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CRE Finance World, Winter 2014

A publication of Winter issue 2014 sponsored by CRE Finance World Winter 2014 23 Brian Lancaster: Barclays recently announced that agency CMBS will be part of the CMBS index and the Lehman Aggregate for the first time, beginning in June 2014. How do you think that will impact your market and the broader CMBS market? Josh Seiff: The short answer is “positively.” We are very excited about the updates to the index. It is the result of a lot of work over the last couple of years. So beginning June 2014, agency CMBS are going to make up about 18% of the U.S. CMBS Aggregate. ACMBS will also make up a small portion of the US and Global indices as well. I think it is definitely positive for agency CMBS. It will broaden the demand base. We will start to get attention from indexers who really haven’t been big participants, and I hope it will continue to decrease spread volatility in a sector that has already been one of the less volatile in CMBS. For the CMBS sector as a whole, I think the changes are positive from a relative value perspective for portfolio managers. The change will give PM’s a very liquid, lower beta product to work with. It also allows them to express their opinion on Agency credits within the index, rather than making out of index plays. Brian Lancaster: We’ve talked about credit quality on the nonagency CMBS side, and changes there. There has been some discussion of the Freddie K program as they are trying to maintain competition. What would you say about your underwriting standard, are you seeing those kinds of issues in the agency side? Josh Seiff: I really don’t think we’re seeing those issues on our end. Management and regulators at both agencies are very diligent on the underwriting front. You can see that looking at the historical trends for delinquencies and losses in the multifamily space. There is always a little bit of pressure in the lending community to push the envelope. But particularly for Fannie Mae’s Delegated Underwriting and Servicing® (DUS®) program, lenders share risk for the life of the loan, so pushing the credit envelope is somewhat self-limited by that credit exposure. Brian Lancaster: In terms of the differences between the Freddie K program, do you see anything in 2014 that might favor the execution of one versus the other? Josh Seiff: Just by way of background, the Freddie K program is a little bit more of a pure conduit execution, with Freddie Mac guaranteeing the top bonds of their structure. Fannie Mae delegates underwriting to their DUS lenders and shares risk with the lenders for the life of the loans. Each of those DUS loans comes out to the market and is auctioned off as an individual MBS. So while we (Fannie Mae) are the largest investor in DUS securities, we are by no means the only investor and we sell much more than we purchase, each year. What does this mean for 2014? We’re likely to have somewhat less production, due to regulation and competition, and more demand, due to inclusion in the index. That makes Fannie Mae’s DUS program very interesting for investors. Investors can trade individual pools, they can trade megas, or they can purchase our GeMS™ structured products, versus their index options. I think it is going to create much more liquidity and transparency for that part of the market. Brian Lancaster: In the single-family residential sector we’ve seen new public/private risk sharing programs, such as the Freddie Mac STACRs issue and Fannie Mae’s Connecticut Avenue Securities (CAS) deal. In many ways in the multifamily programs at both GSEs, you have already been engaged in public private sector risk sharing Fannie Mae with DUS and Freddie Mac with the K program. Do you contemplate any new innovations or types of securities on the multifamily side? Josh Seiff: The CAS and STACRs programs that both agencies put out, on the single-family side, the reception has been really great in the capital markets. But I think that innovation was driven more by regulatory mandate than investor demand. It is difficult to envision a multifamily securitization using the CAS/STACR model — multifamily doesn’t really lend itself to that type of execution. That said, there are lots of other structural possibilities. Fannie Mae hasn’t changed our risk sharing model, but we have been innovating on the structural front pretty continuously for the last several years in order to meet investor demand. We routinely structure floaters off fixed-rate production, we structure support bonds to create more stable average life profiles on other cash flows. I think there is some room for both agencies to have a little bit of structural flexibility without necessarily changing the risk sharing paradigm because, to your point, it ain’t broke. The credit performance is excellent, and there is good participation from private capital in both programs. Brian Lancaster: Thanks Josh. I’m going to close out our discussion as we are over time. Any last minute thoughts on 2014? Richard Walsh: It will be a good year. Randy Wolpert: It is certainly going to be an interesting year. Brian Lancaster: On behalf of the Commercial Real Estate Finance Council and CRE Finance World, I want to thank you all for taking the time to participate in today’s discussion. Good luck in the coming year. CRE Finance World Roundtable Discussion: 2014 Outlook


CRE Finance World, Winter 2014
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