Freddie to Fund, Securitize Small Apt. Loans

Freddie Mac, which increasingly has relied on the securitization market to fund loans its lender partners originate, has launched a program to fund small-balance multifamily mortgages in much the same way.

So far, the housing-finance agency has approved Greystone Servicing Corp., Hunt Mortgage Group and Arbor Commercial Mortgage to write loans for the program. Its aim is to have its first $100 million securitization in the market by early next year. The agency also plans to add other lenders to the program in the coming months, with the hope of having five to seven lenders in the program by the end of the year. Next year, it plans to open the program up to its Program Plus lenders - those that regularly have been writing small-balance loans.

The overall structure of its small-balance securitizations will be similar to the agency’s existing K-series transactions, in that bonds will be structured according to risk and would include a first-loss, or B-piece. It’s not clear whether the most senior bonds will also be rated.

Each transaction will be secured by loans originated, and sold to Freddie, by a single lender. And that lender would be required to retain the B-piece, which would likely amount to more than 7.5 percent of the entire transaction.

As the program evolves, transactions backed by loans originated by multiple lenders might be floated. The agency is aiming to fund loans with balances of between $1 million and $5 million

against properties that have a minimum of five units each. Loans could be sized up to 80 percent of a collateral property’s value and would require debt-service coverage ratios of at least 1.25x, or 1.2x in the country’s strongest markets. It will offer fixed-rate balloon loans as well as hybrid adjustable-rate loans, which could have terms of up to 30 years and fixed rates for their initial five, seven or 10 years. After that, the loans’ coupons are reset every six months.

While Freddie’s small-balance loans, like its larger-balance offerings, are nonrecourse, save for specific carve-outs, the agency will require originators to collect borrower FICO scores. So a borrower’s credit history, in addition to a property’s performance, will play a role in a loan’s underwriting. That’s because most smallcap properties are held by individuals as opposed to bankruptcy-remote entities, like larger properties are. “We believe our initiative will increase liquidity in the small multifamily loan space and provide stability and facilitate private capital investments in this somewhat fragmented and underserved market segment,” said David Brickman, executive vice president of Freddie’s multifamily business.

The agency estimates that roughly half of the country’s apartment units are in what could be considered small-capitalization properties. And about one-third of the multifamily mortgage market is comprised of small-balance loans.

The small-cap apartment market is highly fragmented and generally has been served by local and regional banks, which often won’t write long-term loans. In addition, because of regulatory pressures, those bank lenders often can move out of certain markets, leaving property owners with few borrowing options.

“The opportunity is ripe” for Freddie to get into the small-balance market in a bigger way, according to Nashwa Moussa, director of conventional structured transactions, who oversees the agency’s small-balance lending initiative. “We’re bringing securitization to the space,” she explained. While other lenders have securitized small-balance loans, none has developed a systematic program to regularly bring deals to market.