MORTGAGE LENDING: FREDDIE MAC

APARTMENT FINANCE TODAY • MARCH 2008

Beating Them, and Joining Them

Freddie Mac continues to win back market share from the conduits as it preps a CMBS program of its own.

By Jerry Ascierto

Orlando, Fla.—“Know thy self, know thy enemy,” advised Sun Tzu in The Art of War. It appears Freddie Mac is taking that advice.

Coming off a record year in which it financed $44.7 billion in multifamily developments, Freddie Mac continues to win back market share from conduit lenders hobbled by volatility in the capital markets. That momentum is expected to continue through most of 2008 as the market for commercial mortgage-backed securities (CMBS) remains dormant.

But in a surprise move, Freddie Mac is prepping a conduit execution of its own, the company revealed at the recent Mortgage Bankers Association (MBA) CREF/Multifamily Housing Convention.

“The conduits were so good at what they did, and the borrowers were so satisfied with what they were getting, that we could not get people’s attention,” said Mike May, Freddie Mac’s senior vice president of multifamily sourcing. “Our opportunity now is to expand our footprint to borrowers who never even considered us before, so that when the capital markets come back, we’ll be there to do portfolio and conduit deals.”

The company already buys a large amount of CMBS. Last year, it purchased more than $22 billion in CMBS. The new plan is to create and sell bonds backed by a pool of multifamily mortgages, which would be provided by its network of Program Plus lenders.

“We’re buying so much CMBS anyway,” said May. “The idea here is, let’s make the loan, let’s aggregate the pool, let’s work with the dealers and distribute the risk.”

For borrowers looking for the absolute lowest pricing, the conduit execution may be their best bet once the CMBS market returns. But for borrowers looking for more flexibility—such as the ability to restructure the loan after closing—Freddie Mac’s conventional loan program would be preferred, May said.

Freddie Mac’s development of its conduit program is so advanced that it could execute a deal in the first quarter of 2008, but May said it would first test the product through a pilot program involving a few Program Plus lenders. As of early February, Freddie Mac’s senior management still needed to sign off on the program, so details on it were not yet available.

The company said its conduit execution would not be a big departure from its current practices, and that the securitized loans would be consistent with the company’s credit philosophy. “We know how to buy loans, and we know how to sell credit risk, so this would just be putting it all together,” said May.

Freddie Mac Program Plus lenders, even those with their own conduit programs, applaud the move since it would allow them to offer a broader range of products. “If Freddie went into the CMBS market for multifamily and they were competitive, it would be a good thing for KeyBank,” said David Shillington, KeyBank Real Estate Capital’s new director of agency lending. “Whatever execution that’s best for our clients at the time, whether it’s our own conduit or a Freddie conduit, we will sell.”

Fannie Mae has no such plans to develop its own conduit execution, said Phil Weber, Fannie Mae’s senior vice president of multifamily, at the MBA CREF conference.

Second-half surge

Freddie Mac’s pricing advantage over the CMBS market continues to help it win business. For a typical 10-year, fixed-rate new permanent loan in early February, many conduit lenders were quoting a spread of as much as 300 basis points over the 10-year Treasury rate, compared to Freddie Mac pricing, which was at around 180 basis points over Treasuries. That spread translated to interest rates on Freddie Mac debt of as low as 5.4 percent, with the conduits hovering in the 6.5 percent to 7 percent range.

Johnson Capital, a member of Freddie Mac’s Program Plus network, reported second half 2007 Freddie Mac volume of around $500 million, the same as its full-year 2006 volume.

“Our volume escalated enormously in 2007, especially with the absence of the conduits in the second half of the year,” said Guy Johnson, founder and president of Johnson Capital. “And we’ve got an enormous pipeline moving forward.”

In February, Johnson Capital provided $135 million in financing through Freddie Mac's Acquisition Rehabilitation program for upgrades to the 914-unit Windsor Gardens Apartments in Norwood, Mass.

And Johnson Capital is hardly alone. KeyBank Real Estate Capital is also seeing a boom in agency business, and expects to process about $750 million in Freddie Mac deals in 2008, up from the $250 million last year, according to Shillington.

Business has been so robust for Freddie Mac since August 2007 that the company’s multifamily division increased its employee count by 10 percent, adding 16 new staffers in the second half of 2007. The company expects to boost its staff by another 10 percent in the first half of 2008.

Also in 2007, Freddie Mac processed more than $800 million in Acquisition Rehabilitation/Acquisition Upgrade products—a huge figure when you consider that those products weren’t introduced until October.

Plus, the company saw a big jump in structured transactions, mainly in large portfolio deals such as the acquisition of Archstone-Smith by Tishman Speyer. In that transaction, which had previously been destined for the CMBS market, Freddie Mac bought two pools of loans worth $1.8 billion early last fall. And the agency more than tripled its targeted affordable housing production, or deals for developments that include some form of government subsidy, in 2007.