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CRE Finance World, Winter 2013

The Freddie Mac K Program: Quality, Stability, Liquidity At present, yields and spreads on these bonds range from 1.0% Figure 3 or swaps plus 20 bps on the 5 year AAA Freddie Mac guaranteed General Structure certificates and 2.1% or swaps plus 42 bps on the 10 year AAA guaranteed certificates to swaps plus 185 bps on the unguaranteed B class and swaps plus 325 on the unguaranteed class C certificates. Figure 2 Sequential Paydown Structure Source: RBS, Freddie Mac 1 Guaranteed Bonds may include senior bonds and/or interest only bonds. Source: RBS, Freddie Mac Attractive Features of K-Certificates for Investors: The Freddie Mac Guarantee How K-Deals Are Created To securitize multifamily loans through the K certificate program, The explosive growth in Freddie Mac K certificate issuance is largely attributable to the variety of attractive features these Freddie Mac first sells the loans to a third-party depositor who in turn, deposits the loans into a third-party trust. (See Figure 3). bonds offer investors. The credit quality of the guaranteed AAA certificates is extremely high; the private label securities that The trust then issues private label securities backed by the loans. Freddie Mac then purchases all the senior, guaranteed bonds back the K-certificates are typically rated AAA without taking into account the Freddie Mac Guarantee. The additional Freddie Mac (“Guaranteed Bonds”) issued by the third-party trust and securitizes the senior bonds via a Freddie Mac trust. The resulting Freddie Mac guarantee provides an extra layer of support and means that they will qualify for preferential capital treatment of a 10% risk weight guaranteed structured pass-through certificates (“K-Certificates”) are publicly offered via placement agents, typically Wall Street under the Federal Reserve just as any other Freddie Mac MBS. financial firms, of which there are currently 13. Freddie Mac guarantees the timely payment of interest and the ultimate payment of principal when the loan matures on the The unguaranteed mezzanine and subordinate bonds are issued by the third-party trust and are privately offered to investors by guaranteed A1 and A2 certificates. It guarantees the timely payment of interest on the guaranteed IO. Payment of the prepayment placement agents. premium by the borrower to the investor is not guaranteed. For a comparison of the Freddie Mac guarantee of the K-certificates with those of Freddie Mac MBS and FNMA DUS MBS see Figure 4 below. The other classes in a K-deal are typically not guaranteed by Freddie Mac. A publication of Winter issue 2013 sponsored by CRE Finance World Winter 2013 29


CRE Finance World, Winter 2013
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