GSE Reform: Are the Multifamily Risk Sharing Programs
the Way to Go in the Single Family Market?
Moderator: Brian Lancaster, Adjunct Professor of Finance, NYU Stern School
Steven Boyd, Portfolio Manager, Blue Mountain Capital Management LLC
Mitchell Resnick, Vice President, Loan Pricing and Securitization, Freddie Mac
Michael Shaw, former Chief Credit Risk Officer, Fannie Mae
Mark Willis, Resident Research Fellow, NYU Furman Center for Real Estate and Urban Policy
Fannie Mae Multifamily Serious Delinquency Rates
Multifamily 60+ Day SDQ rates (2006 - Q1 2013)
14%
12%
10%
8%
6%
4%
2%
0%
Fannie Mae
Fannie Mae DUS
Freddie Mac
Life Insurers
CMBS
All FDIC Insured Institutions
Commercial Banks (CMB) $10B+ in assets
All Other FDIC Institutions (Less CMB with 10B+)
2006
0.08%
0.09%
0.05%
0.02%
0.70%
0.53%
0.81%
0.40%
2007
0.08%
0.08%
0.02%
0.01%
1.04%
0.76%
0.70%
0.79%
2008
0.30%
0.24%
0.01%
0.07%
2.40%
1.77%
1.43%
2.07%
2009
0.63%
0.39%
0.20%
0.19%
8.06%
4.43%
5.33%
3.51%
2010
0.71%
0.56%
0.26%
0.19%
13.25%
3.74%
4.09%
3.39%
2011
0.59%
0.50%
0.22%
0.13%
11.66%
2.53%
2.46%
2.59%
2012
0.24%
0.18%
0.19%
0.06%
10.03%
1.56%
1.46%
1.68%
Fannie Mae’s Multifamily DUS SDQ rates remain below MF CMBS and FDIC insured institutions
Source: Fannie Mae, Freddie Mac, CMBS-MF (Trepp), Life Insurers (ACLI) and Banks (FDIC).
Note: FDIC Insured Institutions data reflect 90+ day delinquency rates. Delinquency calculation may vary by institution.
Q1 2013
0.39%
0.34%
0.16%
0.01%
9.08%
1.35%
1.24%
1.48%
Freddie Mac Multifamily Business Results
Basis Points
Delinquency Rates
1,600
1,400
1,200
1,000
800
600
400
200
0
Freddie Mac (60+ Day)
Fannie Mae (60+ Day)
MF CMBS Market (60+ Day)
ACLI (60+ Day)
FDIC Insured Institutions (90+ Day)
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
1Q13
1Q12
3Q12
1Q13
Basis Points
Porfolio Delinquency Rates (GSE)
90
80
70
60
50
40
30
20
10
0
Freddie Mac (60+ Day)
Fannie Mae (60+ Day)
1Q08
3
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
Sources: FDIC Insured Institutions: FDIC Quarterly Banking Profile - Loan Performance Data
MF CMBS Market: TREPP. 60+ days, in foreclosure, REO, or non-performing balloons Fannie Mae: Delinquency rate from SEC filing Freddie Mac:
Multifamily delinquency performance is based on the UPB of the total Multifamily mortgage portfolio ACLI: First Quarter 2013 ACLI Investment Bulletin
Freddie Mac Multifamily Business Results (continued)
12
Basis Points
10
8
6
4
2
0
1
Graph shows Freddie Mac Multifamily portfolio net charge-offs . Data point for each quarter reflects net charge-offs for a rolling twelve month
period. For example, the 2Q11 value equals the sum of net charge-offs in 3Q10, 4Q10, 1Q11 and 2Q11 divided by the average balance of the
multifamily loan and guarantee portfolios during 2Q11. Source: Freddie Mac
4
Fannie Mae Multifamily DUS® Risk Sharing and Delegation Model
$
Borrower
Loan
$
DUS® Lender
Mortgage
$
Multifamily
MBS
Origination
• Applies for loan
• Originates the loans
• Sets loan documentation
and delivery protocol
Underwriting
& servicing
• Borrower and
property evaluated
as part of
underwriting
• Underwrites and
services the loans in
accordance with
Fannie Mae
standards and
requirements
• Sets underwriting
standards and servicing
requirements
• Performs quality
control on underwriting
and servicing
MBS
Investors
• Rely on
standard underwriting
• Require
periodic property
performance
information
• Creates MBS securities
Risk-sharing
(“skin in the
game”)
• Contributes 20%+
equity
• Shares in 1/3 of the
credit losses1
• Shares in 2/3 of the
credit losses1
• Are protected from
credit losses
through Fannie
Mae guarantee
Multifamily’s success has been achieved through its unique model of risk-sharing and leveraging of private
capital
Source: Fannie Mae Multifamily
Note: 1Example illustrates pari passu loss sharing.
Fannie Mae Multifamily DUS® Features and Benefits
Features
Feature
Benefit
Benefits
• Countercyclical stability – consistently provides access to credit throughout economic cycles
Industry Continuity
• Promotes confidence that funding and liquidity will be accessible
Published Underwriting and
Servicing Guidelines and Loan
Documents
• Sets industry standards for multifamily underwriting and servicing best practices
Delegation and Scalability
• Enables Fannie Mae to scale the business as industry conditions change
• Promotes standardization and transparency across all industry participants
• Facilitates reliable securities disclosures
• Improves efficiency and, therefore, lender responsiveness to customers
Network of Approved Lenders/
Servicers
• Maintains a select group of business relationships based on:
– Financial strength
– Extensive multifamily underwriting and servicing experience
– Strong portfolio performance
– Creation of quality branded product
Loss Sharing
• Originators, Servicers and Fannie Mae have “skin in the game” throughout the life of the loan
• Awareness of risk potential improves processes and performance of all parties
• Optimizes outcomes (e.g., profitability and loss mitigation) for all participants
DUS Mortgage-Backed Security
(MBS/ DUS)
• Transforms a mortgage loan into a more liquid asset, which increases available funds in the financial
system
• Offers investors highly-rated credit strength due to Fannie Mae’s guaranty of timely payment of
principle and interest
The delegated model allows Fannie Mae to be more responsive to customers
Source: Fannie Mae Multifamily release titled DUS® – The Role of Risk Retention in Multifamily Finance, Fourth Quarter 2011
Fannie Mae Multifamily DUS® Lenders
DUS® Lenders service 89% of Multifamily Book
1.
ACRE
9.
Citibank
17. M&T
2.
AmeriSphere
10. Dougherty
18. Oak Grove
3.
Arbor
11. Grandbridge
19. Pillar
4.
Beech Street
12. Greystone
20. PNC
5.
Berkadia
13. HomeStreet
21. Prudential
6.
Berkeley Point
14. HSBC Bank
22. Red
7.
CBRE
15. JP Morgan Chase
23. Walker & Dunlop
8.
Centerline
16. KeyCorp
24. Wells Fargo
The Multifamily Lender base includes both large and small institutions
Source: www.eFannieMae.com and Fannie Mae 10-K
Basic Freddie Mac K-Deal Transaction Structure
Freddie Mac securitizes CME loans via the K-Deal program through the following steps:

