0.05                                 7,367                           0.14
2003                       32,353                                     0.28                               17,547                            0.01
2004                       31,956                                     0.11                               16,196                            0.03
2005                       35,103                                     0.32                               14,432                            0.00
2006                       29,572                                     0.05                                 6,249                           0.00
2007                       34,506                                     0.06                                 7,066                           0.02
2008                       37,958                                     0.27                                 8,108                           0.00
2009                       38,369                                     0.62                                 8,876                           0.10
2010                       38,126                                     0.71                                 9,322                           0.13
2011                       36,885                                     0.49                                 9,680                           0.10
                                        Source: GAO analysis of data from Fannie Mae and Freddie Mac.



                                        Table 18 contains loan counts and delinquency rates (based on unpaid
                                        principal balance) for multifamily loans with original LTV ratios greater
                                        than 80 percent purchased from 1994 through 2011.




                                        Page 87                                                         GAO-12-849 Multifamily Housing Financing
                                        Appendix III: Additional Data on Fannie Mae
                                        and Freddie Mac’s Multifamily Activities




Table 18: Fannie Mae and Freddie Mac’s Serious Delinquency Rates for Multifamily Loans with LTV Ratios Greater Than 80
Percent

                             Fannie Mae                                                                     Freddie Mac
                                      Percentage of multifamily                                                Percentage of multifamily
                                       unpaid principal balance                                                 unpaid principal balance
             Number of multifamily with LTV ratios greater than                       Number of multifamily with LTV ratios greater than
              loans with LTV ratios 80 percent that was 60 days                        loans with LTV ratios 80 percent that was 60 days
Year        greater than 80 percent         or more delinquent                       greater than 80 percent         or more delinquent
1994                             0                                0.00%                                        1                         0.00%
1995                            17                                   0.00                                      2                           0.00
1996                            53                                   0.00                                      2                           0.00
1997                           134                                   0.00                                      5                           0.00
1998                           485                                   0.00                                     11                           0.00
1999                           569                                   0.13                                     22                           0.00
2000                           686                                   0.00                                     23                           0.00
2001                           787                                   0.56                                     28                           0.00
2002                         1,078                                   0.00                                    271                           0.00
2003                         1,336                                   0.78                                    362                           0.59
2004                         1,335                                   0.21                                    421                           0.61
2005                         1,363                                   0.37                                    451                           0.00
2006                         1,327                                   0.44                                    387                           0.91
2007                         1,378                                   0.32                                    534                           0.00
2008                         1,383                                   0.89                                    698                           0.46
2009                         1,363                                   0.56                                    729                           1.58
2010                         1,328                                   0.56                                    754                           2.36
2011                         1,290                                   2.91                                    742                           2.15
                                        Source: GAO analysis of data from Fannie Mae and Freddie Mac.

                                        Note: Fannie Mae’s underwriting standards for traditional rental housing loans typically require an
                                        LTV ratio of 80 percent. However, for certain asset classes, the ratio may exceed 80 percent.




Multifamily Administrative              The enterprises’ administrative costs associated with their multifamily
Costs                                   business from 2002 through 2011 are shown in table 19.




                                        Page 88                                                         GAO-12-849 Multifamily Housing Financing
Appendix III: Additional Data on Fannie Mae
and Freddie Mac’s Multifamily Activities




Table 19: Fannie Mae and Freddie Mac’s Multifamily Administrative Costs, 2002-
2011

 Year               Fannie Mae (dollars in millions)         Freddie Mac (dollars in millions)
 2002                                           $192                                      No data
 2003                                            236                                      No data
 2004                                            270                                      No data
 2005                                            424                                          $151
 2006                                            597                                           182
 2007                                            548                                           189
 2008                                            404                                           190
 2009                                            363                                           221
 2010                                            383                                           212
 2011                                            264                                           220
Sources: Fannie Mae and Freddie Mac.

Note: Fannie Mae could not provide data prior to 2002, and Freddie Mac could not provide data prior
to 2005. For Fannie Mae, the data include direct expenses, direct allocated expenses, and indirect
expenses for its entire multifamily business.




