As part of its commitment to expand funding options for multifamily borrowers and supporting rental housing supply across the nation, Freddie Mac has updated its Preferred Equity Investment Program. In late May, it updated the policy to include lenders who wish to retain servicing rights.
“Last year, to help address the need for additional sources of capital in the market, Freddie Mac announced that lenders could make preferred equity investments, but only if they transferred servicing rights. That requirement had the effect of limiting participation from our [Optigo] lender network, so we reevaluated the program,” says Adam Monti, Freddie Mac Multifamily vice president of conventional underwriting. “From the effective date of the policy change, lenders may now make a preferred equity investment and retain servicing of the mortgage, provided certain terms and conditions are met.”
The most important conditions, says Monti, relate to the lender’s investment structure and require the lender to control any joint-venture investment vehicle. The lender would be required to transfer the rights to servicing concurrent with the control takeover right. The preferred equity investments also must be in compliance with the requirements in the Freddie Mac Multifamily Seller/Servicers Guide and are only permitted in connection with non-Small Balance Loan mortgages.
According to Monti, preferred equity investments can be a critical part of the capital stack, expanding funding options for multifamily borrowers with lender-supplied equity investments. It’s a win-win, he says, with lenders benefiting from the increased insight into a transaction and control of the larger capital stack and borrowers getting easier execution and broader options to increase overall leverage.
“As a secondary market player, Freddie Mac Multifamily can bring much-needed liquidity to the market, freeing up capital for more investments in housing around the country,” Monti adds. “In addition, our mission focus gives us the unique ability to keep lending in all kinds of market environments and to work hard to make deals pencil that other industry players might not be able to get over the finish line.”
