Freddie Mac: Best solution for multifamily financing is securitization
The four-year old Freddie MacMultifamily securitization program provides investors, borrowers and taxpayers financed in the government-sponsored enterprise with profit generation and transfer of risk away from the company, according the vice president of pricing, costing and capital deployment Mitchell Resnick of Freddie Mac.
"Borrowers who choose to sell us a loan for securitization instead of selling it to us to hold in our portfolio receive lower cost financing," said spokesperson Patti Boerger with Freddie Mac. "This helps keep the rental financing market liquid and rentals affordable. The vast majority of Multifamily mortgages we purchase are for rentals that are affordable to those earning less than the local area median income."
Rental leasing volumes rose each month for the past two years, according to CoreLogic, and are expected to continue to rise.
The majority of the Freddie Mac multifamily business comes through the Capital Markets Execution product, where the GSE purchases mortgages secured by apartment housing from an approved lender network, and then pools and sells the loans as commercial mortgage-backed securities, or Freddie K-Deals.
Each K-Deal is about $1.2 billion in senior, guaranteed bonds and about $200 million in unguaranteed subordinate bonds, which accounts for the majority of the loan risk. The risk of losses is then transferred up the capital stack to the bonds guaranteed.
If a loan were to experience losses, the subordinated bonds already sold to third-party investors would absorb it, thereby lessening the risk to the issuer Freddie Mac and by extension the American taxpayer.
“Securitization is the best vehicle we have for pairing our borrowers' financing needs with the risk appetite and return requirements of a diverse group of capital markets investors,” Resnick said in a blogpost on Freddie Mac's website.
Freddie Mac uses a prior approval underwriting process to manage the risk associated with any individual loan. In-house underwriters make credit decisions based on various factors including strength of sponsors, cash equity and historical property operations.
As a result, the GSE has posted $40 billion of settled K-Deals since its creation in 2008.