MF Industry Believes Freddie’s New Loans Will Help Borrowers Re-Capitalize Assets

Freddie Mac has decided to allow mezzanine debt on qualifying senior multifamily mortgages (first mortgages) that it purchases.

Dees Stribling, Contributing Editor

McLean, Va.–Freddie Mac has decided to allow mezzanine debt on qualifying senior multifamily mortgages (first mortgages) that it purchases. According to the GSE, the program is aimed at recapitalizing multifamily properties and easing the process of deleveraging, but not to increase leverage at the property level or fuel excessive risk-taking by investors.

“The intent is to help the industry reduce the number of properties that may otherwise become defaults, timely workouts or foreclosures if they don’t get much-needed financing,” Mike May, Freddie Mac senior vice president of Multifamily, said in a statement. “We are working with mezzanine providers who are experienced multifamily owners, operators, or investors to help fill the capital gap due to reduced property valuation compared to existing financing.”

David Valger, director at RCG Longview L.P., a specialist in unconventional financing, sees the change as a positive development. “I believe Freddie Mac’s move will indeed help some of its borrowers effectively re-capitalize assets which may otherwise need too much new equity to be saved from foreclosure,” he tells MHN.

“As a participant in the multifamily finance business for many years, we strongly believe in the use of well-structured mezzanine products to help ensure the sector stays healthy and well capitalized,” he continues. “During the up-cycle they provide additional leverage for buyers to maximize returns, and in the down-cycle help borrowers restructure and refinance.”

Under the plan, Freddie Mac seller/servicers (multifamily lenders) will originate a first mortgage with an LTV of up to 75 percent, then work with the mezzanine lender to provide additional leverage, up to another 15 percent for their borrower. The GSE will then purchase eligible first mortgages from its seller/servicers to either retain in its portfolio or securitize into its K Certificate multifamily mortgage backed securities.

The mezzanine portion of the financing is backed by the borrower’s equity, not the property, so the GSE is not taking on additional risk with this arrangement, Freddie Mac emphasizes. The mezzanine providers also can bid on the b-piece of a Freddie Mac K Certificate if the first mortgages are securitized.