The Mortgage Bankers Association (MBA) and other groups have asked the Securities and Exchange Commission (SEC) to exempt multifamily transactions from a proposed rule that would require margin be posted on forward-settling agency securities.
On Oct. 20, 2015, the SEC published for comment a proposed rule submitted by the Financial Industry Regulatory Authority (FINRA) that would require margin (collateral) to be posted on forward-settling agency securities. The proposed rule (amending FINRA Rule 4210) would have significant and unintended consequences on the financing of multifamily apartments, the vast majority of which are affordable to families earning below median income.
Although the focus of the proposed rule is to impose margin requirements in the single-family “to-be-announced” market, the proposed rule scopes in the forward settling multifamily housing finance programs of Fannie Mae, Freddie Mac and the Ginnie Mae/Federal Housing Administration in an abbreviated manner and without adequately considering the economic impact of the proposed rule on the multifamily rental housing market. The public comment period ended Nov. 10, 2015 and FINRA requested that the timeframe for SEC action on the proposed rule be extended until Jan. 15, 2016.
The agency multifamily market has operated efficiently, competitively and subject to appropriate safeguards (including the posting of good faith deposits for the benefit of broker-dealers/investors) under both vibrant and stressed market conditions. The multifamily agency securitization process differs considerably from that of the single-family TBA market. The forward-settling multifamily agency securities market is much smaller than the single-family TBA market. With the forward-settling portion of the multifamily market lending about $40-50 billion annually in a strong year (compared to annual lending on single-family homes which can exceed $1 trillion), the multifamily market does not present the systemic risk considerations that appear to be a reason behind the proposed rule.
The securitization process, underwriting reviews and the character of multifamily real estate fundamentally differ as well. The multifamily agency security is backed by a particular loan collateralized by an identified, unique and extensively underwritten multifamily housing property (rather than a pool of yet to be identified single-family mortgages). The asset purchased by the investor is more akin to a whole loan; its form as a security simply provides greater liquidity and the agency guarantee to the investor. Failed trades in multifamily securities are exceedingly rare because of these safeguards, as well as the strong oversight provided by Fannie Mae and FHA/Ginnie Mae as bearers of risk in these transactions, and the legal and financial commitment entered into by the borrower/owner to obtain a loan on the identified, underwritten multifamily property.
Given the existing safeguards in multifamily agency finance, and the differences between the multifamily and single-family agency markets, the MBA recommended in its comments that multifamily agency securities be expressly exempt from the proposed rule.
Specific Recommendations
1) The proposed rule should carve out multifamily transactions from coverage under the margin requirements. The multifamily finance market was not the reason for policymakers to consider margin requirements on agency securities, nor does this market present the systemic and counterparty risks that appear to have motivated the development of the proposed rule.
2) Alternatively, the SEC and FINRA should expressly treat the Good Faith Deposit (held for the benefit of the broker-dealer/investor) as fully satisfying (and serving as a cap) for any margin requirement, including “variation” margin.
3) Any requirement to mark-to-market on a daily or frequent basis (as contemplated by the proposed rule) should be eliminated, given the difficulties associated with marking-to-market each unique multifamily property.
4) An economic impact analysis on the multifamily rental housing industry should be fully performed prior to the proposed rule being finalized and, given the potential impact to the multifamily market (for which these rules were not designed), any implementation period must be multiyear.
The MBA’s comment letter can be found here. The MBA led a multifamily coalition of 15 national trade associations to submit additional comments, which can be found here. The SEC published for comment a proposed rule by the Financial Industry Regulatory Authority (FINRA) to amend FINRA Rule 4210, which can be found here. Additional background on the issue and MBA’s recommendations are available here.
