application of such an effort would be a well-designed data collection effort focusing on loan applications and approvals. All application information should be computerized and made available for analysis, subject to confidentiality. Finding out about other options available to the borrower and the reasons for choosing the SPP program would be particularly interesting. As noted above, loan performance information is particularly crucial as a measurement of the length of time between default and final mortgage resolution. Ideally, an evaluation component would include analysis of a control group. For example, efforts might focus on one metropolitan market with basic information collected about a sample of multifamily lending. This would include information about lending terms, loan purpose, lender, project size, and loan performance. The objective would determine whether FHA participants in the sample are different from other borrowers. More specifically, it is important to determine whether the risk of adverse selection is particularly high. Perhaps a joint effort could be undertaken with Freddie Mac and Fannie Mae to collect such information.

A Different Type of HUD

The new program includes a call for emphasis on multifamily mortgage lending by HUD. SPP charges HUD to increase its monitoring role and decrease its activity as primary underwriter or direct producer, according to incentives within the program for private participation. The experiences of Fannie Mae and Freddie Mac have been mixed with respect to this style of program management. Fannie Mae appears to have a highly successful delegated underwriting system for its multifamily lending program; criteria for selection as a delegated underwriter appear to be the key ingredient. Conversely, Freddie Mac encountered far more difficulty with its multifamily lending programs and curtailed this activity in the early 1990s to review its plans. Its new approach calls for concentrating more on primary underwriting and less on delegated underwriting, at least until it gathers sufficient data on multifamily lending to design a successful delegated underwriting process. HUD could learn from both approaches.

SPP highlights a long-heralded role for FHA as an innovator in the mortgage market. This is an appropriate and longstanding role for the Federal Government, a tradition that includes the introduction of insurance for the 30-year fixed-rate mortgage in the 1930s. Nonetheless, financial markets are much more complex than they were in the 1930s. The SPP project can serve to demonstrate the potential viability of a needed new product and potential profitability of a new product.

Two points are relevant regarding the private sector's receptivity to mortgages for small projects. First, some of the perceived underprovision of such loans by the private sector may be due to lingering perceptions of small multifamily loans that were formed as a result of loan defaults in the late 1980s. It is well known that this market was just returning to full capacity in the mid-1990s. Second, the private sector is well positioned to adopt new and profitable ideas. Indeed, anecdotal information obtained since the launching of SPP suggests it is well received. If this is true, ways for shifting responsibility for the program from FHA to the private sector should be considered.

Complexity of Providing Affordable Housing

The process of developing the SPP program underscores the complexity of providing decent shelter for low-income households. Part of this difficulty is due to the variety of different existing programs. For example, FHA still administers a large number of insurance products. At the Federal level, there are housing vouchers, public housing, and LIHTC. A variety of financing mechanisms and subsidies also operate at the State and

local levels. In addition, numerous factors contribute to insufficient shelter for the poor, many outside the housing market.

As a result of this complexity, designing new programs and evaluating their impact are difficult. HUD can simplify this undertaking by using a more targeted approach through clearer statements about its priorities and more specific ways to improve the private sector's performance in providing affordable housing. While the new management plan, ongoing discussions about ways to reinvent HUD, and SPP are excellent steps in this direction, much more can be done.

Authors

Drew Schneider is a principal consultant at Price Waterhouse in the Center for Financial Intermediaries in Washington, D.C. Mr. Schneider specializes in housing finance policy and community development, with specific focus on program development, risk management, and transaction support. Mr. Schneider holds an M.S. in public policy analysis from the College of William and Mary and a B.S. in economics from the University of Colorado.

James Follain is a professor of economics at Syracuse University, where he studies and teaches housing economics and finance, real estate taxation, and urban and regional economics. He served as visiting scholar at HUD and the Urban Institute in 1993–94. The work in this article grew out of a consulting assignment with Price Waterhouse and is part of Dr. Follain's continuing research on the multifamily mortgage market. Several of Dr. Follain's recent articles and a variety of information useful to students of housing and urban and regional economics can be found on his Web site at http:// www.maxwell.syr.edu/maxpages/faculty/follain/resources/

Special thanks are extended to U.S. Department of Housing and Urban Development staff David Harre, Dick Schmitz, Courtland Wilson, Will Taylor, Bill Pollard, Ben Jacinto, Jane Luton, and Joe Malloy; key contributors Scott Werdal, Mike Petrie, Michael Sears, Mike McCullough, and Bronwyn Morgan; and research assistants Patrick O'Sullivan, Kristen Clements, Alvin Bragg, Elisabeth Bourrie, and Deepa Daryanani. In addition, thanks are due to David Rosen, Nora Lake-Brown, and Greg Chin of David Paul Rosen & Associates.

Notes

1. James R. Follain and Edward J. Szymanoski (1995) and William Segal and Szymanoski (1997) discuss some issues surrounding the reform of FHA multifamily programs. Kerry Vandell (1995) and responses to his paper by Nicholas Retsinas and John Weicher in the same volume of Journal of Housing Research provide an overview of the process surrounding reform proposals for FHA and specific insights about the need for reform of multifamily insurance programs.

2. Amy Bogdon and Follain (1996) provide more information about multifamily housing finance based on the residential finance survey.

3. Denise DiPasquale and Jean L.Cummings (1992), Follain and Szymanoski (1995), and Segal and Szymanoski (1997) provide background and support for issues related to the securitization of multifamily loans.

