Posts Tagged 'Freddie Multifamily'

Freddie Mezzanine launches

Freddie finally launched their mezzanine program.  This program was announced earlier this year, but was delayed by the needed approval of the government.     This program initially sounded like a possible solution to the mountain of over-leveraged properties out there, but after carefull review it will only help a select few of those loans.

The base program is well designed, it allows mezzanine loans up to 90% LTV behind a Freddie first of up to 75%.  DSCR on the combined can be as low as 1.0x and both the first and mez are non recourse.  Given the low first mortgage rates charged by Freddie even a high mez rate will blend out to be pretty good.  Also, the program is designed to serve the whole multifamily community, not just existing Freddie loans.   They will refinance any existing loan as long as it fits the program parameters.

However, the program has a few limitations that make this a niche product.   First the program is open only to existing Freddie Mac customers or major owner/operators.     This limits the program greatly as the majority of borrowers don’t fit this criteria.  There may be some wiggle room on this, but I suspect the borrower with only 2 or 3 properties will not fit this mold.  

The real limiting factor on the program are the mez. lenders themselves.   There is a select group of 4 mez lenders who are really driving this bus.  They will determine how aggressive they want to be on an individual deal as well as the structure and cost of the deal.  This makes perfect sense from a risk perspective, but I think it will limit the loans that fit the program.  These lenders are all multifamily owners who typically focus on major market and class A properties.  They will have a strong bias for these type of properties.   One lender I spoke with commented that they will b looking for properties they would be willing to own and that fit into their portfolio.

I suspect those deals in coastal supply constrained markets will get aggressively serviced by these lenders, but properties in less attractive or harder to understand markets will be left out of the program.   That’s unfortunate because the real problem we have is not in the major market class A properties. 

This program will help Freddie and the Mez lenders make some good loans and profits and it will help some borrowers.  But for the majority of over-leveraged multifamily properties and borrowers this will be of no help. 

However, if you do have a property that is in a major market this program might be your solution to a slightly over-leveraged property.  If you have a loan maturing in the next year or that is open to prepay today you should discuss this program with a Freddie lender.  It’s the only program available that can get you 90% financing with a low rate agency first mortgage.

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June Rate Survey

Continue reading ‘June Rate Survey’

Thinking about the future of multi-housing

I spent much of last week at the National Multi-Housing council’s Strategies Update and Finance Conference and Board Meeting.  This was a group of about 300 industry professionals, owners, sale brokers, mortgage bankers and lenders who listened to a number of panel discussions about the industry and its future.  There was a lot of discussion about a number of topics, too much for me to recount.    For me the highlights were a discussion on capital markets (lending) and the last panel discussing the future of Freddie/Fannie and housing policy.

The discussion on capital markets did not reveal any new information, but confirmed many of my opinions.  1) Lending on multifamily is still strong, supported by Freddie/Fannie/Hud, but with some smaller banks and life companies also participating. 2) The lending pie is much smaller than in the past with many loans or borrowers not fitting today’s underwriting criteria. 3) More lenders are entering the market, but on their own terms.  Life companies are aggressive on lower leveraged class A/B deals in top markets, conduits will do multifamily, but at much higher rates than Freddie/Fannie and only on larger deals. 4) Everyone is looking to buy deals, but very few are finding deals that work.  5) There is no consensus on the future rest rates, but everyone recognizes today’s rates are low and if they had deals to finance they would.

The most interesting part of the discussion was how everyone is keenly interested in how CMBS will look when the market comes back.  There have been some CMBS deals and the pro’s expect there to be many more this year.  There is strong appetite for the securities so as long as the lenders can find product they can do loans.   But the interesting thing was how all the other lenders in the room were keenly interested in whatever the CMBS professionals said and were actively asking questions.  Clearly they see the potential/possibility for CMBS to drive the market again.   Everyone is hoping this time it will be more controlled and with wiser underwriting.

The other hot topic at this session and running through other sessions was how to deal with many of the problem loans/properties.   Everyone recognizes that over the next few years more and more loans will mature with properties that can’t be refinanced.   There will need to be new capital for these properties either through new equity or lender write-downs.   It sounds like there is equity for recapitalizing the properties in top markets, but lenders will probably have to take the hit in many weak markets.

