Freddie Mac Says Lever It Up

According to Instutional Investor, Freddie Mac (FRE) is bringing its high leverage crack pipes back to the multi-family market. But the move is less a return to the go-go days than a sign of how weak the commercial real estate market is, and it appears to be driven more by the fact that Freddie is running out of underwriting capacity rather than any real confidence in apartment investments.

Under the plan, Freddie intends to bribe join forces with a handful of mezzanine lenders to “expand its multifamily mortgage origination program”. However, the new program is definitely more about saving Freddie’s existing program than expanding it. Freddie Mac has already been offering relatively high LTV loans for some time, but the agency lender relies on liquidity in the CMBS market to refresh its underwriting capacity. With the CMBS market only now starting to show signs of life, Freddie is holding on to much more of this paper than it originally intended.

And this is where Freddie Mac wants its mezzanine lender “partners” to do some heavy lifting. In return for buying the lowest tranche of equity in Freddie Mac CMBS securitizations – the hardest bit to sell – Freddie will reward them with a well-priced senior loan at no more than 85% loan to value.

Publicly, the program is geared toward helping over-leveraged borrowers deal with looming mortgage maturities. “There is a market need for this,” said Patricia Boerger, a spokeswoman for the agency. “It is part of our mission to keep the market liquid and capital flowing.”

Privately however, Freddie now seems unable to fulfill that mission without the aid of private sector lenders, which ironically include still crippled Mortgage REITs like Winthrop Realty Trust (FUR). Even with the “new”, safer underwriting standards of today’s market, Freddie Mac intends to hold only the most senior paper, up to approximately 65% loan to value.

The more junior tranches, including the “B Piece” kryptonite, will be sloughed off to the more servile Mortgage REITs, up to a combined 85% loan to value. I’m not a borrower in trouble, but if I were a borrower in trouble, I’m pretty certain that 85% of today’s value isn’t going to solve my 2006 problems. This “expansion” program is definitely more focused on saving Freddie Mac’s balance sheet, not those of its customers, and it’s another indication of what will most likely be a very prolonged recovery.

Disclosure: No positions

Comments

[Mark Bern]

If Freddie can get investors to buy this garbage, I suspect that there is some political pressure being applied with some sort of carrot being dangled as well (like regulatory legislation, or the lack of it). Otherwise, who in their right minds would risk their capital in such poor investments?

Mar 11 09:29 AM

[REIT Wrecks]

I'm not sure about the political end of things here, but it certainly seems plausible given the very obvious and transparent financial arm twisting going on. To label it an "expansion" program is ludicrous. They need to unload their positions, and co-opting the private sector with this quid pro quo appears to be the only way they can do it.

Mar 11 02:58 PM