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Freddie Mac Sees 20% Drop in Originations This Year - 12/18/09

Freddie Mac is likely to see a 20% reduction in its origination volume this year, to roughly $19 billion.

Despite the expected drop, the housing-finance agency, along with Fannie Mae, will still by far be the most active lenders against apartment properties this year.

The two agencies, as well as other government entities, were the only loan investors to see an increase in their share of the overall commercial mortgage universe in the third quarter. According to analysis of Federal Reserve data by the Mortgage Bankers Association, they and securities they've issued held $360 billion of apartment loans, or 40% of the $911.7 billion outstanding at the end of the third quarter. Their share of the entire commercial mortgage universe was 10.5% in the third quarter, up from 10.2% in the second quarter.

"The pie's not growing," it's shrinking, explained Michael May, senior vice president of multifamily for the agency. "Our volume decline will match the market's" decline, he said. Fannie Mae previously said it too would see a decline in origination volumes this year.

Last year, Freddie originated a record-breaking $24 billion of loans as it took advantage of a dearth of competition from other lenders, specifically CMBS lenders. Freddie and Fannie are charged with improving the country's stock of affordable housing. They generally do that by purchasing mortgages from lenders or buying securities tied to apartment properties.

That lack of competition allowed it to become more stringent in its underwriting.

"We have stuck to credit principals," May said. "Our philosophy is 'cash is king.' People have to put cash in their deals, so it hurts if the property doesn't work out." He added that the agency, through its lender partners, also does a fair amount of underwriting of sponsors and tries to avoid what he called investors with "hot money."

The agency's origination volume was $14.8 billion in 2006. But it also bought $14 billion of CMBS rated AAA that were backed by apartment cash flows. Then, as the market reached its peak, it started reducing its originations pace. Through the third quarter of 2007, it was on pace to write $12 billion of loans. By then, property owners had nowhere to turn for loans, so Freddie started opening its spigot. It ended the year with $22 billion of volume.

Despite expectations that the apartment market will continue to weaken - Reis Inc. projects that the national vacancy rate will climb to 8.1% next year from 7.8% this year and 6.7% last year - Freddie isn't fazed. That's largely because it generally writes 10-year loans and focuses on property replacement costs when underwriting loans.

While the agency has balance-sheet capacity, the success it has seen in the capital markets has prompted it to ramp up the origination of loans for securitization. It expects to conduct a securitization of roughly $1 billion of loans every quarter. Its next deal should hit the market sometime in February. It uses its balance sheet to write loans with more flexible terms that might make them unsuitable for securitization.

A massive loan it recently funded for the Starrett City complex in Brooklyn, NY, was originated through its capital markets execution program, meaning it will be securitized.

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