Freddie Mac executives are looking to maintain their momentum in 2006 after turning in a record year for financing multifamily housing in 2005.

Freddie’s achievements in 2005 benefited from increased flexibility and innovation for the agency’s lenders, combined with attention to product quality, according to Adrian Corbiere, senior vice president of Freddie’s Multifamily Sourcing Division.

The government-sponsored enterprise (GSE) closed a record $26.2 billion in multifamily transactions in 2005, an increase of 10% from the $23.8 billion it closed in 2005. That included nearly $10 billion through its flow programs, more than $1 billion through structured programs, and $2.2 billion in capped adjustable-rate mortgage flow financings.

The loan production in 2005 took Freddie’s multifamily financing since 1993 (when it introduced the Freddie Mac Program Plus network of loan originators and servicers) to more than $100 billion, said Mike May, who is succeeding Corbiere as head of multifamily sourcing.

Focus on competition

Strong competition from Wall Street conduits has presented a problem for Freddie Mac and fellow GSE Fannie Mae because conduits are able to offer higher-leverage loans than the GSEs. But when other parts of the financing process are put together, Freddie executives are confident that they haven’t seen the last of their record production numbers.

May is a relative newcomer to the multifamily market after more than two decades at Freddie Mac, where his executive roles have included working on single-family products, technology and securities products. Since his new role was announced in June 2005, May has been meeting with Freddie’s lenders and borrowers to learn more about their satisfaction level with his company’s multifamily business.

He divides the customer concerns into five areas: price, proceeds, products, servicing flexibility and customer service. May said his customers told him that on pricing, products and servicing, “we’re untouchable.” But proceeds and customer satisfaction are areas he believes need to be addressed.

The amount of proceeds a borrower is able to pull out of a deal is “probably our weakest area,” May admitted. “If I could [deliver] the same amount of proceeds as the conduits, they’d never win” a deal.

In December 2005, Freddie announced that it had teamed up with CWCapital to provide total financing that can hit 85% loan-to-value or loan-to-cost. May suggests that the program is a fair example of how Freddie will address the proceeds issue, by “finding other sources of capital and blending them for the borrower.”

As far as customer service is concerned, Freddie does pretty well, according to May, “but we’re losing some [customers] – where we get the deal done and the borrower wasn’t that satisfied with the transaction.” The main problem is timing. “We require a lot of paperwork and have a lot of people involved in the process,” May said.

In 2005, the GSE pushed more authority down to its regional level, eliminating the number of decisions that need to be made by Freddie’s national staff. That partially devolved authority now covers 80% of Freddie Mac’s business.

For targeted multifamily affordable housing, Freddie allows what it calls shadow underwriting, in which it gives more underwriting authority to the lender if it is comfortable with the lender’s underwriting values.

“It’s not full empowerment, but we are going to move toward full empowerment in targeted affordable housing,” said May.

Other servicing changes May promises include a 40% reduction of paperwork and a reduction in deal cycle time by 20% to 25%.

2006 priorities

In 2006, Freddie Mac will focus on several high-profile businesses: acquisition/rehabilitation deals (both affordable and conventional), portfolio retention, and small loans (less than $3 million).

One of the reasons Freddie Mac will be paying attention to its customer service is its focus on retaining customers – both for new properties they may want to develop or acquire as well as for refinancing existing ones.

May estimated that Freddie is likely three years away from experiencing another surge in refinancings, but many of the changes it is making this year are focused on increasing the “stickiness” of its programs so its customers will want to choose Freddie products when the time comes for refinancing.

Small loans are also a priority at competitor Fannie Mae, but May believes it will still be a major component of his business in 2006. Though he declined to forecast a figure for small-loan production, he said it will constitute the majority of Freddie Mac’s growth in 2006.

Further out, he predicted that standardization of lending practices in the small-loan market will lead to greater interest from the capital markets in buying the securitized loans, which will make it even easier for Freddie Mac to penetrate a category he estimates roughly as being as large as 40% of the multifamily commercial loan market.