Freddie Mac has unveiled three new acquisition products in the last few months in an effort to expand its offerings for rehabilitation deals.
The company began offering two new acquisition products in October, one for those seeking light upgrades and another for those looking to do more substantial rehabilitation on existing multifamily properties.
Additionally, the company released a streamlined acquisition product in July aimed at keeping existing properties in its portfolio when they are sold to new buyers.
“A lot of acquisition deals involve new owner/operators who want to renovate,” said Mitch Kiffe, vice president of multifamily sourcing. “We developed the products in response to customer requests; it’s part of our vision to buy more loans that our seller/servicers originate and borrowers close.”
The products should help Freddie Mac continue to reclaim market share lost to conduit lenders earlier this year and last year. The problems in the subprime mortgage have forced conduit lenders to scale back multifamily loan production, and as a result, more borrowers are moving to the certainty of execution provided by portfolio lenders like Fannie Mae and Freddie Mac.
In August, Freddie Mac doubled its production from the previous year, and while declining to quote specific volume figures, it said it saw a 120 percent increase in the number of loans which use the company’s early rate-lock feature. The company also saw a 250 percent increase in multifamily dollar volume in August over the previous year as a result of the conduit meltdown. The company indicated that September was similarly successful, but by early October, business was slowing to more predictable levels.
Acquisition upgrade and rehab products
The first of the new products, Freddie Mac’s acquisition upgrade mortgage, is aimed at cosmetic improvements, or light rehabilitation, which could include deferred maintenance items. The product is capped at either $10,000 per unit or 20 percent of the acquisition cost, with a minimum cost of $3,000 per unit.
The light rehabilitation is generally limited to upgrades to interior or exterior finishes, such as new kitchen and bathroom cabinets and fixtures. The product offers borrowers financing of up to 86 percent loan-to-value, and 80 percent loan-to-cost. The debt-service coverage ratio (DSCR) is 1.15x for the interest-only portion of the loan (in the property’s “as is” phase), and converts to 1.20x with a 30-year amortization schedule once the property is stabilized and leased up.
The second product, known as an acquisition rehabilitation mortgage, is aimed at more substantial rehabilitation efforts such as those in repositioning deals. The product is capped at $30,000 per unit or 30 percent of acquisition cost, with a minimum cost of $10,000 per unit. The mortgage offers borrowers up to 80 percent loanto- cost, with a DSCR of 1.10x for interest- only loans in the “as is” phase, and 1.15x with a 30-year amortization schedule once the property is stabilized.
The company began working on the products in the fourth quarter of last year, when conduit lenders were mounting an aggressive challenge for such deals.
“We think that with these acquisition rehab products, that we will take those loans off the street sooner than anybody else, at what appears to be very aggressive terms,” said Mike May, Freddie Mac’s senior vice president of multifamily sourcing.
Streamlined acquisition financing
Freddie Mac also recently rolled out a streamlined acquisition-financing product aimed at new borrowers seeking acquisition loans of Freddie Macfinanced properties.
The government-sponsored enterprise is hoping to retain properties already in its portfolio by offering advantages to the new buyer for sticking with Freddie Mac. Whereas most lenders offer incentives for repeat customers, this effort looks at repeat properties.
“Most of the time, mortgage bankers look at retention of existing borrowers,” said Phil Melton, a director at Collateral Real Estate Capital, LLC, which agreed to be purchased by BB&T Corp. in August. “Freddie Mac’s taken that a step further and said ‘Let’s make it more attractive for that acquirer to continue using Freddie Mac.’”
Benefits for the new borrower include reduced documentation requirements. Borrowers won’t have to provide appraisals, engineering reports, or environmental reports, lowering the cost of the transaction and speeding up the cycle. The third-party report waivers are the same that Freddie Mac extends to existing borrowers for a refinance.
“Since [Freddie Mac is] already familiar with the property, the costs go down because you don’t have to order some of the reports, and you don’t have to wait for them, either,” said Todd Rodenberg, senior vice president and agency lending director for KeyBank Real Estate Capital. “The acquisition can happen a lot faster this way.”
The GSE says this streamlined process could result in transactions being completed in half the time it takes to originate most new loans. In the past, a typical acquisition deal could be turned around in 45 to 60 days. This new process could result in a three- or four-week execution, lenders said, since many due diligence requirements are eliminated.
“For both the buyer and seller, it really takes away the financing contingency associated with the transaction,” said Melton. “It means cheaper pursuit costs for the buyer and more certainty of execution for the seller, so it’s a plus on both sides.”
In addition to transaction speed, Freddie Mac is also offering an economic incentive equal to up to 1 percent of the unpaid principal balance on the current, existing loan. The borrower has a choice between receiving that incentive in cash, when Freddie Mac buys the loan from the lender, or through a lowered cost on the new loan.
Freddie Mac-affiliated lenders applauded the move, saying it would help borrowers achieve significant savings. “I’d equate that 1 percent savings to 10 to 15 basis points on the rate side. That’s pretty sizable,” said Rodenberg. “I’ve seen deals move from one source to another for a lot less than that.”
Eligible properties include garden, mid-rise, and high-rise apartments and cooperatives with minimum occupancies of 90 percent for 90 consecutive days. The program features a minimum debt-service coverage ratio of 1.25x, and a maximum loan-to-value ratio of 80 percent (75 percent for loans of less than seven years).
Small loans pilot program on hold
Lenders in Freddie Mac’s Program Plus delegated network expected the company to test a new approach to small loan production through a pilot program beginning in the fourth quarter.
The program would have offered better terms and quicker deals by delegating more authority to lenders. But the pilot program has been put on hold as the company deals with the increased production it has seen in the wake of the conduit meltdown. “We were just about ready to push [the small loan program] forward and go live, and we’ve put that on hold,” May said. “We’ve redirected those resources just to process the opportunity in front of us.”