References

Bogdon, Amy, and James R. Follain. 1996. “Multifamily Housing: An Exploratory Analysis Using the 1991 Residential Finance Survey," Journal of Housing Research 7(1): 59-78.

Coopers and Lybrand. 1993. “Assessment of the Financial Condition of the Insured
Multifamily Portfolio and an Estimation of the Required Insurance Reserves,"
Unpublished report.

DiPasquale, Denise, and Jean L. Cummings. 1992. "Financing Multifamily Rental Housing: The Changing Role of Lenders and Investors," Housing Policy Debate 3(1): 77-116.

Fabozzi, Frank J., Chuck Ramsey, Frank Ramirez, and Michael Marz, eds. 1997. The Handbook of Nonagency Mortgage-Backed Securities. New Hope, PA: Frank J. Fabozzi Associations.

Follain, James R., and Charles Calhoun. 1997. "Constructing Indexes of the Price of
Multifamily Properties Using the 1991 Residential Finance Survey,” Journal of Real
Estate Finance and Economics 14:235–255.

Follain, James R., and Edward J. Syzmanoski. 1995. "A Framework for Evaluating
Government's Evolving Role in Multifamily Mortgage Markets," Cityscape 1(2):

151-177.

Goldberg, Lawrence. 1997. “Default Risk Models for FHA Multifamily Loans: The
Effect of Terminating Project-Based Rental Assistance," Unpublished manuscript.
Washington, DC: U.S. Department of Housing and Urban Development, Office of
Federal Housing Enterprise Oversight.

Price Waterhouse LLP. (n.d.) “Final Reports on Small Projects and Pool Insurance."

Segal, William, and Edward J. Szymanoski. 1997. “The Multifamily Secondary Mortgage Market: The Role of Government Sponsored Enterprises," Working Paper No. HF-002. Washington, DC: U.S. Department of Housing and Urban Development, Office of Policy Development and Research.

Vandell, Kerry. 1995. “FHA Restructuring Proposals: Alternatives and Implications,” Journal of Housing Research 6(2):291–393.

Fannie Mae, Freddie Mac, and the Multifamily Mortgage Market

William Segal

U.S. Department of Housing and Urban Development

Edward J. Szymanoski

U.S. Department of Housing and Urban Development

Abstract

Fannie Mae and Freddie Mac, the two principal government-sponsored enterprises (GSES) in the mortgage markets, have come to play an increasingly important role in the multifamily housing finance system. Newly available loan-level data, released as part of HUD's GSE oversight activities, are used to evaluate the performance of GSEs in meeting the mortgage credit needs of properties affordable to low- and moderate-income families and of properties located in underserved geographic areas. The extent to which GSEs have been successful in addressing segments of the multifamily mortgage market affected by credit gaps is examined in the context of broader market trends, HUD's GSE housing goals, and the GSEs' need to manage default risk.

This article examines the performance of Fannie Mae and Freddie Mac in the market for
multifamily mortgages, especially those on properties affordable to low-income families.'
To what extent have Fannie Mae and Freddie Mac been successful in filling identified
credit gaps where the demand for mortgage credit exceeds the supply? Have their roles
changed since 1993 when HUD established affordable housing goals for these two
government-sponsored enterprises (GSES)? It is hoped that this analysis will contribute
to answering such questions.

The pace of annual GSE multifamily acquisition volume has expanded rapidly since
HUD's interim housing goals were established in early 1993. After an absence of several
years, Freddie Mac reentered the multifamily mortgage market in late 1993 (see exhibit 1).
Since then Freddie Mac's multifamily mortgage volume has increased rapidly-from
$191 million in 1993 to $2.4 billion in 1996. Freddie Mac's multifamily housing activity
has been critical to its success in meeting HUD's housing goals. Fannie Mae has played
a much larger role in the multifamily housing market, with purchases worth $7 billion in
1996. If Fannie Mae's multifamily acquisitions maintain their current growth rate, it is
likely that it will be successful in reaching its publicly announced goal of conducting $50
billion in multifamily transactions between 1994 and the end of the decade. Together,
GSEs currently represent approximately 22 percent of the multifamily mortgage market.3

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Cityscape 59

Notwithstanding an expansion in total GSE multifamily volume since the HUD goals were established, we find that the GSES' overall approach toward affordable multifamily housing activities remains cautious. For example, there is evidence that the GSEs have continued to concentrate their efforts with respect to affordability in the middle of the multifamily mortgage market. GSES have reduced their credit risk on multifamily transactions to a degree that many of their loans would have been made by the nonagency sector without GSE participation."

To address these issues, the remainder of this article is organized as follows. The next section summarizes differences between the multifamily and single-family mortgage markets. The article then reviews significant developments in the multifamily market since the mid-1980s. Next, a new Public Use Data Base (PUDB) is drawn upon to evaluate GSE performance relative to HUD's affordable housing goals. The following section discusses a number of default risk mitigation techniques employed by GSEs for making their multifamily transactions and explores their consequences. Conclusions follow in the last section. This article also has two appendixes. Appendix A presents additional data about 1996 multifamily acquisitions from the PUDB. Appendix B summarizes preliminary findings from the HUD Property Owners and Managers Survey (POMS), a new database with the potential for better explaining the broader market context for the GSES' multifamily activities.