Page 89                                                GAO-12-849 Multifamily Housing Financing
Appendix IV: Enterprises’ Multifamily Loan
                                           Appendix IV: Enterprises’ Multifamily Loan and
                                           Property Sizes Compared with Other Market
                                           Participants


and Property Sizes Compared with Other
Market Participants
                                           From 2005 through 2011, the size of the multifamily loans that Freddie
                                           Mac purchased and the properties it financed were more comparable with
                                           loans financed by life insurance companies than Fannie Mae. As shown
                                           in table 20, during this period Freddie Mac purchased loans and financed
                                           properties that were larger than those financed by Fannie Mae, generally
                                           comparable to those financed by life insurance companies, and generally
                                           larger than those financed by commercial mortgage-backed securities
                                           (CMBS) lenders. During the same period, Fannie Mae purchased smaller
                                           loans and financed smaller properties than those financed by Freddie
                                           Mac, life insurance companies, and CMBS lenders (except for 2010).

Table 20: Median Loan Size and Number of Units for Multifamily Loans Financed by the Enterprises, Life Insurance
Companies, and CMBS Lenders, 2005-2011

Acquisition         Median loan size (dollars in thousands)                                                       Median number of units
or                                                                                                                                            Life
origination                             Life insurance                     CMBS                     Fannie          Freddie             insurance           CMBS
                                                                                                          a
year          Fannie Mae    Freddie Mac     companies                    lenders                      Mae              Mac             companies          lenders
2005                $629          $7,450              $10,800             $5,400                           13              196                    210        144
2006               1,179           8,450                13,800              6,268                          24              200                    236        154
2007                 691           7,768                13,840              7,200                          15              192                    224        144
2008               1,836           9,000                  6,800             4,187                          44              200                    144        120
                                                                                   b                                                                            b
2009               3,280          10,170                  4,850                                            92              217                    144
2010               3,500          10,500                12,500              1,424                          85              199                    228         66
2011               4,365          11,500                13,000              9,040                        102               212                    207        222
                                           Sources: GAO analysis of data from Fannie Mae and Freddie Mac; American Council of Life Insurers; and Trepp.

                                           Note: For Fannie Mae and Freddie Mac, the year represents the year the loan was acquired. For life
                                           insurance companies and CMBS lenders, the year is the year the loan was originated.
                                           a
                                            The numbers for Fannie Mae may be low because we excluded loans associated with multiple
                                           properties. Such loans tend to finance large properties, according to Fannie Mae.
                                           b
                                           CMBS lenders did not originate any multifamily loans in 2009.



                                           Other sources of multifamily housing financing—state and local housing
                                           finance agencies (HFA), loan consortiums, and the Rural Housing Service
                                           (RHS)—focused on smaller loans and properties for the most part. 1 For
                                           example, as shown in table 21, data for 2005 through 2011 from three
                                           state HFAs showed that they financed small loans (with median loan


                                           1
                                            The Federal Housing Administration was not able to provide data on average or median
                                           loan and property size.




                                           Page 90                                                              GAO-12-849 Multifamily Housing Financing
                                          Appendix IV: Enterprises’ Multifamily Loan and
                                          Property Sizes Compared with Other Market
                                          Participants




                                          sizes ranging from more than $165,000 to about $4 million) and small
                                          properties (median units per property ranging from 12 to 95). Three other
                                          state and local HFAs reported median loan sizes ranging from $3 million
                                          to $26 million and median units per property ranging from 76 to 230.
                                          RHS’s average loan size ranged from about $1 million to $1.4 million. 2
                                          During this period, the median number of multifamily units supported by
                                          RHS ranged from 44 to 50.

Table 21: Median Loan Size and Number of Units for Loans Originated by Selected Housing Finance Agencies, 2005-2011

Origination
year                 Median loan size (dollars in thousands)                                      Median number of units
                HFA 1    HFA 2    HFA 3       HFA 4       HFA 5         HFA 6           HFA 1   HFA 2   HFA3    HFA 4    HFA 5     HFA 6
2005              N/A    $4,472    $391        $165      $3,750 $11,523                  N/A      175      58      18        70       125
2006              N/A     4,825     508          308       2,320        10,340            N/A      92      60      13        63       104
2007            $3,000    6,773     344          215       1,703        26,000             76     109      60      16        57       230
2008             8,150    5,695   3,081          200       2,350          8,530           106     102      95      14        80        78
                                      a                                                                     a
2009             7,502    5,430                1,750       3,133        16,695            160      98              27        75       130
2010             7,345    4,680     790        1,500          N/A       10,620            101     105      40      16      N/A        107
                                      a                                                                     a
2011             5,203    4,880                1,100       1,600        12,377             96     100              12        50        98
                                          Sources: Selected housing finance agencies.

