«Testimony of Terri Ludwig President and Chief Executive Officer Enterprise Community Partners, Inc. Before the Committee on Banking, Housing and ...»
Testimony of Terri Ludwig
President and Chief Executive Officer
Enterprise Community Partners, Inc.
Before the Committee on Banking, Housing and Urban Affairs
United States Senate
“Housing Finance Reform: Essential Elements of the Multifamily Housing Finance
October 9, 2013
Chairman Johnson, Ranking Member Crapo and members of the committee, thank you for the
opportunity to testify this morning. I am Terri Ludwig, president and CEO of Enterprise
Enterprise works with partners nationwide to build opportunity. We create and advocate for affordable homes in thriving communities linked to jobs, good schools, health care and transportation. We lend funds, finance development and manage and build affordable housing, while shaping new strategies, solutions and policy. Over more than 30 years, Enterprise has created 300,000 affordable homes across all 50 states, invested $14 billion into communities and improved millions of lives.
One of Enterprise’s many business lines is mortgage debt financing with a focus on affordable multifamily rental housing in low-income communities. Last year we originated $788 million in multifamily mortgages through our subsidiary, Bellwether Enterprise Real Estate Real Estate Capital, Inc., working with the Federal Housing Administration (FHA), Fannie Mae and Freddie Mac (the GSEs), private investors and other partners. We are an FHA Multifamily Accelerated Processing (MAP) lender and Ginnie Mae issuer, a Fannie Mae Special Affordable Delegated Lender, a Freddie Mac Program Plus Seller Servicer and Targeted Affordable Housing lender and a U.S. Department of Agriculture Section 538 lender. We also make loans through the FHA Section 232 program and operate a registered community development financial institution, Enterprise Community Loan Fund, which invested $97 million into communities last year.
Before becoming president and CEO of Enterprise, I worked for more than 20 years in investment banking. My team and I used capital markets to efficiently invest in affordable housing and community development, often partnering with groups like Enterprise. This experience taught me that public-private partnerships are critical to bringing capital to working families in low-income neighborhoods. In countless communities across the country—rural, urban and suburban—the combination of public and private financing is effectively producing quality affordable housing.
Still, there is an urgent and growing need for decent and affordable rental housing. Enterprise is working with members of this committee and others in Congress on several issues to ensure that the needs of low-income renters are met, including housing finance reform, preserving and expanding the Low Income Housing Tax Credit (Housing Credit), ensuring adequate appropriations for critical housing and community development programs, authorizing much needed reforms to rental assistance programs such as public housing and Housing Choice Vouchers, and finding new ways to preserve and improve the country’s aging affordable housing stock. We look forward to continuing to work with you on these important issues as we work toward a day when every person in the U.S. has a quality and affordable home in a vibrant community.
We greatly appreciate the leadership of the chairman, the ranking member and members of this committee as you work to determine the future of Fannie Mae, Freddie Mac and the rest of the country’s housing finance system. And we thank you for focusing today on an oftenoverlooked component of the reform effort: the multifamily mortgage market, which finances rental buildings with five or more units.
Above all else, we believe that any GSE reform plan must start with a simple goal: ensuring a liquid, stable and affordable housing market with appropriate support for both homeowners and renters, especially low income families.
In my testimony this morning, I will make the following points:
Multifamily housing is a key part of a well-functioning housing market. Today more than one-third of the U.S. population rents, and that number is expected to grow in the coming years. And given who we expect these new renters to be—namely older or younger single-person households—multifamily will play an increasingly important role.
Fannie Mae and Freddie Mac play a critical role in multifamily housing finance today. Among other things, Fannie and Freddie provide broad liquidity to the multifamily mortgage market, much-needed financing for affordable housing and a buffer from severe booms and busts in the rental market.
A limited, explicit government guarantee is essential to a well-functioning rental market. According to a series of recent studies from the Federal Housing Finance Agency (FHFA), without a government guarantee on multifamily mortgages new construction of rental housing would plummet, average rents would rise significantly and the entire rental market would be more vulnerable to boom-and-best cycles.1 Lowincome families would be disproportionately harmed, at a time when they already face an unprecedented affordable housing crisis.
Congress should pursue smart reforms to the multifamily market that preserve the business lines and other activities that work. I will lay out a series of steps Congress should take to ensure a liquid, stable and affordable rental market, starting by spinning off Fannie’s and Freddie’s multifamily businesses and providing access to a limited, paid-for government guarantee.
Any future system of multifamily housing finance must have explicit provisions to support affordable housing, reach underserved segments of the market and promote long-term sustainability. I will lay out specific recommendations for each of these goals, which Congress should include in any housing finance reform legislation.
I’d like to start by providing a bit of context, including some background on the U.S. rental market and the government’s essential role in it.
Background on the U.S. rental market, multifamily housing and the growing affordable housing crisis More than 100 million people in the United States—about 35 percent of the population—rent their homes. In recent years more and more families have turned to the rental market, some because they are not ready for or not interested in homeownership, others because they have no other option. Over the past eight years, the percentage of renters in the U.S. has increased by four percentage points.2 On average, renters are younger, earn less income, are more likely to be people of color and live in smaller households compared to homeowners. Their median age is 40, compared to 54 for homeowners. The typical renter household earns just over $31,000 per year, almost exactly half of the typical homeowner. Forty-seven percent are households of color, compared to 22 percent for homeowners. And 37 percent of renters are single-person households, compared to 23 percent for homeowners.3 Analysts predict a further shift toward rentals in the coming years. Part of this is due to the carry-over effects of the recent housing crisis, but the key driver is changing demographics.
