Government-sponsored enterprise Freddie Mac took a big step towards bringing its Capital Markets Execution (CME) program to the market on Tuesday when it launched the Series K-003 Structured Pass-Through Certificates (or K-Certificates). The securities are backed by nearly $1 billion in multifamily loans originated through the GSE's CME program, which was launched in early 2008.

The program represents the company’s first full-scale securitization of multifamily loans, and this first pool is backed by 62 multifamily loans originated in 2008. The K-Certificates, which are guaranteed by Freddie Mac, will be sold through a network of dealers led by Deutsche Bank Securities in June.

This is just the opening shot in the company’s push toward securitizing a much larger portion of its multifamily loans. The company is eyeing a second issuance in the second half of the year, and Freddie Mac lenders are now busy originating loans for the next pool. “We hope to get the CME program on a quarterly issuance schedule in the near future, certainly by the beginning of 2010,” says David Brickman, vice president of multifamily CMBS/capital markets for McLean, Va.-based Freddie Mac.

For borrowers, the CME program offers better rates than the company’s portfolio loans, sometimes by as much as 30 basis points. When the program was in a pilot phase, it offered better leverage levels, too, but Freddie has since backed off on that promise. “We did start the CME program allowing a little higher leverage, but we now have identical underwriting policies and standards for the two programs,” Brickman says. “There’s not a loan in the CME pools that we wouldn’t be perfectly happy keeping in our own balance sheet.”

The drawback for borrowers is that the loan documents are much less flexible than a Freddie Mac portfolio loan. Like CMBS deals, borrowers have to be special purpose entities, for instance. And defeasance provisions replace yield maintenance. “While we are allowing some limited negotiation on CME documents, they are more restrictive,” Brickman says. “That’s the value proposition, if you’re willing to accept slightly more constrictive documents for the reduced spread.”

Lenders are hopeful that a successful issuance will lead to an even lower spread on CME loans, much as investor demand has allowed Fannie Mae’s Mortgage Backed Securities (MBS) loans to offer rates inside of Freddie’s for most of 2009.

“If it goes well, then the same demand that has led Fannie Mae’s MBS to a lower yield requirement should lead Freddie to a lower yield requirement, too,” says Jeff Patton, a senior vice president at Charlotte, N.C.-based Grandbridge Real Estate Capital.
In all, the move is one of necessity for Freddie Mac, which is under a federal mandate to reduce its portfolio holdings. “We’re looking to a future in which our balance sheet will be restricted,” Brickman says. “Being able to sell risk and move off balance sheet are two things that decrease risk and reduce our internal capital allocations, and thus enable us to ultimately offer a lower spread.”