Mortgage-related securities issuers have to decide whether to maintain their ability to come to market regularly in tough times or whether it might be wiser to wait for calmer waters.
Some issuers or particular types of securities perceived to have relative strengths at a time when issuance is relatively scarce might find opportunity in maintaining regular deal flow but even they still may need to be prudent about timing.
New issues of Freddie Mac’s “K” multifamily certificates reportedly have done relatively well despite challenges in a volatile market, for example.
A K deal backed by seven-year loans was said to be in the works at press time but had not come to market.
Fannie Mae also has a multifamily program that does not issue as regularly, noted Lisa Pendergast, a managing director and commercial mortgage-backed securities strategist at Jefferies.
While multifamily has high delinquencies relative to other property types, “Both Fannie and Freddie have posted tremendously strong loan performance numbers compared to what you have seen in say the multifamily sector for private-label CMBS,” Pendergast told this publication in an interview last week.
Pendergast said she could not discuss the latest seven-year deal due to her firm’s involvement with it.
“But I think it’s fair to say that in the secondary market, and in previous transactions that have priced already, their spreads have continued to hold in,” she said.
The deals are, among other things, backed by loans with prepayment restrictions aimed to reduce their interest rate sensitivity. But that appears to not add as much to their relative appeal as their relatively strong collateral performance and the Freddie Mac guarantee on the upper portion on the structure, Pendergast said.
The bottom portions of the structures in K transactions, which are not guaranteed, have “widened out, but certainly far less so than what you have seen in other transactions, in private-label CMBS, for example,” she noted.
K deals also had reportedly done relatively well through press time when it comes to at least one other challenge in the market as well.
A recent deal known as K-14 faced a situation earlier this summer as it was coming to market where a preliminary rating it received from Standard & Poor’s was pulled for review by the rating agency due to a general calculation issue S&P uncovered in a portion of its multifamily securities rating process.
But Victor Pa, vice president, portfolio management and securitization, Freddie Mac, and a Freddie spokeswoman indicated it was able to proceed with using another company’s rating alone and settle on schedule as planned.
S&P subsequently resumed assigning ratings to new conduit/fusion transactions originally affected by the review, including the Freddie K deal, according to an S&P spokeswoman.
Freddie did indicate it would not be issuing a Reference Note in August, but it has issued similar statements about such decisions before.
The upshot is that investors should remember that issuance could be affected when the market or anything potentially affecting it goes haywire, and decisions on this could differ depending on the type of concern in the market, what this does to the investment in question, and who the issuer is.
