While Freddie Mac dominated pricing in the last few months of 2008—by as much as 75 basis points (bps) on some deals—the momentum has shifted in favor of Fannie Mae.
As interest in Fannie Mae’s mortgage-backed securities continues to heat up, its pricing was inside of Freddie’s by as much as 50 bps or more in late February. These extreme shifts in pricing between the government-sponsored enterprises (GSEs) over the past three months have surprised many industry watchers.
“I’ve never seen the pendulum swing between Fannie and Freddie so quickly and so much,” says Don King, who heads GSE production for CWCapital. “It’s a wild time.”
This is good news for borrowers. As of late February, Fannie Mae was pricing many conventional 10-year deals below 6 percent. Top deals were pricing at 5.75 percent, with 75 percent to 80 percent loan-to-value ratios and 1.25x debt service coverage ratios (DSCR), though many deals were closer to 6 percent with tighter underwriting.
Freddie Mac’s evolving securitized-loan platform, the Capital Markets Execution (CME) program, may again narrow the gap. The burgeoning program offers great rates, usually 25 bps inside of Freddie’s conventional execution, and borrower interest is ramping up. At the recent MBA/CREF conference, the company said it hopes to get a $1 billion issuance out by April.
CWCapital closed its first CME deal in December, offering a rate below 5 percent on a 10-year deal for a low-leverage stabilized asset in a primary market. The rate was a perfect storm—the deal was extremely conservative, and it was rate-locked during a rally in the Treasuries in early December, when rates were temporarily at their lowest in the quarter.
Early indications are that the GSEs will begin charging a slight premium for portfolio loans, providing an incentive for borrowers to go the securitized route. The GSEs are under a regulatory mandate to shrink their portfolios starting next year, so they’ve put more emphasis on their securitized programs.
The shift is more dramatic for Freddie, since Fannie is an old hand at securitizing loans. Freddie Mac always behaved more like a life insurance company, holding about 86 percent of its loans in portfolio. Fannie, on the other hand, only holds about 53 percent of its multifamily business on its books.
As such, there has been some resistance to the program from long-time Freddie borrowers that have grown used to the flexibility and heavily negotiated documents of portfolio loans.
While both GSEs continue to rein in their credit standards, the discussion over which company can offer the best deal will continue to shift. “They’re moving in the same direction but at different velocities, and at any given point in time, one is more conservative than the other,” King says. “The one thing I can guarantee is that within a month it will change.”