Mortgage Financing: Fannie Mae and Freddie Mac's Multifamily Housing Activities Have Increased
Published: 2012-09-06T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Congress established the enterprises to provide stability in the secondary market for residential mortgages and serve the mortgage credit needs of targeted groups. But in September 2008, FHFA placed the enterprises in conservatorship out of concern that their deteriorating financial condition would destabilize the financial system. As Congress and the Executive Branch have explored options for restructuring\ the enterprises, most of the discussion has focused on the single-family market. But the enterprises also play a large role in providing financing for\ multifamily properties (those with five\ or more units).
GAO was asked to describe (1) how the enterprises multifamily loan\ activities have changed, (2) the 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 Mortgage Bankers Association; interviewed key multifamily housing stakeholders; and reviewed FHFA examination reports. FHFA, Fannie Mae, and Freddie Mac provided technical comments, which GAO incorporated where appropriate.
section_title: What GAO Found
paragraphs: From 1994 through 2011, the multifamily loan activities of Fannie Mae and Freddie Mac (the enterprises) generally increased. In this period, Fannie Mae held a lower percentage of multifamily loans in its portfolio than Freddie Mac. While the enterprises multifamily business operations generally were profitable, both enterprises reported losses in 2008 and 2009.
In recent years, Fannie Mae and Freddie Mac played a larger role in the multifamily marketplace, and their multifamily activities contributed considerably to meeting their affordable housing goals (set by their regulator for the purchase of mortgages that serve targeted groups or areas). Before 2008, the enterprises financed about 30 percent of multifamily loans. Their share increased to 86 percent in 2009, but decreased to 57 percent in 2011 as other participants reentered the market. GAO's analysis showed that multifamily activities greatly contributed to the enterprises' ability to meet affordable housing goals. For example, the enterprises' multifamily activities constituted 4.5 percent of their 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.
The enterprises have purchased multifamily loans that generally performed as well as or better than those of other market participants, but the Federal Housing Finance Agency (FHFA) has identified deficiencies in their credit risk management. In 2005-2008, the enterprises' serious delinquency rates (less than 1 percent) were somewhat lower than the rates on multifamily loans made by 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 assets. Both enterprises have been taking steps to address these deficiencies.

section_title: Letter
paragraphs: 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.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.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   They share a  standards from primary mortgage lenders such as banks or savings and  loan associations (thrifts). 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. 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.
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:  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. To assess the reliability of these data, we interviewed  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. 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  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.
subsections: section_title: Background
paragraphs: The multifamily housing finance market has three principal participants:  (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   All three participants contribute to the  are backed by mortgage loans.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.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   Most multifamily loans also include protection for the investor  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. 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.  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. Due to these losses, Freddie  Mac exited the multifamily market for 3 years starting in 1991. The same  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. 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. 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  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. 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  loans—are primary lenders for multifamily housing with less than 50  units.
section_title: The Enterprises’ Multifamily Loan Activities Generally Increased and Delinquencies Remained Low
paragraphs: From 1994 through 2011, the multifamily loan activities of Fannie Mae  and Freddie Mac generally increased, while delinquency rates remained  relatively low. During this period, the number of loans they purchased  spiked in some years to meet goals for financing affordable housing.  Fannie Mae has held a lower percentage of its loans in portfolio than  Freddie Mac, but both enterprises have increased securitization activities  in recent years partly in response to a mandate from the Department of  the Treasury (Treasury) to reduce retained portfolios. Serious  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.
subsections: section_title: Multifamily Loan Purchases Peaked in Recent Years, with Some Fluctuation Tied to Housing Goals
paragraphs: From 1994 through 2011, the enterprises’ multifamily loan activities  generally increased. As shown in figure 1, the enterprises’ annual  purchases of multifamily loans (in terms of unpaid principal balances)  dramatically increased starting in 2000, peaked in 2007 and 2008, and  generally declined in the years following. Fannie Mae’s purchases  ranged from $6.3 billion in 1994 to $49.8 billion in 2007. Freddie Mac’s  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.
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  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.
section_title: Fannie Mae Retained a Lower Percentage of Multifamily Loans Than Freddie Mac
paragraphs: From 1994 through 2011, Fannie Mae retained a lower percentage of its  annual multifamily loan purchases in portfolio at acquisition than Freddie  Mac (see fig. 2). From 1994 through 2003, the majority of Fannie Mae’s  multifamily loan purchases were packaged into MBS. The percentage of  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.
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  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.  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.
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  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.
section_title: Enterprises Generally Financed Large Multifamily Properties in Large Metropolitan Areas
subsections: section_title: Size of Multifamily Properties Financed
paragraphs: The majority of Fannie Mae and Freddie Mac’s purchases of multifamily  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.
