When Freddie Mac was looking for someone to test drive the expansion of its venture into securitization last year, there may have been no better candidate than Lindsey Management, a multifamily owner, manager, and builder based in Fayetteville, Ark. Lindsey had closed more than 50 commercial mortgage-backed securities (CMBS) loans since 1997. So they weren’t daunted by Freddie’s pilot Capital Markets Execution (CME) program—where the ultimate owner of the loan would be someone they didn’t know. And, to top things off, the firm was one Freddie wanted to work with.

Eventually, Lindsey used Freddie’s CME program for a $38.7 million, 10-year fixed-rate mortgage from Pittsburgh-based Holliday Fenoglio Fowler (HFF) to refinance The Links at Lincoln in Lincoln, Neb.—a transaction that closed in September. That deal helped set the stage for a billion dollars in deals, which Freddie plans to start selling this summer.

Freddie, which usually holds multifamily loans on its books, launched the CME program in 2008. After that, both Freddie and Fannie Mae have shouldered the bulk of multifamily originations. But, by selling these loans as securities under CME, Freddie can take a sizeable step towards reducing its portfolio. As a result, the stakes seem high. If Freddie can get a good price for its CME deals, the program as a whole might successfully revitalize the stagnant securitization market.

A Profitable Option

Unlike a lot of their peers in the development world, Lindsey wasn’t under the gun to refinance or retire its construction loans. In fact, the largest apartment owner in Arkansas was in pretty good shape. “We had put construction loans on those deals, and we had two or three years left,” says D. Scott Rogerson, president of corporate operations and CFO for Lindsey.

But when Freddie proposed a loan program, Lindsey listened. Freddie offered both the portfolio execution and the CME program. Ultimately, Lindsey generated about 5 percent more proceeds under the CME program. It received a 60 percent loan-to-value at a 5.87 percent interest rate under CME. That was good enough for Rogerson to retire his construction debt. “We decided to go ahead and lock in the rate and get a longer term deal on the books,” Rogerson says.

Lindsey might not have got this if Freddie kept the loan on its books. “The CME relies heavily on the appraisal,” says Kim Cozza, Freddie’s producer of multifamily sourcing. “In our portfolio execution, we look at the appraisal and the third-party reports, but we also rely on internal valuation, which sometimes turns out to be more conservative than that of the third parties.”

Rich Martinez, managing director of Freddie’s central region, says it was possible to generate more proceeds because of a change in Lindsey’s expense numbers. “We’ve looked at this borrower’s properties in the past as a portfolio lender, but we had a little difficulty with his low expenses number,” Martinez says. “But under our CME product, one of the things we look at is the historical trailing 12 months. Looking at that, our underwriting lined up with his trailing 12-month expenses and income.”

Uncommon Comfort

From a pure numbers perspective, with its high proceeds and sub-6 percent, fixed interest rate, Freddie’s CME program appealed to Lindsey. But that doesn’t necessarily mean the majority of apartment owners would sign up for the program.

“To get a borrower to do that type of deal with the additional paperwork, loan docs, and transaction costs, and potentially losing control of who you call if you have an issue on servicing, you’re going to offer some nuggets,” says HFF director Brian Carlton, who handled the deal. “That’s the pricing and dollars in this case, which were important to this borrower.”

The main issue: In this climate, a lot of buyers aren’t comfortable not knowing where their loan is going. “Some borrowers are like, ‘No, forget it. I will not do a securitized loan. I’ve been there, done that, and I don’t want to do it again. I don’t care what the pricing is,’” Carlton adds.

Even Martinez admits there could be some concern for borrowers not accustomed to securitization. “On a portfolio loan, you can have more flexibility with loan documents,” he says. “CME is a little more standardized. There’s not as much flexibility. Borrowers that have done CMBS are excited about our CME execution.”

And that’s why Lindsey was a good candidate. The firm had done more than 50 CMBS loans over the years and wasn’t daunted by the program. “It was very similar to all of the CMBS deals that we’ve done,” Rogerson says.

Carlton agrees. “They were not one of the groups scared off by getting lost in the servicing world,” he says. “They’ve seen the documents and understand the business.”

Start of a Trend

Since the pilot CME program began, Freddie Mac has generated $1 billion more in origination through the program.

“We’re seeing greater acceptance of this in the market, the more we work with our seller/servicer base and the more they market to new borrowers as well as existing borrowers,” Martinez says.

HFF has closed a second securitized loan as of early May. Meanwhile, NorthMarq Capital, a lender based in Bloomington, Minn., has completed a whopping 12 CME deals totaling $122.5 million as of early April. “We think it works pretty well,” says Larry Stephenson, executive vice president of NorthMarq Capital. “We’ve done a bunch of these deals. The execution has worked well, and the buyers like the product.”

Lindsey even did one more such deal in October, refinancing a 792-unit property in Tuscaloosa, called The Links at Tuscaloosa, for around an 80 percent loan-to-value at a 6.05 percent interest rate. And Rogerson predicts doing even more such deals. “I think we could do it again without too much difficulty,” he says.

Still, the program has changed as credit markets have gotten tighter. “We’ve become a little more conservative,” Martinez says. “We’ve made sure the proceeds for both were equal because of our concern about what we’re seeing in the markets nationwide.”

Ultimately, the program’s success will be determined when the first $1 billion bucket of loans, which includes the one Lindsey made at The Links of Lincoln, is sold to investors.

“Hopefully, the securitization will go well,” Stephenson says. “If it goes well, I think it will be the first step to recovery of the securitization market. That could be the first step, if they get a good price. It could be a ray of hope because we need more capital in the system.”

New Ventures

Before you go with a securitized loan program, consider the following:

1. Bring experience. It helps to have some experience in securitized loans and to know what to expect. “Lindsey [Management] has done a lot of them; they know what to get in the docs, and, from there, they can handle it,” says Brian Carlton, director of Holliday Fenoglio Fowler.

2. Make sure it’s worth your time. With additional proceeds and better rates, Freddie Mac’s Capital Markets Execution (CME) program can work for an owner. But they have to get solid proceeds to make the extra brain damage worthwhile. “They’ve just now gotten a certain level where it makes sense to go through the transaction costs of doing it,” Carlton says.

3. Watch the market. Though Lindsey did two CME deals, D. Scott Rogerson, president of corporate operations and CFO for Fayetteville, Ark.-based Lindsey, isn’t ready to commit to a third. He’s happy with his construction debt and doesn’t want to jump back in unless the time is right. “Our rate on our construction mini-perm [permanent loan] is so good that we’re just holding off and watching the rates,” he says.