The Secondary Market’s Role in Multifamily Lending

A couple discussing their finances with an adviser First-time homeowners and families who cannot afford single-unit homes turn to multifamily housing. These are properties defined as having five or more residential units in one building. According to projections, demand for multifamily housing will remain strong in 2017 based on lifestyle preference and demographic trends; young people today are choosing to live in affordable condominiums and apartments, at least until they can afford single-unit homes.

This demand grew only in the last decade, but two driving forces that supply said demand are already in place since 1938.

Fannie Mae and Freddie Mac

After the economic recession in the 1930s, the government sponsored the FNMA and FHLMC enterprises (Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, respectively known as Fannie Mae and Freddie Mac) to pump liquid assets into the mortgage market. They offer financing to multifamily real estate developers, but the funds don’t go directly to the borrowers. Although they still technically borrow money from lenders, the latter only do so with the backing of the two government-sponsored enterprises (GSEs).

The Secondary Market in Action

Through the Frannie Mae and Freddie Mac, the government essentially buys mortgages from banks and lending institutions, giving them liquidation to offer more loans to the public. Hence, applying for a Fannie Mae Multifamily Loan (as Freddie Mac is now dealing less with multifamily markets) gives more developers the opportunity to fund and pursue multifamily housing projects.

In this set-up, banks and lenders are the mortgage originators. They, along with Freddie Mae and Freddie Mac, make up a secondary mortgage market. The GSE’s bundle the purchased mortgages into securities and sell them to investors as hedge funds.

The secondary market is vital for the health of the housing market. It financed 60% of housing mortgages in 2013 and enabled originators to continue granting loans to more borrowers. Declines in the secondary market will affect mortgage originations, resulting to reduced available funds for housing loans, among other things.