Demand Fuels Record K-Deals, but Can Growth Last?
Freddie Mac is on track to top its record for multifamily securitization this year, but what will happen next year depends on both the market and its regulator’s new leader.
“It feels like the market is pretty strong right now, and it feels like the conditions could continue,” says Mitch Resnick, Freddie’s VP of multifamily loan pricing and securitization.
The government-sponsored enterprise estimates issuance will hit a record high of $28 billion this year, up from over $21 billion last year. The increase occurred even though the Federal Housing Finance Agency capped Freddie’s new multifamily loan purchases at roughly $26 billion for this year.
Freddie purchased almost $19 billion in total MF loans through the third quarter of this year, and it settled almost $21 billion in so-called K deal securities through 3Q. The latter is up from almost $14 billion in 3Q12.
The GSE has been able to grow its multifamily securitization volumes this year despite the purchase cap by reducing the lag between the time it purchases loans and when it securitizes them. It reduces the so-called warehouse risk it has in holding the loans before securitization in this way, Resnick says.
“We wanted to bring our warehouse numbers down to reduce the risk on our balance sheet,” he says.
The fact that Freddie was able to securitize more than it purchased this year for the first time ever shows how much Freddie’s efficiency has improved in this area, he says.
Freddie only securitizes new multifamily origination, but it included some of its previous recent purchases from last year in securitization settled this year. The lag between purchase and securitization is generally about four to six months. It securitizes almost all of its purchases.
There was strong demand for everything from the guaranteed, senior tranches of its deals to first-loss positions in them that lack guarantees, Resnick says.
The demand could persist and even grow next year as K-deals will be included in Barclays’ aggregate U.S. and global bond indices for June 2014, but with the constraints of regulatory caps, volume could fall.
There will be pressure on the FHFA’s new head to back off on multifamily cutbacks due to recent evidence of need for that financing, says Jim Carr, senior fellow, Center for American Progress and a former Fannie Mae executive.
Freddie and Fannie Mae’s guaranteed debt financed the bulk of multifamily originations between 2010 and 2012, according to a recent Harvard Joint Center for Housing Studies report. The percentage of renters is growing and rent accounts for a growing percentage of their income, the study finds.
Subsidized AH slated for financing through the GSEs’ legislatively mandated but yet-to-be funded National Housing Trust Fund and unsubsidized affordable rental programs Fannie and Freddie have are two key vehicles to address this need, according to Carr. He backs these in a report he authored for the Opportunity Agenda, National Fair Housing Alliance and National Association of Real Estate Brokers on priority FHFA goals.
“Rental housing is critical in serving affordability goals,” says Resnick. “There’s a whole large population out there that can’t afford to buy and renting is the answer. We’re making sure we’re out there to provide financing for housing.”
More than 90% of the apartment units Freddie finances are affordable to households earning the area median income, according to a recent report by the GSE.