Freddie Mac continues its rise in the CMBS market
Commercial mortgage brokers who work with multifamily property owners and investors should keep their
eyes on commercial mortgage-backed securities (CMBS). Although private-label CMBS issuances within the
multifamily sector increased by 7 percent, to $5.3 billion, in 2017, according to commercial real estate data provider Trepp, that figure is dwarfed by what the government-sponsored enterprises Fannie Mae and Freddie Mac
did in that market.
Freddie Mac, for example, securitized more than $68 billion in multifamily loans last year. David Brickman, executive vice president of Freddie Mac Multifamily, said he expects the agency to record similar CMBS numbers
in 2018. Brickman spoke with Scotsman Guide about CMBS and multifamily housing trends this past February
during the Mortgage Bankers Association’s Commercial Real Estate Finance/Multifamily Housing Convention
and Expo in San Diego.
What is the outlook for delinquencies on Freddie’s CMBS issuances?
Our delinquency rate and our credit statistics have been very strong, and actually have been that way for a few
years now. We’re moving into  with a 2 basis-point delinquency rate. Our total credit losses were truly
negligible, barely over one-tenth of a basis point in terms of our total portfolio. People joke about [how] we’re
in a business of basis points, and we’re not even at a basis point in terms of losses. Again, it has been that way
for a few years now.
What about underwriting standards? Have there been any recent changes that impact CMBS issuances?
The statistics I look at are remarkably stable, and we strive hard to keep them that way. The metrics I primarily
focus on are debt-[service] coverage ratios, our loan-to-value [ratios] at origination, and then also our loan-to-values (LTVs) at maturity. … In the capital markets, it’s common for people to say we’re boring. It’s deal after deal,
in terms of our K-Deals (securities), that look remarkably similar.
The only metric that probably has moved up over the last few years is the percent of IO (interest-only loans). But,
candidly, I think that tends to get misunderstood a little bit. Not all IO periods are the same and, in fact, that’s
why I tend to like the maturity LTV as a metric, because it effectively takes that into account. So, no, we don’t see
a slippage in credit standards. I mean, it’s something we’re always concerned about, given the healthy competition we see in the market and the potential for credit competition on the margins, with so many folks looking
to put capital out. But, so far, we haven’t moved.
Do you expect more interest rate increases from the Federal Reserve in the near future? Is there concern
about how that will impact the multifamily market?
Yes, there is some concern, and we are vigilant in terms of tracking the economic data and being on our toes, to
be able to respond to what occurs. We can’t control the level of interest rates.
… I think I take some comfort in the notion that if we get, on the margin, a steeper increase — particularly in
short-term rates — it’s likely because the Fed is seeing inflation starting to increase. If we’re seeing inflation
increase, that’s primarily due to wage growth. If you have wage growth, that’s likely to be directly affecting rent
levels. So, there is a natural hedge, particularly in multifamily, against inflation. Rent is actually one of the largest
components of the CPI (consumer price index) and [is] going to move largely in tandem with inflation.
Overall, single-family home prices are rising and there is a lack of inventory. Will this impact multifamily
demand or the number of deals financed?
I think, sometimes, people disregard the fact that multifamily is part of the broader housing market, and you
can’t really look at it independently. You have to look at overall supply and demand for housing.
The increase in price in single-family [homes] and a limited supply point more toward a shortage of housing
rather than excess housing. We believe [that] means the multifamily [supply] that’s being built will get absorbed,
that you will continue to see rent increases and strong fundamentals underlying multifamily for probably the
next few years. And, in fact, the greater concern we see is actually affordability. As you see some of that growth
in the single-family market getting kind of transmitted over to multifamily, that’s just putting greater pressure
on household budgets and incomes, and the declining stock of affordable rental housing. n
David Brickman is executive vice
president of Freddie Mac Multifamily,
where he leads a team of more than
900 employees in the multifamily
housing business. His team provides
liquidity and stability to multifamily mortgage markets, supports
affordable rental housing and looks to
produce consistent economic returns
at minimal risk to U.S. taxpayers. Brickman was the architect of Freddie Mac
Multifamily’s securitization programs,
and he frequently speaks about the
conditions and challenges of U.S.
multifamily housing. Reach Brickman
Neil Pierson is editor of Scotsman Guide Commercial Edition.
Reach him at (800) 297-6061 or firstname.lastname@example.org.
Executive vice president, Freddie Mac Multifamily
By Neil Pierson