CME loans are sold to a third-party depositor who deposits the loans into a third-party trust

Private label securities backed by the loans are issued by the third-party trust

Freddie Mac purchases and guarantees certain bonds (“Guaranteed Bonds” ) issued by the third-party trust and securitizes these bonds via a Freddie
Mac trust

The resulting Freddie Mac guaranteed structured pass-through certificates (“K-Certificates”) are publicly offered via placement agents

The unguaranteed mezzanine and subordinate bonds are issued by the third-party trust and are privately offered to investors via placement agents
1
Freddie Mac
sells loans to
a third-party
depositor
Loans
deposited
into the
third-party
trust by the
depositor
Freddie Mac
acquires
Guaranteed
Bonds1 and
deposits them
into a Freddie
Mac trust
Freddie Mac
sells
Guaranteed
K-Certificates
backed by the
Guaranteed
Bonds
Senior Bond
Investors
Unguaranteed
Mezzanine
Bonds
Mezzanine
Bond
Investors
Unguaranteed
Subordinate
Bonds
Subordinate
Bond
Investor
Relevant Parties/Entities
Underlying mortgage loan seller: Freddie Mac
Underlying originators: Freddie Mac Program Plus Seller/Servicers
Underlying master servicer: Selected by Freddie Mac through bidding process
Underlying special servicer: Selected by subordinate bond investor in consultation with Freddie Mac
Underlying trustee/certificate administrator: Selected by Freddie Mac through bidding process
8
1
Guaranteed Bonds include senior amortizing bonds as well as interest only bonds off senior and subordinate P&I bonds.
Source: Freddie Mac
Freddie Mac Multifamily Securitization Program
(2009 – Sept 2013)
K-Deal Execution Volume
$25
UPB ($ Billion)
$20
$15
$10
$5
$0
2009
2010
10 Year
Total UPB
K-Deals
9
7 Year
2009
$2.1
2
Source: Freddie Mac
5 Year
2010
$6.4
6
2011
Single Sponsor
No-Subordination
2011
$13.7
12
2012
Floating Rate
2012
$21.2
17
2013
Seniors Housing
2013
$20.71
14
Freddie Mac Multifamily Securitization Program – Strengths
• Strong credit provided by Freddie Mac’s guarantee plus credit support of
underlying mortgages underwritten to Freddie Mac’s portfolio standards
• Diversification through pooled risk of many assets versus single asset risk
• Call protection associated with defeasance or yield maintenance
• Rated bonds, the private-label securities that back the K Certificates are typically
rated by 1 or 2 nationally recognized statistical rating organizations (NRSROs)
• Transparency and consistency on collateral and deal information via Multifamily
Securities Investor Access Tool
• Liquidity supported by expectations for repeatable and reliable issuance subject to
market conditions
10
Freddie Mac STACR 2013-DN1 Structure Illustration
The notes are linked to a reference pool from loan production for 30yr fixed rate fundings from Q3 2012
Hypothetical Allocations of Principal Collections
Specified Credit Events
$22,584MM
Reference Pool
Fixed Severity
Less than or equal to 1.00%
15.00%
Greater than 1.00% and less than
and equal to 2.00%
25.00%
Greater than 2.00%
40.00%
$21,907MM
Class A-H
(Reference Tranche Only)
97% thick / 3% CE
Freddie Mac pays coupon on Notes,
and its obligation to repay principal on
the Notes is reduced for credit events
on the Reference Pool based on a fixed
severity approach
11
Principal
$250MM
Class M-1
1.35% thick / 1.65% CE
$250MM
Class M-2
1.35% thick / 0.30% CE
$55MM
Class M-1H
(Reference Tranche Only)
$55MM
Class M-2H
(Reference Tranche Only)
$68MM
Class B-H
(Reference Tranche Only)
0.30% thick / 0% CE
Losses
Cum % of Credit Events