                                          N/A = data not available
                                          a
                                          HFA had no loans in 2009 and 2011.


                                          The two loan consortiums that provided us with data reported much
                                          smaller loans than the enterprises, with median loan sizes ranging from
                                          $284,000 to $1.6 million and median number of units per property ranging
                                          from 12 to 43 (see table 22).




                                          2
                                              RHS was only able to provide us with average loan size.




                                          Page 91                                                 GAO-12-849 Multifamily Housing Financing
Appendix IV: Enterprises’ Multifamily Loan and
Property Sizes Compared with Other Market
Participants




Table 22: Median Loan Size and Number of Units for Loans Originated by Selected
Loan Consortiums, 2005-2011

                               Median loan size
                             (dollars in thousands)               Median number of units
Origination
year                                  LC 1        LC 2                    LC 1           LC 2
2005                                  $284      $1,090                      12             31
2006                                   421            865                   18             18
2007                                   520       1,620                      18             43
2008                                   625       1,480                      21             35
2009                                   460            749                   17             24
2010                                   343            745                   15             40
2011                                   289       1,500                      12             36
Sources: Selected loan consortiums.




Page 92                                                 GAO-12-849 Multifamily Housing Financing
Appendix V: Data from Selected Housing
                                            Appendix V: Data from Selected Housing
                                            Finance Agencies and Loan Consortiums



Finance Agencies and Loan Consortiums

                                            This appendix contains data provided by six state and local housing
                                            finance agencies (HFA) and three loan consortiums on the first-lien
                                            multifamily mortgages that they originated from 2005 through 2011.
                                            Specifically, they provided data on their median debt-service coverage
                                            ratios, median loan-to-value (LTV) ratios, and delinquency rates. These
                                            data are presented as examples of specific HFA and loan consortiums for
                                            the purposes of comparison against information provided in this report for
                                            each of the enterprises. Because there can be variation between
                                            individual HFAs and individual loan consortiums, these data should not be
                                            seen as representative of all HFAs or loan consortiums.

                                            Table 23 provides information on the median debt-service coverage and
                                            LTV ratios for loans originated by six HFAs from 2005 through 2011. The
                                            debt-service coverage ratio estimates a multifamily borrower’s ability to
                                            service its mortgage obligation using the secured property’s cash flow,
                                            after deducting nonmortgage expenses from income. The higher the debt-
                                            service coverage ratio, the more likely a multifamily borrower will be able
                                            to continue servicing its mortgage obligation. The LTV ratio is the ratio of
                                            the unpaid principal balance of a mortgage loan to the value of the
                                            property that serves as collateral for the loan, expressed as a percentage.
                                            Loans with high LTV ratios generally tend to have a higher risk of default
                                            and, if a default occurs, a greater risk that the amount of the gross loss
                                            will be high compared to loans with lower LTV ratios.

Table 23: Median Debt-Service Coverage and LTV Ratios for Loans Financed by Selected Housing Finance Agencies, 2005-
2011

                          Median debt-service coverage ratio                                              Median LTV ratio
Origination
year             HFA 1 HFA 2 HFA 3 HFA 4                 HFA 5           HFA 6            HFA 1   HFA 2    HFA 3    HFA 4    HFA 5    HFA 6
2005               N/A       1.21    0.92     1.15           N/A            1.16           90%     44%        7%     78%      53%       68%
2006               N/A       1.20    1.72     1.15           N/A            1.20             90      60         6      65       33          75
2007               1.15      1.30    1.11     1.15           N/A            1.13             90      62         4      79       47          67
2008               1.15      1.57    0.97     1.15           N/A            1.21             90      58        16      48       36          71
2009               1.25      1.18    N/A      1.15           N/A            1.11             90      57      N/A       58       62          77
2010               1.25      1.23    1.10     1.15           N/A            1.27             90      31        11      94      N/A          64
2011               1.20      1.15    N/A      1.15           N/A            1.17             90      32      N/A       43       70          75
                                            Sources: Selected housing finance agencies.

