Page 36

CRE Finance World, Winter 2013

The Freddie Mac K Program: Quality, Stability, Liquidity Figure 9 Freddie Mac K-Certificates Offer Excellent Multifamily Fundamentals Prepayment Protection Nearly all multifamily loans in the Freddie Mac K certificate program are call protected utilizing a combination of lockout and either defeasance or yield maintenance. Most loans backing Freddie Mac K certificates carry defeasance prepayment protection which usually occurs after a 24 month lockout period. Lockout and defeasance are the strongest forms of call protection. Prepayment lockouts simply prohibit outright the borrower from prepaying their loan. A loan with prepayment protection in the form of defeasance permits a borrower to release the related mortgage property from the lien of the mortgage by delivering substitute Source: RBS, PPR Global collateral. The substitute collateral is typically a Freddie Mac security (although it could also be a Treasury — albeit more expensive Figure 10 for the borrower) designed to eliminate cash flow volatility caused Homeownership Rate by prepayments. Because of the exact replacement of cash flows by the borrower, loans that have been defeased continue to generate the same anticipated sequence of payments to the investor. Defeasance, when done to a sufficient number of loans in a deal, can also result in ratings upgrades, as the replacement collateral is typically of better credit quality than the commercial real estate loan being replaced. Yield maintenance prepayment protection is designed to compensate the lender for early principal retirement. It is calculated as the present value of future commercial loan cash flows discounted by Treasury yields with the average life equal to the remaining loan term. Source: RBS, U.S. Census Bureau When Freddie K deals are being priced the market assumption is 0% CPR. Prepayment protection is in place except for the last three months of the loan. While economic prepayment protection is generally excellent, default induced prepayments could occur. This would arise from the payment to investors of any principal recovered as the result of the liquidation of a loan. CRE Finance World Winter 2013 34


CRE Finance World, Winter 2013
To see the actual publication please follow the link above