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. 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. 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. 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. 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. 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. 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. 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). 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. 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. 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. 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. 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. 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. 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. 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. 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). 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. 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.

Summary: 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. 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.