                                            N/A = data not available
                                            Note: The median LTV ratios for one of the HFAs are low because there are multiple sources of
                                            subordinate financing.




                                            Page 93                                                   GAO-12-849 Multifamily Housing Financing
                                        Appendix V: Data from Selected Housing
                                        Finance Agencies and Loan Consortiums




                                        Table 24 provides information on the median debt-service coverage and
                                        LTV ratios for loans originated by three loan consortiums from 2005
                                        through 2011.

Table 24: Median Debt-Service Coverage Ratios and LTV Ratios for Loans Financed by Selected Loan Consortiums, 2005-
2011

                           Median debt-service coverage ratio                             Median LTV ratio
Origination year                LC 1                       LC 2               LC 3    LC 1             LC 2           LC 3
2005                             1.24                       1.27              1.17    80%              51%             N/A
2006                             1.22                       1.23              1.14      70               59            N/A
2007                             1.21                       1.17              1.13      71               38            N/A
2008                             1.23                       1.28              1.13      75               56            N/A
2009                             1.24                       1.31              1.15      76               47            N/A
2010                             1.27                       1.25              1.18      72               35            N/A
2011                             1.31                       1.49              1.20      70               46            N/A
                                        Sources: Selected loan consortiums.

                                        N/A = data not available


                                        Table 25 includes information on the percentage of loans seriously
                                        delinquent for the six HFAs. The percentage of loans seriously delinquent
                                        (60 or more days delinquent) each year is based on unpaid principal
                                        balance and the status (as of December 2011) of only those loans
                                        originated in that year.




                                        Page 94                                      GAO-12-849 Multifamily Housing Financing
Appendix V: Data from Selected Housing
Finance Agencies and Loan Consortiums




Table 25: Percentage of Selected Housing Finance Agencies’ Unpaid Principal
Balances That Were Seriously Delinquent as of December 2011, 2005-2011

 Origination                                   60 days or more delinquent
 year                          HFA 1          HFA 2      HFA 3       HFA 4        HFA 5       HFA 6
 2005                          0.00%          0.00%      0.00%       0.00%            5.6%    0.00%
 2006                             0.00         0.00          0.00      0.00           7.1%      0.00
 2007                             0.00         0.00          0.00      0.00           0.0%      0.00
 2008                             0.00         0.00          0.00      0.00           0.0%      0.00
 2009                             0.00         0.00          0.00      0.00           0.0%      0.00
 2010                             0.00         0.00          0.00      0.00            N/A      0.00
 2011                             0.00         0.00          0.00      0.00           0.0%      0.00
Sources: Selected housing finance agencies.

N/A = data not available


Table 26 includes information on the percentage of loans seriously
delinquent for three loan consortiums.

Table 26: Percentage of Loans Seriously Delinquent for Selected Loan
Consortiums, 2005-2011

                                                      60 days or more delinquent
 Origination year                                     LC 1                     LC 2            LC 3
 2005                                             7.63%                       0.00%           0.00%
 2006                                                 0.87                     0.00             0.00
 2007                                                 0.00                     0.00             0.00
 2008                                                 0.00                     0.00             0.00
 2009                                                 0.00                     0.00             0.00
 2010                                                 0.00                     0.00             0.00
 2011                                                 0.00                     0.00             0.00
Sources: Selected loan consortiums.




Page 95                                                      GAO-12-849 Multifamily Housing Financing
Appendix VI: GAO Contact and Staff
                  Appendix VI: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  William B. Shear, (202) 512-8678 or shearw@gao.gov
GAO Contact
                  In addition to the contact named above, Paige Smith (Assistant Director),
Staff             Farah Angersola, Steve Brown, William Chatlos, John Karikari, John
Acknowledgments   McGrail, Jon Menaster, John Mingus, Marc Molino, José R. Peña,
                  Barbara Roesmann, Jim Vitarello, and Heneng Yu made key
                  contributions to this report.




(250642)
                  Page 96                                GAO-12-849 Multifamily Housing Financing
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