Since the fourth quarter of 2007, Fannie Mae and Freddie Mac increased their exposure in the multifamily market by $76 billion, compared with an $80 billion decrease by all other lenders, a net of more than $150 billion, according to Fitch Ratings report on U.S. Equity REITs: The Key Issues for Multifamily.

The aim of such research is to prepare for a world post-GSE reform. And if such a world were to happen tomorrow, the mortgage finance market would be woefully under-prepared.

Both government-sponsored enterprises are now the largest multifamily lender by 17 percentage basis points, compared with a three percentage basis point lead as of 4Q07. 

Click on the graph to view multifamily loans outstanding.

However, the long-term fate of the GSEs has been in question for quite some time.

While there is limited political will to keep Fannie Mae and Freddie Mac under an indefinite conservatorship, Fitch does not expect banks, life insurance companies or commercial-mortgage backed securitization market to have the "willingness and capacity" to fill their void. 

"It’s looking at the balance sheet side," Britton Costa of Fitch Ratings - REITs said. "It would be very difficult for any of these participants to make up the differences."

In regards to what type of entity could take over the GSEs, "there are no existing institutions that can fill the void."

The two options are for both GSEs to stay in the market or a new privately capitalized entity that receives a credit guarantee from the government to go into effect.

However, Fitch posted that the GSEs conservatorship is a long and protracted process.

Multifamily accounts for 15% of CMBS portfolios, as returns are materially higher than in-place yields.

Managing director of Trepp Matt Anderson stated that over a longer term, banks and CMBS could provide more multifamily lending.

While Anderson also noted that the financial spreadsheet is an issue, he doesn’t believe CMBS and banks couldn’t fulfill the multifamily market. 

The bigger problem at hand is competing interest rates. 

"Fannie and Freddie offer lower interest rates on mortgage financing so there’s a limit on how low CMBS and banks can go," Anderson said.