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Freddie Mac's next K-Deal raises stressed leverage levels

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Freddie Mac's next K-Deal multifamily mortgage securitization is one of its mostly potentially highly leveraged to date, according to ratings agency presale reports.

The $1.5 billion transaction, FREMF 2017-K71, is backed by a pool of 65 loans from 43 sponsors, with an average coupon of 4% and remaining loan terms of 10 years. it has a current Kroll-issued loan-to-value ratio of 120%, as measured in stress scenarios by Kroll Bond Rating Agency, and a projected ending KLTV of 108.7%.

That's the highest among the 38 fixed-rate K-Series deals rated by KBRA since 2012. It's not the first K-Deal with an KLTV this high however; another transaction, FREMF 2017-K728, was equally leveraged. The in-trust KLTV for the 38 transactions Kroll has rated to date ranged from 104.9% to 120.0%, with an average of 114.2%. It's recent FREMF 2017-K70 deal issued in November was at 114%.

Kroll estimates that 81% of the loans in FREMF 2017-K71 have an agency-rated LTV above 110%.

The levels are in contrast to the aggregate "as-is" appraised values of the properties, which total $2.2 billion or an issuer-stated weighted-average current LTV of 70.3% and an ending WA LTV of 63.5%. But Kroll includes the potential subordinated debt that borrowers are allowed to incur by Freddie a year after a loan's origination.

Fitch Ratings assigned a stressed WA in-trust LTV of 119.1%. Fitch includes net-cash flow variances from issuer estimates (in this case, 9.32%) to determine both stressed LTV and debt-service coverage ratios published in its analysis of the deal.

Twelve classes of notes will be issued in the transaction; six tranches of guaranteed senior notes, five nonguaranteed mezzanine notes and a residual class of notes.

The deal is designed to transfer credit risk on the underlying affordable housing commercial loans pooled in Freddie's K-Series program to the private sector.

Both Kroll and Fitch have assigned preliminary triple-A ratings to the senior notes, which benefit from 18.75% credit enhancement. A tranche with 14% credit enhancement is rated A+ by Kroll; a tranche with 10% support is rated BBB+ and another with 7.5% credit support is rated BBB-.

Since 2009, Freddie Mac’s K-Deal program (which was created in the wake of the financial crisis to seed affordable multifamily commercial development) has securitized 11,845 housing loans.

The loans in the pool, which will have an estimated cash flow of $119.7 million annually, are sprawled across 39 metropolitan statistical areas, but the 12.4% concentration of loans from the Baltimore MSA is the highest of any one MSA in a Kroll-rated K-series deal within the past two years, according to Kroll. Nearly 60% of the loans are in secondary markets. That compares with only 3.1% of a recently rated K-Deal securitization in September.

The top 10 largest loans make up 43% of the pool, compared to the K-Deal series average of 40.2%.

The largest loan in the pool was a $164.6 million cash-out refinancing of a 1,167-unit Union, N.J., apartment complex (Mill Run at Union). Its confidential sponsor took out $20 million in the transaction.

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CMBS Multifamily GSEs Freddie Mac