Securitization is the Best Remedy for Multifamily Financing

By Sari R. Updated on 11/20/2012

The Freddie Mac Multifamily securitization program gives borrowers, taxpayers and investors who finance with them a risk transfer away from the company as well as profit generation.  Borrowers who sell Freddie Mac a loan for securitization instead of selling it to hold in their portfolio receive reduced cost financing.  This helps maintain the rental financing market as being liquid and keeping rentals affordable.  Most Multifamily mortgages that Freddie Mac purchases are for rentals that are affordable to individuals who earn less than the area’s median income.

In the past two years, rental lease volumes have increased each month and are expected to continue to do so over the next few years.  Most of Freddie Mac’s multifamily business derives from the Capital Markets Execution product.  This is when Freddie Mac buys mortgages secured through apartment housing by a qualified lender network, and then sells the loans as commercial mortgage-backed securities (Freddie K-Deals).

Every K-Deal is $1.2 billion in guaranteed bonds and around $200 million in unguaranteed subordinate bonds.  This makes up the majority of the loan risk.  The loss risk is then transferred to the bonds guaranteed.  If a loan were to have losses, the subordinated bonds that had already been bought by outside investors would be able to absorb it.  This would lessen the risk to Freddie Mac and the American taxpayer alike.

Freddie Mac officials believe that securitization is the best outlet for matching the financing needs of borrowers with the return requirements of capital markets investors.  Freddie Mac utilizes a prior approval underwriting procedure to minimize individual loan risk.  Freddie Mac underwriters make their decisions based on several aspects including cash equity, historical property operations and sponsor strength.  Freddie Mac has posted $40 billion of closed K-Deals since its inception in 2008.