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Freddie to Allow Mezzanine Debt on Multifamily Mortgage Refinancings

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In an attempt to bridge the gap in capital needed to refinance debt on overleveraged multifamily properties, Freddie Mac (FRE) announced it will accept mezzanine debt on the qualifying senior multifamily mortgages it purchases. Under the terms of the new plan, Freddie Mac seller/servicers of multifamily loans will originate a first lien mortgage with a loan to value (LTV) of up to 75%, then work with the mezzanine lender to provide additional leverage, up to another 15% for their borrower, allowing the property owner to borrow up to 90% of a property’s value. The program requires the property owner hold a 10% cash equity position in the property. Freddie Mac will then purchase those eligible first mortgages from its seller/servicers to either retain in its portfolio or securitize into its K Certificate multifamily mortgage backed securities (MBS). Since the mezzanine portion of the financing is backed by the borrower’s equity, not the property, Freddie Mac said it is not taking on additional risk. The program is open to refinancing of loans from either Freddie Mac or non-Freddie Mac portfolios and can be used for existing construction loan financing, as well as multifamily acquisitions. The program is open to stabilized class A and B conventional multifamily properties in good physical condition. The first mortgage must be fixed-rate, but the mezzanine debt can either be fixed- or adjustable-rate. Freddie Mac said allowing subordinate debt on the first lien mortgages will recapitalize multifamily properties that have decreased in value. The program is not intended, however, to increase leverage at the property level or fuel excessive risk taking by investors, the company said. “The intent is to help the industry reduce the number of properties that may otherwise become defaults, timely workouts or foreclosures if they don’t get much-needed financing,” said Mike May, Freddie Mac senior vice president of multifamily, in a statement. “We are working with mezzanine providers who are experienced multifamily owners, operators, or investors to help fill the capital gap due to reduced property valuation compared to existing financing,” he added. In addition, the mezzanine providers also have the capability to bid on the b-piece of a Freddie Mac K Certificate, after the first mortgages are securitized. Like many other real estate sectors, financing for apartments has dwindled, the result of tighter lending standards, declining property values and fewer lenders Freddie Mac said. The government-sponsored enterprise (GSE) originated more than $228bn in financing for approximately 57,000 multifamily properties since the start of the Freddie Mac multifamily business in 1993. Last week, Freddie reported the delinquency rate among multifamily mortgages grew 2bps to 0.17% in February. In addition, the delinquency rate of single-family mortgages grew 5bps from January to 4.08%, up almost double from 2.13% at the same time last year. In addition, Freddie’s total mortgage portfolio decreased at an annualized rate of 2.6% in February. Its refinance-loan purchase and guarantee volume remained at $22.6bn, unchanged from January. Write to Austin Kilgore. The author held no relevant investments.

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