Harvard’s Joint Center for Housing Studies projects an additional 3.6 million new households will become renters between 2010 and 2020, led mostly by an increase in younger, senior and minority households.4 These populations increasingly rely on multifamily housing as a source of stable, affordable rental housing. Today 40 percent of rental units in the U.S. are in multifamily buildings, but roughly 60 percent of single-person renters—often a sign of a younger or senior household— live in multifamily buildings. In addition, analysts at Harvard have found that younger renters “tend to favor multifamily housing in center city locations” linked to transit, jobs and other opportunities.5 Regardless of what type of housing America’s renters live in, one thing is clear: they are facing an unprecedented affordable housing crisis. That’s especially true for renters at the lower end of the income scale.
Housing costs for the typical renter rose by 6 percent between 2008 and 2011, while their income dropped more than 3 percent after adjusting for inflation, according to the Center for Housing Policy.6 While the number of very low-income renters has increased by 17 percent since 2007, the total number of affordable rental units has actually declined.7 As a result, of the
17.1 million very low-income renters in the U.S. today, 7.1 million spend more than half their income on rent, live in substandard conditions, or both, according to the Department of Housing and Urban Development. 8 All told, 27 percent of renters—about 11 million families—are paying at least half of their monthly income on housing, a severe cost burden that often leaves families one paycheck away from losing their home. That’s an all-time high.9 Fannie Mae and Freddie Mac play a critical role in multifamily housing finance today Today there is roughly $875 billion in multifamily mortgage debt outstanding.10 Capital flows
to the multifamily mortgage market from five main sources and several smaller ones:
Fannie Mae and Freddie Mac, which account for 36 percent of multifamily debt outstanding. The GSEs serve a wide geography and a range of income levels and housing types, during both good and bad economic times.
Banks and thrifts insured by the Federal Deposit Insurance Corporation (FDIC), which account for 28 percent of multifamily debt outstanding. Banks and thrifts typically offer floating-rate, short-term debt, serving a broad range of lenders and communities. But their presence in the multifamily market has shrunk significantly since the start of the financial crisis.
The federal government, which accounts for 10 percent of multifamily debt outstanding. This includes Ginnie Mae securities backed by mortgages insured by the Federal Housing Administration (FHA), the Department of Agriculture and other federal agencies. The FHA insures high-leverage loans with terms of up to 40 years and offers construction financing as part of the permanent loan.
Conduits for commercial mortgage-backed securities (CMBS), which account for 9 percent of multifamily debt outstanding. These are securities issued by financial institutions made up of multifamily, office, retail and other loans that are not backed by the federal government. The CMBS market was a leading source of capital during the recent housing bubble—peaking at 17 percent of the market in 2007—before it practically shut down during the crisis.
Life insurance companies, which account for 6 percent of multifamily debt outstanding. Historically, life insurance companies have preferred to finance “Class A” multifamily assets, such as luxury apartment buildings in top-tier housing markets.
Other sources, which account for the remaining 11 percent of multifamily debt outstanding. This includes state and local governments, private pension funds, Real Estate Investment Trusts and nonbank corporate businesses.
From their volume alone, it’s clear that Fannie and Freddie are a critical part of today’s multifamily market. By purchasing and securitizing a range of multifamily mortgages across geographies and lender types, Fannie and Freddie ensure that developers and owners have the capital they need to build, maintain and preserve rental housing. But increased liquidity is just one of many roles the GSEs play.
First, they promote stability and broad access to credit through flexible products. Fannie and Freddie tend to offer longer-terms and more fixed-rate loans than banks, thrifts and life insurance companies, which helps owners plan for future costs. Shorter-term, adjustable-rate mortgages, on the other hand, require frequent refinancing and recapitalization, which could discourage owners from holding onto a property over a long period.
Second, the GSEs promote strong underwriting, which mitigates systemic risk in the rental market. Fannie and Freddie multifamily deals are carefully underwritten and include a significant amount of risk sharing with purely private investors, which further limits taxpayer exposure to risk. For example, Freddie Mac’s K-Series deals typically require private investors to cover the first 15 percent of losses without a guarantee, while Fannie Mae’s mortgagebacked securities require its licensed lenders to cover the first five percent plus a significant portion of further losses.11 As a result, GSE multifamily loans have experienced much lower delinquency rates than similar loans from private investors. According to the Mortgage Bankers Association, today only about 0.2 percent of Fannie- or Freddie-backed multifamily loans are delinquent by 60 or more days, compared to 2.1 percent for loans held by banks and thrifts and 7.8 percent for loans in commercial mortgage-backed securities.12 Third, they provide crucial countercyclical support to the market. As recently as 2007, Fannie and Freddie combined for less than 30 percent of multifamily loan originations, while private investors absorbed the rest of the market in their eagerness for mortgage debt. By 2009—the year after the housing market collapsed, taking the entire financial system with it—Fannie’s and Freddie’s share nearly tripled to 85 percent as investors were leery of putting their money into housing without a government guarantee.13 Without that support, financing for multifamily housing would have all but dried up, halting all new construction and making it extremely difficult for building owners to refinance maturing loans.
Finally, the GSEs are critical sources of financing for affordable rental housing. This includes both the apartments financed through GSE multifamily securities and the investments held in each company’s portfolio. Over the years, Fannie and Freddie have developed working relationships with small community banks, state housing finance agencies and community development financial institutions across the country, allowing them to efficiently and profitably finance affordable housing in lower-income communities.