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CRE Finance World, Winter 2013

The Freddie Mac K Program: Quality, Stability, Liquidity Brian P. Lancaster Joseph Ruszkowski, CFA Richard Hill Co-Head of Structured CMBS Strategy CMBS Strategy Transactions, Analytics, RBS RBS Risk and Strategy RBS F reddie Mac K certificates combine some of the best stripped off the senior bonds and generally structured as a WACstructure. In addition they are also guaranteed by Freddie Mac.These guaranteed, AAA-rated bonds consist of both shorter averagelife amortizing classes (approximately 5 year and 10 years) as wellas an interest only class. The interest only certificates (IO) arefeatures of a private label CMBS conduit program withthose of agency multifamily deals. Regular issuance,consistent structure, strong prepayment protection,large deal size, diversification, good liquidity and readily available loan level information, are combined with the high credit IO or Variable IO. They are generally priced at 100CPY which quality typical of GSE multifamily programs. In addition, a choice assume the underlying loans prepay in full after the prepayment of both amortizing and interest only classes with AAA ratings and protected periods. a Freddie Mac guarantee, as well as higher yielding classes with lower ratings and no guarantee, have led to the market’s strong The non-guaranteed subordinate classes receive principal payments reception of this product and explosive issuance. Indeed in 2012, we in sequential order after the senior bonds and can also have IO expect K-certificate issuance to equal that of the entire non-agency classes. In addition to IOs, it is common to see a Principal Only (PO) CMBS conduit market. certificate at the bottom of the capital structure. The mezzanine, subordinate bonds in these K deals have lower ratings given their Historical Context of Freddie Mac Multifamily Lending and position further down the capital structure and are not guaranteed the K Program by Freddie Mac. The Multifamily Division of Freddie Mac finances the purchase and refinancing of multifamily properties (5 or more units), the rehabilitation Freddie Mac recently completed its first fully wrapped K-deal, K-P01. of older buildings and the construction of new apartments. Freddie The $450 million in K-certificates are guaranteed by Freddie Mac Mac purchases loans on mid-rise buildings, high-rise buildings, and backed by 28 seasoned multifamily mortgages. Freddie Mac walk-ups, garden-style apartment complexes and co-op buildings. also served as the special servicer for the underlying trust for Freddie Mac has been lending to the multifamily sector both on the first time. The deal was also unique in that it was backed by and off balance sheet since 1993. In 2008, Freddie Mac launched performing, seasoned loans from Freddie Mac’s retained portfolio the Freddie Mac K program to facilitate capital markets execution. rather than newly originated loans. Freddie Mac’s K program is similar to that of a CMBS conduit. Freddie Freddie Mac K-certificates consist of loans with various terms (5 years, Mac aggregates and securitizes multifamily loans, which it then 7 years and 10 years), fixed rate, floating rate, new collateral, seasoned regularly issues as Freddie Mac K deals. Freddie Mac buys the collateral, single borrower and multiple borrower conduit deals. loans from a network of approved Program Plus® Seller/Servicers and Targeted Affordable Housing Correspondents1. Freddie Mac Figure 1 credit reviews and underwrites these loans to the same standard K-Series Types as those on its own balance sheet. Freddie Mac K-Deal Structure Freddie Mac K-deals are typically structured as sequential pay (see Figure 1). As with a CMBS conduit deal, losses are applied first to the lowest rated tranches and then to the higher rated ones. On the other hand, principal is paid down first to the highest rated bonds and then to those lower down in the capital stack. These lower rated, non-guaranteed classes consist of generally longer average life2 amortizing and interest only classes. The highest rated bonds on these deals, the A1 and A2 certificates, pay fixed rate coupons and are typically rated AAA by one or two Source: Freddie Mac rating agencies by virtue of their senior position in the deal’s capital CRE Finance World Winter 2013 28


CRE Finance World, Winter 2013
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