Freddie Mac is having a furious fourth quarter, processing deals hand over fist in a return to the traditional year-end rush of deals.
Through the first six months of the year, the company logged about $3.6 billion in multifamily debt volume. In November and December alone, it’s closing about $2 billion per month.
Apartment Finance Today senior editor Jerry Ascierto recently sat down with division chief Mike May to get his perspective on the competitive landscape—both against chief rival Fannie Mae, and the larger private sector—as well as the company’s plans for 2011.
AFT: Have you seen more competition coming in from the private sector in the fourth quarter?
May: Freddie and Fannie probably lost a slight amount of market share but not a tremendous amount. Insurance companies got a little bit more aggressive. Some of the transactions we’ve seen from them, they beat us on spread on business that we would have normally won. That’s kind of surprising; it doesn’t happen often. And New York is always a market that banks do well in, and so I don’t think that’s changed much. There’s no doubt we can’t maintain 40 percent market share; we have no intention of doing that. What I think will happen next year is, there will be market growth, we’ll give back share, and we will grow because the market is growing.
AFT: Many agency lenders have noted that Fannie Mae has a faster execution than Freddie Mac these days. What are you doing to speed up deal cycle timelines?
May: I know we’re being sold against on this dimension. What I would say is, if you get a commitment from us that we’re going to do the deal, we’ll do the deal. There are four things we’re working on right now to address it. We have a series of outsourcing relationships with third-party vendors. We’re fine-tuning those and building scale there. We’re going back to our processes and figuring out what doesn’t need to be done, and we’re picking up some efficiency there. We’re adding a sizable number of production resources—we’re hiring people right now—so that will give us more capacity. And then the final thing is, there is some technology that we’re going to implement next year which is all about the underwriting process, and that will speed up the whole process as well. So we think we’ll be quite flexible and scalable with these few changes.
AFT: Fannie Mae started their large borrower initiative this year, and I hear they’ve been taking some business away from you guys. How do you plan to respond?
May: You know what I think about all that? I think that’s a great commentary on our success. We have great borrower relationships, always have. I have borrowers calling me up and telling me what’s going on. And I’m not going to compete on price, let’s put it that way. If [Fannie] wants to buy some business for a period of time, that’s fine. Fannie’s done a good job at figuring out who’s important, and they’re out there selling hard. Our share with that customer base was pretty large, so I understand losing some of that business. But we’ve been a reliable execution for years, and we’ll continue to be that. And that’s what people want: a reliable business partner they can count on day in and day out.
AFT: Are you seeing more interest these days in your Acquisition Upgrade and Acquisition Rehab mortgage products?
May: At the height of the market, the insanity that everyone was wrapped up in was basically trending apartment performance, trending the rents, and trending of expenses. It was trending to the “nth” degree. And what’s happened in lending is people going back to basics and saying ‘I’m not into betting on what’s going to happen. Let me see it.’ There’s some of that business coming back, but it’s nothing like it was. There are different types of acq-rehab—there’s the tired B property that needs investment to bring it up to market rents. That works because you have good comps you can compare it to, and you know that product will work. Then there’s the acq-rehab in which you’re taking a C property and you’re going to make it into a B property—you’re going to change the nature of that property. That one isn’t happening. We won’t make that loan because we’re not going to speculate on that type of transformation. Some of our largest problem assets were exactly that.
AFT: Is the mezz program that you introduced this year seeing much traction?
May: Like anything new, it takes a while for the market to digest it. We’ve seen a handful of deals come through and approved a couple of them. So we know it can work. But if you think about when we introduced that and what’s transpired since—there was a pretty good rally. So if you were short 5 percent or 10 percent, and you were counting on this mezz program to help you out, you might look at it now and say, 'Heck, I’m only out a couple of percentage points off, I’m willing to put in that difference.' The market has kind of worked in the borrower’s favor. We’ll keep it on the books, though, because we won’t always be in this situation. At some point, the market ebbs and flows, and there will be a need for this type of product. So that will just be a product on the shelf that we’re willing to pull out and use.
AFT: What’s next for the Capital Markets Execution program?
May: More frequent issues, to get more consistent, predictable issues. We know that helps from an investor’s standpoint. They like seeing that routine issuance, which translates into better execution. We’re still working on transitioning all of our product offerings to CME. We’d like to do more of a pass-through type CME product that doesn’t have a subordinate bond in it, where we own all the risk. That will allow us some flexibility on the servicing side. It will be an appealing offering to some of our borrowers, but there will be a price associated with that.
AFT: Are there any underwriting changes in the work?
May: We’re basically a 1.25 lender, and we’re holding the line pretty good on that. We are willing to, for the right deal, go south of there, and we are. But you ask the question, ‘Do all these things really add value or was that just a fear reaction that we put a bunch of stuff in place?’ I think for the most part what we did makes perfect sense.