Freddie Mac has rolled out a mezzanine arrangement aimed at plugging the gap in the capital stack of overleveraged multifamily borrowers. The initiative, which will go live April 12, will marry a Freddie Mac senior loan with a mezzanine piece provided by a pre-approved third-party to allow up to 90 percent combined leverage.
While Freddie hasn’t yet named the mezzanine providers, the company did say that there would be between six and eight of them, all of which are large multifamily owners, operators, and/or investors. These multiple partnerships are one major difference between this new program and Freddie Mac’s previous High Leverage program, which partnered with only one lender, CWCapital.
In fact, the choice of mezz partners speaks to the most importance difference between this program and the previous one: Today’s mezz program is focused on defensive refis, where borrowers are in danger of losing the property. By partnering with large owner/operators and investors, Freddie Mac has the comfort of knowing that, should the borrower go under, the mezz provider could stand in as owner.
“If the property performs as the current owner expects, everything’s great,” says Mike May, senior vice president of the multifamily division at McLean, Va.-based Freddie Mac. “But if there’s a problem—let’s say value falls so much that the owner gets wiped out—then we have somebody right there who we know, who we would be happy with them owning and managing the property.”
The mezz initiative is aimed at refis from within or outside of Freddie’s portfolio, take-outs of existing construction loans, and acquisitions. Borrowers can get up to 90 percent loan-to-value (LTV) by combining a 75 percent maximum LTV Freddie Mac fixed-rate loan with a 15 percent LTV mezz piece, which can be either fixed- or floating-rate. A minimum of 10 percent cash equity in the property is required, and the mezz portion is backed by that borrower’s equity. The blended debt service coverage ratio is 1.05x, though the Freddie Mac first mortgage will not go below 1.25x. The Freddie loan can be either a CME or portfolio execution.
And it appears that Freddie won’t be alone in offering this kind of arrangement. Several Fannie Mae lenders have confirmed that Fannie is working on reviving its DUS Plus mezz program for a roll out later this year. While Fannie hasn’t yet provided details, the program is expected to also focus on defensive refis.
Meanwhile, Freddie Mac is in the midst of settling its latest CME issuance, totaling $1.1 billion in structured pass-through certificates. This is the company’s second CME offering this year, and it hopes to have three or four more done this year, “but it’s mostly a function of the size of the market, and the market’s really contracted,” May says.
Indeed, 2010 is shaping up to be a tough year for the government-sponsored enterprises (GSEs). In 2007, the companies saw a lot of business in saving deals that got stuck in the suddenly dormant CMBS pipeline. In 2008, Fannie and Freddie were practically the only games in town, and last year, the GSEs focused on larger deals as REITs moved to secured debt. But this year, with the transaction market still stalled, “there’s no pent-up demand,” May says.
