Economic cycles and individual life phases are not always in sync. Even while the financial crisis began to unfold in late 2007 and reached its depths a few years later, young people graduated college, got married, and started to have children. Due to challenges in the housing market, many of those young families did all those things from spare rooms in their parents’ basements—hardly an ideal situation.
And it’s why Freddie Mac exists. As a government sponsored enterprise (GSE) that nonetheless is also a publicly traded firm, a big part of the Freddie Mac mission is to even out the rough spots in the broader economy by working overtime to maintain a stable housing market. It accomplishes this by purchasing home mortgages and apartment loans from lenders, ensuring a steady supply of capital in the US mortgage marketplace.
“Our task is to help achieve affordability goals and yet remain profitable ourselves.”
As Rich Martinez, vice president for multi-family production and sales for Freddie Mac explains, the global recession illustrates their function in extremis. “Private funding sources such as life insurance companies, banks, and conduits tend to focus mainly on high-end properties and top-tier markets along the US coasts,” he said, adding that almost all disappeared from apartment lending altogether by late 2008. “We focus on all aspects of the market, including rehabilitating older rental properties across the country and properties in smaller markets that have greater difficulty tapping into private capital, especially in times of economic stress.”
Martinez adds that the economics of working with older buildings generally provides housing on a lower cost-per-square-foot basis—which, of course, translates to greater affordability. This shores up neighborhoods without gentrifying them, a key concern given how wages have remained relatively stagnant in the economic recovery.
As most who follow the financial markets know, Freddie Mac was placed into conservatorship in September 2008 just as the financial markets entered what appeared to be a death spiral. Along with its sister GSE, Fannie Mae, the Federal Housing Finance Agency used its authority to protect it from the severely deteriorating housing markets of that time period. Martinez notes that the multifamily portion of Freddie Mac remained profitable throughout that time, and that together with the single-family operations, it recovered from its deficit to pay back to the US Treasury $22 billion more than what was borrowed in the crisis.
“Other lenders ran for the hills in the recession,” says Martinez. “Consequently, because we continued to make loans, our market share actually increased.” Competitors in a healthy economy include the Department of Housing and Urban Development, mortgage banks, Wall Street firms such as Goldman Sachs and Cantor Fitzgerald, and commercial-backed mortgage securities firms.
Freddie Mac lends not to homeowners but to banks and mortgage companies, which then provide individual loans to apartment owners and developers and home buyers across the country. The bulk of mortgages that Freddie Mac acquires are in single-family homes, but Martinez’s focus is on rentals that include apartment buildings for students, senior citizens, and families or individuals, as well as manufactured home developments more characteristic of rural and Sunbelt areas. One program variation, small balance loans, is now available for buildings valued at under $5 million, many owned by individuals. Where individual banks in many geographical areas simply lack the capital to fund these kinds of developments, lending remains possible when Freddie Mac brings its capital to the table.
Rental housing has grown significantly more important in recent years. After homeownership rates peaked in 2005 at more than 69 percent, that has since dropped to below 64 percent of households. With that decline in ownership, about five million more households now rent than before. With greater demand on the rental sector, rents have unfortunately gone up.
“We recognize the high-rent crisis in some markets,” says Martinez, citing New York and San Francisco as among the most difficult examples. “Our task is to help achieve affordability goals and yet remain profitable ourselves.” The market segment most impacted by this is families with small children. Hispanic families are affected at a higher rate as statistics show that Hispanics skew younger and typically have children at younger ages.
The multifamily loans area overseen by Martinez currently funds as many as 350,000 multi-family units out of 430,000 funded a year. He has little trouble convincing investors that more money could and should go into the rental sector, given that apartment demand should exceed supply for years to come. Industry analysts peg demand at more than 440,000 units per year as the economy improves. Most of that targets the affordable housing market, including all those rehabs. But some Freddie Mac money bets on luxury rentals, which are in high demand in some places where people simply do not want the burden of ownership.
Creating rental properties in all segments of the market matters, according to Martinez. Or, as he puts it, “a rising tide raises all boats.”