• A good year for multifamily
  • The LIBOR initiative
  • Freddie assists rural housing

When Freddie Mac’s Program Plus lenders gathered in the Napa Valley in September 2001, they had every reason to break out the finest wines to toast their success. Freddie and many of its lenders did a record volume of business in 2001.
As of September 2001, the firm was on pace to have “our best year ever, potentially by a pretty good margin,” said Mitchell Kiffe, vice president of multifamily loan production.

Kiffe said the firm had financed about $4 billion in multifamily housing during the first half of the year and was “on pace to do $8 billion to $9 billion for the full year.”

Several lenders said they too were having record years in 2001, thanks to Freddie’s ability to tailor deal terms and pricing for each transaction.

“Freddie Mac has been a tremendous partner to work with over the past several years. We expect to have our best year ever with them in 2001 by targeting $2 billion in multifamily purchases during this calendar year,” said John Cannon, senior vice president and managing director of GMAC Commercial Mortgage.

“We expect Freddie to continue to be our number one lender for apartment transactions. They have proven to have the lowest rates, easy execution and deliver what was promised,” said David Woida of Richter-Schroeder Co., Inc.

A good year for multifamily

Lenders are having a good year with all of Freddie’s multifamily product lines, Kiffe said.

One of the newest Freddie Mac lenders is Capri Capital, LLC, which got its license at the beginning of 2001 and planned to reach a goal of $75 million by year’s end. The firm decided it needed to offer Freddie Mac programs as well as Fannie Mae programs because Freddie, which holds loans it buys in portfolio, can be more aggressive on deals it really wants, said David Lacki, senior vice president.

In 2001, low interest rates were driving demand for refinancing. While most borrowers were opting for fixed-rate loans, Kiffe said several large, sophisticated borrowers were using floating-rate loans.

Borrowers were very receptive to a new loan execution that pegged loan rates to Freddie Mac reference bills, which resulted in a loan rate that is typically 10 to 20 basis points lower than loans pegged to London Interbank Offered Rate (LIBOR).

As of late August 2001, Kiffe said borrowers could get an all-in pay rate on a Freddie Mac reference bill ARM of 5% to 5.5% compared to long-term fixed rate of 6.5% to 7%.

“The introduction of Freddie Mac Reference Notes as the index for adjustable rate mortgages and revolving credit facilities is saving borrowers 10 to 15 basis points in rate versus the equivalent LIBOR index,” said Peter Donovan of Berkshire Mortgage Finance. “The Freddie Mac Early Rate Lock execution continues to be very attractive and effective for our borrowers. Freddie Mac continues to exhibit flexibility and creativity to respond to specific borrower needs in structuring loan terms.”

“The Adjustable Rate Program has been a big marketing tool and allows us to compete with the local banks,” said Woida.

The LIBOR initiative

The first transaction closed under the LIBOR adjustable-rate mortgage (ARM) initiative announced by Freddie Mac in 2001 was a $120 million loan secured by the Elan at River Oaks Apartments property in San Jose, Calif. The borrower, Shea River Oaks Associates, LLC, and its manager J. F. Shea Cos. in Walnut Creek, Calif., originally obtained an $86 million convertible LIBOR ARM loan in March 2000. Barely one month later, Shea converted that loan to a fixed interest rate while increasing the loan amount by an eye-popping $34 million and extending the term to 10 years.

Borrowers that choose adjustable-rate loans were betting that the economy would remain weak and short-term rates would stay low, Kiffe said. Plus, they like the fact that the program allowed for “easy and speedy” conversion to a fixed rate.

GMACCM had done close to $1 billion as of August in interest-only loans. This program allows borrowers to pay no interest for one to 10 years, depending on the terms of the loan.

For loans for less than 70% of value, borrowers can get 10 years of interest-only payments. On 80% loans, Freddie Mac lenders can make loans with one- or two-year interest-only periods.

The program is typically used for acquisitions, often in conjunction with capital improvements, because it helps increase the yield to investors, Kiffe said. The program is only available to strong borrowers, he added.

For refinancing, Freddie Mac remained cautious about approving loans intended to let owners take cash out of their deals in markets that were starting to soften.

He said markets that seemed to be softening include North Carolina; South Carolina; Silicon Valley in California; Orlando, Fla.; Indianapolis; Kansas City, Mo.; Phoenix, Ariz.; Atlanta; and Austin, Texas.

For new construction of market-rate deals, Freddie Mac planned to introduce a forward commitment program, Kiffe said. Many lenders said they were eagerly awaiting implementation of this program.

Kiffe said it would be similar in operation to the firm’s existing forward commitment program for tax credit deals. Underwriting would be like conventional mortgage parameters, with a standard loan amount of 80% of value and 1.2x debt service coverage.

Freddie assists rural housing

Freddie Mac also was coming to the aid of rural apartment projects. It had joined with the United States Department of Agriculture (USDA) to purchase multifamily loans secured by rural properties financed through the USDA’s Rural Housing Service (RHS) Sec. 538 program.

Prior to Freddie Mac’s agreement with the RHS, the RHS had little success selling loans originated under the 538 program in the secondary market. Low-income rural areas have been more difficult for industry participants to serve, due in part to the smaller populations of these areas, which attract fewer builders, developers and lenders. In addition, loans secured by multifamily properties in rural areas are typically smaller in size. The average Sec. 538 loan is $1.6 million.

Freddie Mac’s agreement to purchase Sec. 538 loans would increase the availability of capital for the program and draw more borrowers and investors to the low-income rural rental housing market.

As part of the agreement with the USDA, all Program Plus Seller/Servicers with experience in rural lending were immediately eligible to sell Freddie Mac Sec. 538 loans.

Freddie’s multifamily operations is headed by Adrian Corbiere, who joined Freddie in 1999 from the life insurance industry. Freddie is working hard to serve borrowers’ needs, Corbiere said. “Almost every transaction you do is a new product. The ability to customize [loans] and accommodate borrowers is effectively a new product.

“Requirements that borrowers have today are extraordinary, and lenders are forced to accommodate them. There’s going to be tremendous pressure on the servicing group to accommodate the customized loans.”

Corbiere cited release of escrows, reserve requirements, substitution of properties in multi-property transactions, and negotiation of prepayment penalties as loan terms that frequently require customization.

But Corbiere opposed conceding too much to borrowers in the realm of underwriting standards. “Borrowers are always looking for the best rate and the most dollars,” so underwriting standards are being tested, he said. “Lenders have to hold the line on capitalization rates, and not build in all kinds of extraordinary rent growth” into apartment property valuations, he added.

Freddie Mac’s main market-rate apartment lending vehicle was its group of 37 Program Plus lenders. Freddie dropped two lenders from the fold in 2000 because of their failure to meet standards.

Corbiere remains skeptical about the potential for new technology to accelerate loan production. “It doesn’t bother me that it takes 30 days to underwrite and commit on a loan. That’s reasonable. I’m not sure that faster is necessarily better. I’m not sure I’d want to do it faster than that.”

What borrowers want most is a quick loan commitment, not necessarily a quick closing, he said. He also said technology can go only so far in streamlining the lending process. It’s “very important, but it can’t replace” face-to-face contact with borrowers and careful inspection of the underlying real estate. “Commercial real estate is still a relationship business.”