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CRE Finance World, Winter 2013

The Freddie Mac K Program: Quality, Stability, Liquidity Figure 6 below shows the percent of on balance sheet defaulted As noted above, the track record of Freddie Mac K collateral to loans by funding year. The Multifamily Loan Performance Database date has been even better than the on-balance sheet performance (MLPD) includes multifamily loans funded beginning in 1994, when with only one delinquent loan in the program. Freddie Mac actively reentered the multifamily market using a revised underwriting process. Through 4Q11, the 2000 vintage Figure 8 has the highest cumulative default rate at 1.5% followed by 2006 Freddie Mac Multifamily Net Charge-offs (Rolling Through 2Q12) at 1.4%. In total, 0.55% of the reported population has defaulted with a 21% loss severity, resulting in a 0.11% loss. This compares extremely favorably with legacy non agency conduit CMBS. As of October 2012, the total default rate of legacy CMBS multifamily loans was ten times greater at 6.5% with almost double the severity of 40% and a cumulative loss level over twenty times higher at 2.5%! Figure 6 Percent Defaulted by Funding Year Source: RBS, Freddie Mac The inherent quality of the more senior bond certificates and the underlying collateral is also enhanced through diversification. Freddie Mac K deals, on average, are backed by the pooled risk of approximately 68 different multifamily loans with some deals having as many as 91 loans. U.S. Multifamily Fundamentals Source: RBS, Freddie Mac Further supporting the credit quality of the program, the fundamentals of the multifamily housing market in the U.S. are strong. Indeed, Freddie Mac’s serious delinquency rate peaked at 44 bps in Octo- the strongest of any U.S. commercial real estate property types at ber 2010 and has subsequently declined to 27bps as of 3Q2012 present. The multifamily housing sector is expected to perform well (see Figure 7 below). as limited supply and strong demand drive vacancies lower and rents higher. As shown in Figure 9, the vacancy rate is around 6%, Figure 7 the lowest it has been since 2008. Freddie Mac Serious Delinquency Rates Multifamily The lack of readily available financing for marginal buyers, job insecurity, continued household formation, concerns that property values could fall or that home ownership is not a good investment have all contributed to increased demand for rental housing. Indeed, the homeownership rate in the U.S. has plummeted to below 66% (see Figure 10), a level last seen in 1996. Property Portfolio Research (PPR), a widely used and respected commercial real estate firm, forecasts multifamily vacancies to fall below 6% by 2016 from a peak of 8.3% in the fourth quarter of 2009 even as net completions pick up. Source: Mortgage Bankers Association CRE Finance World Winter 2013 32


CRE Finance World, Winter 2013
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