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National Multi Housing Council | Research Notes
National Multi Housing Council | Research Notes
September 17, 2013

The implosion of the financial markets that followed the bursting of the house price bubble had a major effect on all mortgage financing, including in the apartment space. Other sources of multifamily debt finance largely dried up, leaving the Federal Housing Administration (FHA) and the government-sponsored enterprises (GSEs) to pick up the slack by providing critical liquidity and stability to a shaken multifamily mortgage market.

However, in the five years since GSEs Fannie Mae and Freddie Mac were placed in conservatorship, much has changed. For one thing, the GSEs’ balance sheets have vastly improved. Instead of siphoning funds away from the U.S. Treasury to pay for losses, the two enterprises contributed $14 billion to the Treasury in the most recent quarter. At the same time, multifamily lending by banks, thrifts and life insurance companies has rebounded, although net commercial mortgage-backed securities (CMBS) mortgage credit extended is still negative.

Despite these significant changes, one thing has remained constant: There is still no consensus on the future of the two GSEs. There has been a flurry of activity focused on the GSEs, with the Obama Administration issuing a set of principles and several housing finance reform bills pending before Congress. Perhaps more important, the GSEs’ regulator, the Federal Housing Finance Agency, recently announced that it is considering a range of proposals that could significantly reduce agency multifamily lending.

Given the political and regulatory attention on setting a new path for the GSEs, this is a useful time to review the current landscape of multifamily mortgage finance

A Backgrounder on Multifamily Mortgage Lending

Mortgage lending volume follows the cyclical pattern of the apartment industry, as the chart below illustrates. The net change in multifamily mortgage debt outstanding (MDO) grew to record levels in the previous decade, reaching $84 billion in 2007 after a gain of $72 billion in 2003. Following a one-year drop in 2010, net multifamily MDO turned positive in 2011 and rebounded more strongly in 2012. Real (inflation-adjusted) mortgage debt shows the same overall pattern, but with the record high in 2003. It also shows a three-year decline (2009-2011) in the recent recession, although it’s important to note the drop was smaller than the three previous recession-related slides.


The federal government has played a part in multifamily financing at least since the founding of the FHA in 1934. FHA increased in importance in the immediate postwar era. Fannie Mae and Freddie Mac began to play a role in multifamily mortgage finance in the 1970s. Since then, the share of new lending stemming from these three agencies has varied considerably, as the chart below makes clear.

In the early 1980s, the net credit extended by Fannie, Freddie and FHA (labeled “government” in the chart) was actually negative, compared with positive net credit from banks, savings and loans and others. The government role rose to be almost equal with the private side in 1985, then drifted back down two years later. In the early 2000s, government net mortgage credit supplied to the industry was once again almost as large as the private supply, but then it plummeted at the height of the boom (and condo craze).

With the implosion in the financial markets and the collapse of the CMBS market in 2008, government net credit offset the complete withdrawal of private funding. By 2012, private credit had crept a little past government lending, restoring a more typical relationship between the two.

Currently, the government share of all multifamily mortgage debt outstanding is 43 percent, an all-time high. Fannie and Freddie combined have a 36 percent share, also an all-time high. Even after the net disinvestment by the private sector, the private sector still holds 57 percent of multifamily MDO.

The lender group shares of total multifamily MDO have varied considerably over time. For example, the government share of MDO has averaged 28 percent from 1950 to the present. Its lowest share was 19 percent in 1967, while the highest was 44 percent in 2011. There have also been variations in the different government sub-sectors. The FHA-insured share of multifamily debt reached its peak in 1951 at 32 percent; the all-time low was in 2008 at 7 percent; and by 2012, it had only recovered to 9 percent. Fannie and Freddie only showed up on the radar screen in the 1970s; their combined share reached an all-time high of 34 percent in 2012.

The Commercial Market Comparison
There are neither institutions in the commercial mortgage market that correspond to Freddie Mac and Fannie Mae nor anything comparable to FHA. While there is a federal “backstop” for the banking industry in the form of the Federal Reserve, federal deposit insurance and considerable regulation of banks, S&Ls and insurance companies, none of that is specific to the commercial mortgage market, making the commercial debt market a little more volatile by comparison.

The commercial and multifamily debt markets are each subject to a variety of influences.Some are specific to each sector, which is why they don’t always move in tandem. Commercial mortgage debt was somewhat insulated from the big drop that multifamily debt experienced in the early 1980s recession—although the two sectors fell by the same percentage in the early 1990s. Moreover, the peak growth rates for each sector in the previous decade occurred in different years. In the Great Recession, however, commercial mortgage debt fell more sharply than multifamily debt and is still declining albeit at a slower rate. It is still 15 percent below its previous peak while multifamily mortgage debt bottomed out in 2Q 2011 and is now higher than its previous peak.


A number of reasons explain the better performance of the multifamily sector since the recession, including the increased popularity of apartment living in the aftermath of the bursting of the housing bubble. However, the stepped-up activity of the GSEs was crucial to counteract the withdrawal of mortgage credit by private lending groups even while the demand for apartment residences was surging.  

It’s too soon to say whether Congress will keep, replace or eliminate Fannie and Freddie as it looks to enact broad housing finance reform. Lacking is general agreement about the proper scope—if any—of government activity in the residential mortgage market, whether single-family or multifamily. At the same time, the urgency for reform may has been blunted somewhat by the fact the two enterprises are now sending net income to the Treasury, rather than drawing on Treasury funds to cover costs.

The financial market disruption five years ago made clear that when normal conditions break down, a government liquidity backstop is necessary for the market to continue to function smoothly. The disruption of the financial markets brought with it the effective shutdown of CMBS, as well as a withdrawal of mortgage credit by all other private lending groups. Without the GSEs or FHA, the residential mortgage market would presumably look a lot like the commercial mortgage market.

© National Multi Housing Council. All Rights Reserved.
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