The Wall Street Journal-20080204-Freddie Looks to Grow in Apartment Financing
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Freddie Looks to Grow in Apartment Financing
Full Text (403 words)Freddie Mac, looking to expand its role in financing apartment buildings, is working on a proposal that would allow it to create and sell bonds backed by multifamily mortgages.
The move, if approved by Freddie's management and regulators, would allow the government-sponsored provider of home funding to be more competitive with Wall Street.
Freddie Mac, together with its bigger rival Fannie Mae, has grabbed a much bigger share of the market for financing home mortgages as other investors have retreated in the face of rising defaults. Now they are also gaining market share in commercial mortgages for apartment buildings.
The proposal comes at a time when rising fears of weakening credit quality in the commercial property market have scared investors away from buying commercial-mortgage-backed securities, or CMBS, which are mortgages pooled together and packaged into bonds with varying risks and returns. Bonds stuffed with multifamily mortgages account for about 18% of the CMBS market, which totals about $800 billion.
The tumbling CMBS sales, in turn, drove Wall Street firms away from bidding for commercial mortgages, leaving Fannie and Freddie the dominant buyers of those loans. "At some point, the market will come back," said Mike May, a senior vice president at Freddie. And Freddie's plan to develop its own ability to create such bonds could help the company compete more effectively with investment banks when the market turns. It would "keep our relevance in all market cycles," Mr. May said.
Today, Freddie mainly keeps the loans it buys on its own books. Under the proposal, the company would buy mortgages secured by apartment units from its network of lenders, pool them together, and then either sell them as whole loans or securities backed by those loans. Specifically, Freddie would package as securities the "senior" portions of the loans that are rated investment grade, and sell the riskier slices. "The loans for this product will be consistent with Freddie Mac's credit philosophy," Mr. May said.
Freddie's senior management and its regulator, the Office of Federal Housing Enterprise Oversight, must approve the proposal. The plan was reported Friday by Commercial Mortgage Alert, a trade publication.
As part of its efforts to provide liquidity to the multifamily market, Fannie Mae also looked at ways of buying loans and selling off risk to investors, but so far has held off. "We haven't pursued such business due to market conditions," a Fannie Mae spokesman said in a statement.