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  housing goals when they purchased these mortgages.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.
The majority of the multifamily loans that the enterprises purchased, as  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.
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.
The majority of the multifamily loans that the enterprises purchased were  loans for properties in the largest metropolitan areas. We used 2010 U.S.  Census Bureau data to identify the 25 largest metropolitan statistical  areas (MSA) by population. 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).
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.
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.
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  from 1994 through 2011 were traditional rental properties. 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.explained this occurred because the majority of the multifamily mortgage  market is concentrated in traditional rental housing.
section_title: Enterprises Increased Their Multifamily Market Share and Generally Met Affordable Housing Goals
paragraphs: Fannie Mae and Freddie Mac have played an increasingly large role in  the multifamily marketplace since the beginning of the financial crisis in  2007, as evidenced by the increase in their market share. Although  empirical research on the enterprises’ role in multifamily housing  financing is limited, the literature we reviewed generally stated that the  enterprises have provided liquidity and market stability. The enterprises  met their affordable housing goals in most years, with multifamily  activities greatly contributing to their fulfillment.
subsections: section_title: Enterprises’ Multifamily Market Share Has Grown Since the Financial Crisis
paragraphs: Although the enterprises historically have played a smaller role in  financing multifamily housing than single-family housing, their role in the  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).
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  on MBA’s annual survey of large institutional lenders, which it defines as  firms with a dedicated commercial/multifamily origination platform.   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). The data from ACLI and Trepp also showed  that life insurance companies and CMBS lenders started reentering the  market in 2010.
Based on our reviews of existing literature and interviews with  stakeholders, the enterprises have provided access to multifamily  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  have played in the secondary market for multifamily housing revealed few  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. 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. 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).
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.” 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. 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  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).
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  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. 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. 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  financing markets exist for office, retail, and industrial properties.”  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. 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   According to  further standardize the process for securitizing mortgages. Fannie Mae and Freddie Mac officials, both enterprises have begun their  market analyses and expect to meet FHFA’s deadline of December 31,  2012.
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.
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.
section_title: Enterprises’ Multifamily Activities Are Important to Meeting Affordable Housing Goal Requirements
paragraphs: Beginning in 2010, FHFA implemented the Housing and Economic  Recovery Act of 2008 (HERA) by making significant changes to the  housing goal framework, including establishing separate goals for the  purchases of single- and multifamily mortgages.
The Safety and Soundness Act required the enterprises to meet annual  numeric goals for the purchase of mortgages serving targeted groups.  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). The special affordable goal targeted  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.
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.
HUD oversaw the enterprises’ compliance with the housing goals through  2008. On July 30, 2008, HERA transferred the housing goal oversight  function to FHFA.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   The Safety and Soundness Act, as amended by  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.
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. in 2010, FHFA, implementing HERA, made significant changes to the  goals framework, such as separating the goals for multifamily and single- family mortgage purchases. 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. 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. FHFA is proposing to  continue the existing structure, with revised single-family and multifamily  housing goal benchmark levels for 2012, 2013, and 2014.
See 74 Fed. Reg. 39873 (Aug. 10, 2009). performance that include loan-level data, as well as an annual report at  the end of each year. 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.
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. 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.
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.
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).
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).
section_title: Enterprises’ Purchased Multifamily Loans Have Performed Relatively Well, but Regulators Identified Issues with Credit Risk Management
paragraphs: The enterprises have purchased multifamily loans that have underwriting  standards and loan performance that compared favorably with those of  other market participants. For example, from 2005 through 2010, the  enterprises experienced lower default rates than the other major  mortgage capital sources, with the exception of life insurance companies.  To help offset some of their credit risks and increase the supply of  affordable multifamily housing, the enterprises have risk-sharing  programs with FHA and RHS.relatively few loans. OFHEO and FHFA, through their examination and  oversight of the enterprises, identified a number of credit risk deficiencies  since 2006. For example, they found deficiencies in Fannie Mae’s  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.
subsections: section_title: Enterprises’ Multifamily Underwriting Standards and Serious Delinquency Rates Compared Favorably with Those of Other Sources of Multifamily Credit
paragraphs: Based on underwriting standards and loan performance, the loans the  enterprises purchased generally performed as well as and oftentimes  better than other major sources of financing for multifamily housing. The  major sources include life insurance companies, CMBS lenders, banks  and thrifts, and FHA and RHS lenders. We compared the enterprises’  credit standards to those of CMBS lenders and life insurance companies,  two major participants in the multifamily housing financing marketplace.  From 2005 through 2011, the enterprises’ underwriting standards—as  measured by median debt-service coverage and LTV ratios—were  generally stricter than CMBS lenders. 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.
