Obama: Eliminate Fannie Mae and Freddie Mac, increase private capital
President Obama recently endorsed bipartisan efforts to wind down Fannie Mae and Freddie Mac, two of the most important sources of mortgage financing for the senior living sector.
Fannie Mae and Freddie Mac are government-sponsored entities that are publicly traded. This makes them “not really government, but not really private sector,” Obama said Tuesday in Phoenix. The time has come to “wind down these companies,” the president declared.
The nature of Fannie and Freddie allowed them to make tremendous profits through mortgage-backed securities, yet put taxpayers on the hook to bail the companies out when the housing market tanked in 2008. This prompted widespread calls to radically change the system, but the continued fragility of the housing market caused the government to delay action.
"Upfront it's important to highlight that seniors housing is not among the property types that have caused the problems for Fannie Mae and Freddie Mac, as the seniors housing loan portfolios of both Fannie Mae and Freddie Mac have been exceptionally strong performers," said Robert G. Kramer, president of the National Investment Center for the Seniors Housing and Care Industry.
While senior housing loans may not have caused the problems for Fannie and Freddie, they would be affected by the reform efforts that have new momentum following Obama's remarks. In particular, the president expressed his support for the Housing Finance Reform and Taxpayer Protection Act of 2013, introduced by Sens. Mark Warner (D-VA) and Bob Corker (R-TN).
This bill would wind down Fannie and Freddie and establish a Federal Mortgage Insurance Corporation, which would insure mortgage-backed securities on a model similar to the Federal Deposit Insurance Corporation. It would repeal the charters for Fannie and Freddie and prevent them from conducting any new business. The charter provisions would remain in effect for those who hold outstanding debt obligations of the companies, such as capital lease obligations or bonds.
The legislation's goal is for the government to support a stable market driven primarily by private lenders. Therefore, a primary question is whether the government role in a new structure would be "adequate enough to attract reasonably priced private sector capital," according to Kramer. Another question is whether the private sector will have time to develop alternative sources of capital, Kramer said in a statement to McKnight's.
The senior living sector relies extensively on financing from Fannie and Freddie. The guarantees provided by the GSEs "have been a major factor in the availability and cost of capital for long-term debt financing for seniors housing," according to Kramer. However, experts have noted recent increases in other sources of capital, and some observers have supported large-scale restructuring.