Freddie Mac’s Capital Markets Execution (CME) program is just the first step in the company’s push toward reducing its portfolio while keeping liquidity flowing.
The government-sponsored entity is planning to securitize the bulk of all conventional multifamily mortgages by the end of next year and is working on a securitized product roadmap that includes several niche product lines.
“We aspire to see upwards of half of our conventional mortgage volume go through a securitization path by the end of 2010,” says David Brickman, Freddie Mac’s vice president of multifamily CMBS/capital markets. “And we are looking to follow CME with other mortgage products that lend themselves to securitization.”
This is bittersweet news for most borrowers. While developers will be able to access lower rates through the securitization programs, the loan documents will be less flexible than a standard portfolio execution.
But the strategy is one of necessity: Freddie Mac is under a regulatory mandate to annually reduce its portfolio size beginning next year. Unlike portfolio loans, which are held on the company’s books, securitized loans are grouped together and sold to investors as securities.
The first CME issuance (about $1 billion) will hit the market by the beginning of June, and the company hopes to have a second issuance, for which it is now collecting loans, by the end of the year. The goal is to produce a quarterly issuance schedule by the beginning of 2010.
While the CME program is only for conventional loans, Freddie Mac is also working on securitizing other mortgage product types, such as debt for the seniors housing industry and loans for affordable housing developments. The company is busy modifying existing mortgage products to make them more friendly to the investment market, such as by adding defeasance provisions as opposed to yield maintenance.
“We’re looking to see how we can expand to fit some of the more niche products into securitization,” Brickman says. “So, doing a seniors-only type of securitization, for instance, is something we are looking at.”
This move may also translate to lower pricing for affordable housing and seniors borrowers, though Brickman cautioned it’s too early to say what the pricing difference will be between the securitized and portfolio versions of these products.
The pricing differential is the main enticement for going the securitized route. CME borrowers have routinely seen interest rates that are 10 to 20 basis points lower than a standard portfolio deal. Like all securitized loans, CME loans have certain restrictions such as requiring the borrower to be a special-purpose entity.
And though the initial CME pilot offered higher leverage levels than portfolio deals, that’s no longer the case. In the fourth quarter, the company made the underwriting of both CME and portfolio deals identical.
Industry watchers expect the first CME issuance to go off without a hitch. Freddie Mac has been in close contact with the investment community, and the securities themselves should be quite safe
“Freddie is working so closely with the B-piece buyers and the market on this,” says David Cardwell, vice president of capital markets and technology at the National Multi Housing Council. “They wouldn’t come to market unless they felt it would be a success.”
Reports from lenders suggest that CME loans are some of the most conservatively underwritten loans that Freddie has made in the last year. And of course, having the government’s backing goes a long way in the investment community.
“I think it will be successful because it’s backed by the full faith and credit of the U.S. government,” says Dan Fasulo, managing director of Real Capital Analytics.