The government's seizure of Freddie Mac and Fannie Mae in early September was a historic event, a shocking twist in the tale of the government-sponsored enterprises (GSEs).

One month after the takeover, Apartment Finance Today spoke with Mike May, Freddie Mac's senior vice president of multifamily sourcing, to get his views on the state of Freddie Mac, the development of the company's Capital Markets Execution (CME) program (based on the conduit lending model), and what the future might hold for the multifamily market.

Q: What's the main thing you want borrowers to know about the state of Freddie Mac?

A: A lot of people ask me that question and basically assume that my life is miserable. And they're generally surprised when I'm done talking to them. What I tell them is, preconservator, we had plans for growth, we had a focus on the future and building out product and capabilities, but we had some real constraints in terms of capital and portfolio usage. After the conservatorship, the main difference is we don't have constraints on capital or portfolio. I now have more capital to deploy. ”¦ During the first four weeks before conservatorship, we averaged $425 million of multifamily and $285 million of rate-locks—that's a weekly average. In the four weeks after conservatorship, we averaged $500 million in multifamily and $340 million in rate-locks. So we haven't missed a beat.

Q: How would you answer critics like John McCain, who at a recent presidential debate said, “The catalyst for this housing crisis was Fannie Mae and Freddie Mac.”

A: I”˜d say I don't agree. The fact of the matter is that the agencies are an important supplier of mortgages, but we were not the only ones—in fact, we were a shrinking presence. Freddie and Fannie didn't touch subprime until that market had grown by an enormous amount, so the trend was already there. And we didn't hold that much in the end. So I think it's wrong. We financed our stuff with Freddie Mac debt and mortgage pass-throughs, and they're performing better than anything else. Bear Stearns went down before Fannie Mae or Freddie Mac was placed in conservatorship, Lehman was in trouble long before, and all that stuff had nothing to do with Fannie Mae or Freddie Mac securities.

Q: What's your sense of what the fourth quarter is going to look like in terms of transaction volume?

A: Our month of September, we did almost $2 billion in multifamily loans, which was our fourth biggest month of the year. Year-to-date volumes are $18 billion through September—that number is twice what it was at the same time last year. But what we found is that buyers are rethinking where values are, so I believe there is going to be a contraction. It may be down in the neighborhood of 5 or 10 percent. I think next year will be down 10 percent for us. ”¦ I do believe that people's views of cap rates have changed, they're going up. Their views on the strength of rent growth are beginning to be questioned.

Q: It seems that new multifamily developments will be difficult to finance next year. Where is the new construction financing going to come from in 2009?

A: I don't know. That's a huge issue. Any property that was pushing it a bit when they started construction in terms of the future performance is going to have some serious trouble getting permanent financing because there's only a couple of people in the market, and they're all pretty conservative right now.

Q: Immediately after the conservatorship went into effect, Freddie Mac's pricing went down about 20 basis points. Has that reduction been sustained?

A: We've done nothing but pass through costs on our pricing, so there was an immediate improvement after the conservatorship, and then the spreads turned around and widened out a bit in the following days. I think that with what's going on in the economy—it seems to be definitely going down a bad path—that we may increase our credit costs, which would raise prices slightly. But we're going to still be well inside of any other alternative out in the market.

Q: Will 7 percent debt be the standard next year?

A: It's a function of the Treasury. I think that being somewhere in the 300 to 350 [basis point] range [as a] spread over Treasuries is a standard.

Q: Has Freddie Mac made any underwriting changes since the conservatorship?

A: Debt coverage is still 1.20x, and in some cases 1.25x. The main change that we've put in place is we used to do a fair amount of exceptions to policy for the right reasons. We're backing off exceptions, we don't see a lot of reasons to stretch credit right now.

Q: Can borrowers still get 80 percent financing from Freddie Mac?

A: I don't think that'll work. We're more in a 70 [percent] range.

Q: Will Freddie's multifamily operations get more aggressive now that it has more room in its portfolio?

A: I think the right way to think about it is, we won't exit the market. Just look at every other market and what the banks and the insurance companies have done: They've exited the market, they're conserving their capital, and they're waiting. We're not doing that. We're sticking to the original plan of growth and fully servicing the market.

Q: After 2009, Freddie Mac's portfolio cap has to shrink about 10 percent annually: Does Freddie Mac intend to shift its focus to its guarantee or securitization business to shrink the cap?

A: The CME program is perfect for avoiding the use of the retain portfolio. It's working well. You should see us finishing the pilot out and making it a standard execution over the next three to four months. And on top of that we're considering whether or not we want to do a straight pass-through, which would keep it off the balance sheet and use a Freddie Mac guaranteed bond to finance it. Right now, just about every single mortgage we buy we place in the portfolio, finance it with debt. Only a subset of that population really needs that, the rest of those could be financed with a pass-through, or with our CME.

Q: How much have you closed in the CME program so far?

A: We have about $500 million in the pipe, and that's only with five lenders—only four of them are truly active. The rest of the lenders are very eager to get in, and we're considering expanding the pilot. But really what we need to do is just get through the pilot and open it up for our full-fledged program.

Q: Has the worsening economic environment made you rethink the timing of a CME-related issuance?

A: Nope. We want to get to issuance as soon as we can to test the concept. We've kept in touch with the street firms that are interested, and we've kept in touch with B-piece buyers, and we still believe that—given that we're willing to own everything above the B piece—the execution will work fine.

Q: Have you had to suspend any new program developments because of the conservatorship?

A: No, not really. It became a little bit more difficult after the legislation passed; new products require a lot more overhead to get through the system. There's a comment period that's required now for public comment and then far more regulatory interaction. But everything we had in the pipe was more tweaks on existing products, so nothing's all-out brand new. One product—student housing—that we brought out this year seems to be working out pretty well for us. We've also invested in our existing products like seniors housing. We've added three full-time people to focus solely on seniors hosuing, and we've seen a pretty good pickup of that business.

Q: Many of our readers are concerned about the long-term prospects of Freddie Mac. What would you say in response to their concerns?

A: Now more than ever I guess the GSEs are showing their value. So after going through one of the worst financial crises certainly in any of our lives, the couple of things that worked right—Freddie Mac, Fannie Mae— provided liquidity when everyone else was running away. ”¦ I can't believe, whatever the outcome is, that there won't be something that will provide that sort of a liquidity when it's needed. But what form it takes is for smarter people than me to figure out.