A new Freddie Mac program brings needed liquidity and more affordable credit to apartment borrowers.
With the successful rollout of a program that provides multifamily housing borrowers with less expensive loans by securitizing the loans and selling them to investors, Freddie Mac is taking an important first step toward reviving the stagnant securitization industry and, in turn, is taking another step in freeing up credit in a market where credit is still hard to find.
At the height of the real estate market (2005 to 2007), credit for multifamily housing borrowers was easier to come by. Many investment banks were offering loans that would be pooled and turned into commercial mortgage-backed securities, or CMBS, which were then sold to investors. What happened next has become a familiar story: the apartment communities backing many of those loans dropped in value, declining rents and occupancies led to a still-growing wave of foreclosures, and CMBS bonds plummeted in value and became illiquid. The investment banks left the CMBS market, leaving Fannie Mae, Freddie Mac and HUD as virtually the sole sources of credit.
Initially conceived as a way for Freddie Mac to compete in the CMBS market, Freddie’s Capital Markets Execution (CME) program has become the first source of CMBS based on aggregated multifamily housing loans in over a year. The program allows Freddie Mac to continue to provide liquidity to the multifamily housing industry without adding new loans to its balance sheet, says Patti Saylor, Vice President, Offerings and Customer Management for Freddie Mac.
“In a couple of years, we’re going to have to start reducing our balance sheet,” she explains, which means the agency will have to reduce the number of portfolio loans that it holds.
The CME program also will benefit multifamily housing borrowers looking for credit to refinance or acquire a community because it provides another strong source of capital with competitive interest rates. Brokers say interest rates will be as much as 30 basis points less than loans that Freddie Mac would keep in its portfolio, although the loan documents will be less negotiable.
John Cannon, Executive Vice President of Capmark Finance, says, “This is going to be Freddie’s benchmark multifamily housing product,” similar to Fannie Mae’s Delegated Underwriting and Servicing mortgage-backed securities (DUS MBS), which also rely on the capital markets but usually consist of only one loan, instead of the multiple loans that back Freddie’s CME securities.
“That doesn’t mean we’re getting rid of portfolio loans,” Saylor notes, “just that this will be a growing part of our business.”
Successful Security Sales
Both Freddie Mac and apartment industry brokers are encouraged by the program’s initial results. The first round of securities (technically called Series K-003 Structured Pass-Through Certificates, or K Certificates) were successfully sold and, in fact, were oversubscribed, meaning demand from investors was greater than supply. “It’s a signal to the market that securitization isn’t dead,” Saylor says. Freddie Mac is continuing to move forward with the program, and is actively planning for subsequent securitizations, she adds.
Some brokers say that success is a good sign for the program and for the securitization industry, though it is only a first step. “The toe got stuck back in the water and it went really well,” says Sue Blumberg, Senior Vice President and Managing Director of the Chicago office for Northmarq Capital. She expects the next securitization to take place in the fall. “If you can go to market that often, I think it’s going to pick up speed. I bet the second securitization is better,” Blumberg says.
The success also shows that the market still thinks there is value in multifamily housing, says Ryan Whitaker, Assistant Vice President at Grandbridge Real Estate Capital. “It’s going to allow Freddie Mac to put more money out there and do more loans,” he says.
But Freddie Mac’s dipping of its toe into the securitization pool is not a sign that borrowers will see a flood of such loans from other lenders, Cannon says. “It’s really premature to make the next logical step. We’re a ways away from other lenders doing what Freddie has done.”
In fact, because Freddie Mac is guaranteeing the securities, the success of the program says more about investors’ belief in the creditworthiness of Freddie than about their belief in the multifamily industry, says Gary M. Tenzer, Co-founding Principal and Senior Director of real estate investment banking firm George Smith Partners. Plus, many of the banks that issue CMBS have disassembled. “It would take a lot of inertia to put that back together,” he says.
Blumberg is more optimistic, saying securitizations will come back--it’s just a question of when. “It could be months, it could be years,” she says. The success of such programs would rely on more accurate credit ratings than the CMBS of the past. If the Freddie K Certificate bonds are rated AAA because they are guaranteed, securities issued by a bank would be rated A-; higher return and higher risk. If Freddie Mac’s next securitization is oversubscribed in the fall and if there is continuing good news in the economy, someone will come out with an A- securitization, she says. “Bankers always figure out how to come back.”
The revival of the CMBS market would provide a kick start to apartment investment, says independent real estate investor and owner Del Walmsley. “If that happens you’ll see the end of the recession and prices start going back up,” Walmsley says.
Jeffrey Lee is NAA’s Staff Writer. He can be reached at jeffreylee@naahq.org or 703/797-0647.