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Freddie Mac Nears Launch of $1B CMBS Deal
Mar 20, 2009 - CRE News

Freddie Mac expects to launch a $1 billion securitization of multifamily mortgages in late May or early June, making it the first of what could be a quarterly series of similar deals.

It has tapped Deutsche Bank to underwrite the initial offering, which will be comprised of some 60 loans that would be pooled and carved out into at least two classes of securities. The structure would be similar to a conventional CMBS deal, with cash flows being applied to the deal's senior classes first and any losses being absorbed by the most junior class.

The agency will be selling a subordinate class comprising perhaps 10 percent of the deal to an investor that, like in a conventional CMBS transaction, would be responsible for lining up a special servicer.

In a twist, the agency is considering rating the deal's senior securities, which it would wrap, or guarantee. That would appear to be redundant. After all, a guarantee by Freddie could be viewed as tantamount to a AAA rating. But the agency is looking to "test the boundaries," according to David Brickman, vice president for multifamily and CMBS capital markets at the agency. He said the goal is to make the transaction, and subsequent deals, as transparent to investors as possible. A rating would provide a third-party opinion on the deal's credit underwriting.

"In this environment, we want to give the highest level of assurance" to investors as possible. Freddie isn't speaking with only Moody's, Fitch and S&P, which together have rated every single CMBS transaction - but also Realpoint and DBRS.

"Some of the newer rating agencies might offer value," Brickman said.

Freddie last year originated a record $24 billion of multifamily loans and bond guarantees. While its goal is to bring a $1 billion deal to market quarterly, if the securitization efforts pan out, it's possible that the agency ultimately would come to market once a month with a deal. That would allow securitization to fund roughly half of its origination volume.

Freddie plans to go forward with its transaction regardless of market conditions. Because of the AAA rating and its wrap, the deal's senior bonds will sell for spreads substantially tighter than current CMBS spreads. Freddie bonds backed by residential collateral sells for prices resulting in yields of less than 70 bp over swaps versus roughly 1,200 bp over swaps for CMBS. Otherwise, the deal would not provide an effective funding mechanism for the agency. If market conditions aren't quite in the agency's favor, however, it could buy any bonds that are offered and keep them in its portfolio until market conditions improve.

The housing agency's securitization efforts got underway roughly four years ago.

At the time, CMBS conduit lenders were the most aggressive in providing financing, which often put Freddie and the other housing agency, Fannie Mae, at a competitive disadvantage. While the two could provide far more flexibility than conduits could, they were often hamstrung in their ability to compete on proceeds and prices. So Freddie decided to develop a strategy to securitize some of its originations.

While its motivation has changed since then - conduit lenders are basically out of the market for now - Freddie still views securitization as a viable strategy. For one, it would allow the agency to tap another funding source for originations. And secondly, it would allow it to address any potential balance sheet issues.

When it was placed in conservatorship last year, the thinking was that its balance sheet would be restricted from growing. Securitization allows it to address that potential headache while continuing to fund apartment loans. Lending against apartments allow it to meet its Congressional mandate of funding affordable housing.

from Commercial Real Estate Direct, a service of FM Financial Publishing LLC