As for the Freddie/Fannie discussion it was a knock down brawl between the speakers who represented the right and left spectrum of the debate.    There was consensus around a few items 1) nothing can be done about the agency lenders now, because we need them. 2) The solution is not just looking at Freddie/Fannie, but the total way our housing system works.  3) Multifamily is just an afterthought the issues will be made on single family and multi will just go along for the ride.  Beyond that there was significant disagreement about whether Freddie and Fannie helped create the problems and if they should be part of the solution.  From an audience perspective I think it was unanimous that if this discussion represents the two sides in Washington that it will be quite a while till anything changes.   Given Freddie and Fannie are supporting the apartment lending business today waiting a few years to make a change may not be too bad.

May Apartment Rate Survey

Below are the results of this month’s rate survey.   Despite the drop in long term treasuries multifamily interest rates have only dropped slightly.   Banks have maintained their rates in the 6% ± range and Agency lenders have modulated their spreads as treasury rates move due to a number of factors including an increase in debt risk premiums.   This makes us feel more comfortable that rates will stay low for the near future.  We expect that as long as the 10 year treasury keeps under 4% multifamily rates will be stable.

 

May MFLoan Update Newsletter

See the recently published May issue of MFLoan Update; a monthly publication on Multifamily Finance.

Expanding the “Bad Boy” carve outs

One reason many borrowers choose to borrower from non-bank lenders is the ability to get non-recourse financing.  On a multifamily (or commercial) investment you don’t want to put your full financial condition on the line if things don’t work out.    However, over the years the line on what it means to have a non-recourse loan has been moving.  While old documents (From the late 1980’s/early 1990’s) were fully non recourse, most modern loan documents have been non-recourse with exculpation for certain items.    This change came after S&L crisis when many lenders discovered non-recourse provided strange incentives to a borrower or borrowing principal.     The most notable items are fraud, misrepresentation, waste and certain environmental items. 

Yesterday Freddie announced a slight expanding of the line in non recourse financing by adding creditor’s rights to the equation.  Creditors rights has been a required title endorsement to protect the lender in the case of fraudulent conveyance of a property including misappropriation of funds from a new loan by one partner from another.     Getting this coverage was no big deal a few years ago, but more recently title companies have asked for significant documentation relating to this coverage, have substantially increased the rates for this coverage and in some cases have refused to provide the coverage at all. 

In order to assist borrowers who are having trouble with this title insurance Freddie is allowing borrowers to choose between obtaining the coverage or adding a new clause to the “bad boy” carve outs .    This would ass recourse “for loss or damage incurred by the lender as a result of the voidance of the mortgage due to fraudulent conveyance or bankruptcy” .  In itself this is not a big deal and will help some borrowers.   Most borrowers I know would rather assume this minor liability than pay the cost of this insurance.   This change will help Freddie borrowers, but we will have to see if other lenders will follow their lead.     

The last round of non recourse tightening came in response to the last commercial real estate melt down.    It makes me wonder if this is just a single action to address one item or the beginning of a bigger trend.

Freddie Loosens the Reigns

Freddie Mac multifamily issued a letter to their customers yesterday announcing changes in their maximum LTV/Minimum DSC for various term loans.  For the last year or so Freddie has been limiting loans under 10 year terms to lower LTV/ higher DSC parameters.   Freddie is keeping the same strategy except moving from 3 categories (5 year, 7 year and 10 or more years) to 2 categories (under 7 years or 7 or more years).  

As they have done for a while 5 year loans are limited to 70% LTV/1.30 DCR for a no cash out refi or acquisition loans and 65% LTV/ 1.35 DSC for cash out refis.   For loan terms of 7 years or higher Freddie Mac will do an 80% LTV/ 1.25 DSC for a no cash out or and acquisition loans and 75% LTV/ 1.30 DSC for for cash out refis.   Basically they moved the 7 year loan into the same category adds the 10 year loan. 

Fannie has handled this differently with artificial underwriting rates for 5 and 7 year loans instead of strict LTV/DSC hurdles.  This has made Fannie a better lender for 5 and 7 year loans.  However, with this change Freddie becomes the more aggressive lender on 7 year loans.  With the yield curve at a unbelieveble angle borrowers should consider a 7 year loan.   Current rates on a 7 year Freddie CME loan are about 5.25%.    For many borrower this is the best option in today’s market.


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