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. 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   The second had  both enterprises for all years from 2005 through 2011.ratios that were higher than Fannie Mae, but lower than Freddie Mac in 3  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   Starting in  peaked at about 24 percent for loans originated in 2007.2008, 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.
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   As shown  provides data on loans that are 90 days or more delinquent.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.
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.
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.
section_title: Enterprises’ Participation in Multifamily Risk-Sharing Programs Has Been Limited
paragraphs: Fannie Mae and Freddie Mac have entered into risk-sharing agreements  with FHA and RHS to increase the supply of affordable multifamily  housing and help offset some of their credit risk, but these programs have  involved relatively few loans. The enterprises participate in two risk- 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).are not to exceed $50 million and the term of the mortgage is for 15 years   The loans generally  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. 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.
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. million. Over this period, Freddie Mac purchased or guaranteed more  than 9,000 loans with unpaid principal balances of $129 billion.
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  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.
section_title: Regulators Have Identified a Number of Deficiencies in Multifamily Credit Risk Management
paragraphs: From 2006 through 2011, FHFA and its predecessor, OFHEO, identified  deficiencies in management of credit risk at the enterprises. FHFA  oversees the enterprises’ credit risk management through on-site  examinations and off-site monitoring. As part of its annual on-site  examination of the safety and soundness of the enterprises, FHFA  assesses their enterprise risk, which includes credit, market, and  operational risk. 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. 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. FHFA is to follow up on deficiencies to ensure that the  enterprise’s response is appropriate, timely, and effective.
Since 2006, OFHEO and FHFA have identified a number of deficiencies  with Fannie Mae’s management of multifamily credit risk, including  several weaknesses in oversight of its DUS program. 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  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.
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.
We reviewed OFHEO’s annual reports to Congress from 1997 through  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. 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.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to FHFA, and it provided copies to  Fannie Mae and Freddie Mac. FHFA, Fannie Mae, and Freddie Mac  provided technical comments, which we incorporated into the report  where appropriate.
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.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: 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. 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. 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. For Fannie Mae, securitized loans included MBS and  discount MBS. Freddie Mac’s securitized portfolio included participation  certificates, tax-exempt bond securitization, and K-deals. 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.  For Fannie Mae, we limited our analysis to single loans associated  with a single property. 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).
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.
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.
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.
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.
We also analyzed data on the performance of multifamily loans each  enterprise purchased from 1994 to 2011 as follows:
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. 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.
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 guarantee fees collected from 2002 through 2011; and administrative costs from 2002 through 2011 for Fannie Mae and from  2005 through 2011 for Freddie Mac.
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. 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.  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  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. 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. Although we found that these 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. We relied on HUD documents to assess the enterprises’  annual goal performance from 1993 through 2000. For 2001 through  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   Specifically, we us obtain data from four state and two local HFAs.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.
For loan consortiums, NAAHL helped us obtain data from three  consortiums.  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. 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.
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.
section_title: Appendix II: Fannie Mae and Freddie Mac’s Multifamily Loan Purchases in the 25 Largest Metropolitan Areas
subsections: section_title: Table 13 shows Freddie Mac’s multifamily loan purchases in the 25 largest MSAs from 1994 through 2011.
section_title: Appendix III: Additional Data on Fannie Mae and Freddie Mac’s Multifamily Activities
paragraphs: 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.
subsections: section_title: Multifamily Loan Purchases by State
paragraphs: Table 14 contains data on the unpaid principal balance of multifamily  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.
Serious delinquency rates for multifamily loans varied by underwriting  characteristic. Table 15 contains loan counts and serious delinquency  rates (based on unpaid principal balance) for multifamily loans with  original debt-service coverage ratios less than 1.25 purchased from 1994  through 2011.
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.
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.
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.
The enterprises’ administrative costs associated with their multifamily  business from 2002 through 2011 are shown in table 19.
section_title: Appendix IV: Enterprises’ Multifamily Loan and Property Sizes Compared with Other Market Participants
paragraphs: 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).
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.example, as shown in table 21, data for 2005 through 2011 from three  state HFAs showed that they financed small loans (with median loan   For  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.  During this period, the median number of multifamily units supported by  RHS ranged from 44 to 50.
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).
section_title: Appendix V: Data from Selected Housing Finance Agencies and Loan Consortiums
paragraphs: 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 24 provides information on the median debt-service coverage and  LTV ratios for loans originated by three loan consortiums from 2005  through 2011.
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.
Table 26 includes information on the percentage of loans seriously  delinquent for three loan consortiums.
section_title: Appendix VI: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Paige Smith (Assistant Director),  Farah Angersola, Steve Brown, William Chatlos, John Karikari, John  McGrail, Jon Menaster, John Mingus, Marc Molino, José R. Peña,  Barbara Roesmann, Jim Vitarello, and Heneng Yu made key  contributions to this report.