After several years of putting most of the multifamily mortgages they bought in their portfolios, Fannie Mae and Freddie Mac are preparing to rev up securitization of such loans.
For lenders that do business with the government-sponsored enterprises, this shift in funding strategy will affect the types of mortgages that can be offered to apartment landlords. Securitization requires more standardized loan structures, forcing borrowers to give up customized terms, though in exchange they can get lower rates than those available from portfolio lenders.
"Some of the more sophisticated clients ... had negotiated pretty customized loan documents with Fannie and Freddie over time," said Todd Goulet, a senior vice president with the real estate capital group at Cleveland's KeyCorp.
"A lot of what they're used to getting in the portfolio execution, they're not going to get in the securitization execution," he said. "So from our perspective, it's getting those borrowers to get comfortable with the more standardized documentation."
The GSEs cited different motivations for their respective efforts.
Fannie said it is retooling for an eventual future in which the GSEs would be forced to slash their massive portfolios of mortgage assets - even though the government right now is enlisting the companies to take on ever bigger roles in housing policy.
"We don't want to be dependent solely on Fannie Mae's retained portfolio as our funding source," said Phil Weber, Fannie's senior vice president for multifamily. Fannie once relied heavily on MBS to fund its multifamily business. Weber said returning to that model "is our top priority" in the multifamily business this year.
It will take a few quarters before Fannie achieves its goal of guaranteeing at least $500 million of multifamily bond issues a month and serving "the market mainly through MBS issuance."
The change entails canvassing a group of investors that Fannie and its lender partners have not called on since the GSE shifted to portfolio financing a few years ago.
Freddie, on the other hand, never did much securitization of multifamily loans. The GSE says it began planning several years ago to develop third-party funding outlets but got sidelined, and is now moving forward with the idea.
Michael May, Freddie's senior vice president for multifamily, said that in 2006 the GSE looked at ways it could compete with Wall Street conduit lenders, then at their height.
Investment banks were offering highly competitive rates to owners of apartment buildings; the loans were pooled with ones secured by office, retail, industrial and hotel properties, then profitably resold into the bond market.
Freddie "decided that having more options on how we finance makes a lot more sense and makes us competitive through all market cycles," May said. But "at that time, the market was super-hot and frankly, nobody really wanted to talk to us all that much about our programs because there was so much liquidity." (Fannie shifted to portfolio financing around the same time because of competition from the conduits.) Since then the securitization markets have seized.
Last year Freddie began buying multifamily loans with the intention of packaging them into a large bond offering. May said the GSE expects to have a pool of sufficient size to issue the bonds next quarter.
Notably, Freddie wants to use a structure that was typical of Wall Street in its heyday but is unusual for a GSE.
Rather than guaranteeing all the bonds, Freddie would create senior and subordinated securities, and try to sell off the latter, riskier pieces. It would either buy the senior class or guarantee it and sell those bonds to other investors.
May said the success of such an offering would depend on investors' faith in the company's track record of low delinquencies. But "we believe we've got real interest. ... There's real capital available."
Freddie will play it by ear, May said.
"If and when the first one goes and it's successful, we'll aggressively pursue the next deal."
If the market rejects the offering, Freddie will turn to the simpler, more common structure of pass-through securities with its guarantee.
Ultimately, May said, the GSE hopes to have three options for multifamily loans - held in its portfolio and financed with Freddie's debt; the Wall Street-style securitizations; and passthroughs.
"There's times when debt will be the [cheapest] and there's times when securitization will be the [cheapest] for the borrower," he said. "I want to see a material amount of my mortgage purchases ... financed with some form of securitization. ... The more you do, the more people understand, the less fear there is, the more liquidity that's generated, and the better the pricing. It's a virtuous cycle."
As of Sept. 30, Fannie owned or guaranteed close to $170 billion of multifamily mortgages. Freddie owned $68 billion and guaranteed about $15 billion of such loans.
William Hyman, the senior managing director for agency lending products in the commercial real estate group at Centerline Capital Group, said the New York company is "seeing significant appetite for Fannie Mae MBS paper from investors."
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