Freddie Mac’s Capital Markets Execution (CME) program has been well-received by both borrowers and investors since its inception in 2009. The program is a type of CMBS execution, where loans are grouped together in a pool and sold off to investors.
At first, there wasn’t a lot of flexibility for the borrower, but CME has evolved to offer more underwriting flexibility at the front end. In mid-2010, Freddie Mac rolled out a menu of waiver options—everything from getting insurance waivers to requesting that the B-piece not be sold off.
But as the program matures, some speed bumps are being felt on the back end of the process. Some problems are beginning to arise regarding the servicing of CME loans, an aspect that has long been one of the chief Achilles heels of the CMBS industry in general.
CBRE was the top-ranked Freddie Mac originator last year, recording $4.3 billion, which accounted for more than 70 percent of its overall multifamily debt volume.
“The servicing is starting to become an issue unfortunately. We had two Freddie loans under CME that went in for assumption, and four months later, they still didn’t have an answer,” says Peter Donovan, senior managing director of McLean, Va.-based CBRE Capital Markets, which was the top Freddie originator in 2011. “When the answer finally came, it was very different than the answer we were expecting, and was unworkable and as a result, the buyer pulled out.”
The experience echoes that of many former CMBS borrowers, who saw their loans securitized and sold to investors, then struggled to figure out exactly who owned their loan, and how to go about amending it.
The CMBS sector is still trying to get some wind in its sails, especially in the multifamily sector where its pricing isn’t competitive with agency executions. But the larger issue with the CMBS industry is that its future is uncertain—many expect the rollout of the Dodd-Frank legislation to reform some of the fundamental flaws inherent in the model. But there’s no timetable on those reforms and to date, not much has been done.
“We need to have a CMBS market that works, but I don’t see anything seriously going on that fundamentally gets to the nature of that problem,” says Donovan. “There’s no clear understanding of who is going to be the authority to say ‘this is how it’s going to be,’ and comes out with a structure that investors get comfortable with, borrowers understand and can work with.”
People call today’s conduit industry “CMBS 2.0,” but nothing has fundamentally changed about the execution. One of the proposed reforms of the CMBS industry is to include a 5 percent risk retention mandate, where issuers would be required to put some “skin in the game.” And that’s one place where Fannie and Freddie could serve as a model.
“Risk retention—that’s why Fannie and Freddie have performed so well and why CMBS blew up,” says Willy Walker, chairman and CEO of Bethesda, Md.-based Walker & Dunlop. “I think at the end of the day, if you’re going to get institutional investors to put billions of dollars toward it, it’s going to need some risk retention component because CMBS 2.0 is no different than 1.0.”