WASHINGTON, D.C. — The director of the federal agency serving as conservator of Fannie Mae and Freddie Mac says multifamily housing remains an important priority for the enterprises, and he has been meeting weekly with their CEOs as regulators chart a different future for the troubled mortgage insurers.

James Lockhart, director of the Federal Housing Finance Agency, says regulators are trying to address a void in the commercial affordable housing market created by Fannie and Freddie’s dramatic shift from investing in about 50% of the tax credit transactions governed by Section 42 of the IRS tax code to virtually none.

The tax credits are designed to offset corporations’ profits through investment in affordable housing. However, because of the recession and credit crisis, many corporations have seen their profits plunge, and have no current need to invest in the tax credits. The government-sponsored enterprises Freddie and Fannie, which were set up as corporations, are no longer tax-paying since they were placed in conservatorship, so it’s difficult for them to buy at this point, says Lockhart.

“But we are looking at what they can do in that area, to see if they can at least work on structuring and guaranteeing [affordable housing loans] if not buying them.”

Lockhart says his agency is examining whether new, nontraditional buyers can be found to invest in affordable housing. Some corporations, for instance, may have avoided investing in the specialty market because they lack expertise, but Freddie and Fannie can assist them, he says. “Maybe with a Fannie and Freddie guarantee, they’d buy it.”

Lockhart is also working with the Treasury Department and state housing finance agencies, which allocate the tax credits to developers. “So it’s an area very much on our mind.” He met with a multifamily coalition last week to discuss funding issues, the director added. “So there’s a lot of activity going on.”

Learning from mistakes

However, although the Obama administration supports multifamily and affordable housing programs in general, the conservator warns that certain lending practices of the past amounted to “folly” and the government needs to avoid them as it seeks to stabilize the nation’s housing market.

The problem is that The Department of Housing and Urban Development set affordable housing goals that were unworkable for the government-sponsored enterprises, says Lockhart. The agencies need a well-defined and consistent mission based on the secondary mortgage market, but it has to be one that doesn’t require them to take excessive risk, he says.

“The affordable housing goals that HUD set in retrospect were too high, and frankly caused them to do some things that they shouldn’t have done. Freddie for instance was a very big buyer of subprime, private label securities, because they got affordable housing goal credit for that.”

Freddie and Fannie also made the mistake of guaranteeing loans on the secondary mortgage market that were highly leveraged, Lockhart told a gathering of the National Association of Real Estate Editors in Washington, D.C. “It was really a folly to let them be able to write mortgages at 100 to one leverage. In fact, their mortgage-backed services could have done it at 200 to one leverage.”

Regulators are targeting better minimum capital levels and risk-based capital to develop a counter-cyclical approach to financing, so that when housing prices rise too high, capital charges can rise, and when prices decrease, capital charges can also be lowered. “We need to figure out how to dampen some of the boom and bust.”

Freddie and Fannie own or guarantee about 57% of the nation’s 55 million single-family mortgages in this country, but they have a comparatively small amount, 22%, of the serious delinquencies of 90 days or more.

The National Multi Housing Council has urged Congress and the federal conservator to protect the GSEs' multifamily retained mortgage portfolio lending programs. That is critical, the council says, because in 2008, the agencies’ retained multifamily mortgages amounted to more than 11% of Fannie and Freddie's combined portfolio holdings, totaling $172 billion.

Early next year, the conservator will present to Congress a proposal for the revamped government-sponsored agencies, which would basically involve the choices of nationalizing them, continuing them as government-sponsored agencies, or breaking them into private companies, Lockhart says.

“There is no shortage of proposals on how to fix Fannie and Freddie going forward. Ultimately, it’s going to be the Congress and the administration who decide.”