2012 Credit Policy Changes: Modest Tightening, on Average
By VP of Multifamily Credit Risk Management Ed Hussey
Freddie Mac Multifamily’s ability to promote liquidity and stability in the rental housing market is built on effective risk management. Credit discipline helps keep that foundation strong. If we make credit too tight, we risk inadequately supporting the rental markets that we were chartered to serve. Too loose, and we risk borrowers taking on mortgages that they can’t sustain. Striking the right balance benefits our customers, the housing market, and communities across the country as well as helps protect U.S. taxpayers’ investment in Freddie Mac.
That’s why Freddie Mac Multifamily strictly adheres to a core set of credit principles when deciding whether to purchase mortgages. Borrowers must have equity in the deal, strong understanding of the local market, and a proven record of performing well in all economic cycles. Also, the properties must be well maintained and deliver positive, sustainable cash flow. And loans must have a clear path to refinancing at maturity.
Another factor: Our assessment of market fundamentals and, importantly, how they might change. It’s our projection of how they might change that drives adjustments to credit policy. In turn, these policies affect the business terms we offer on current loan applications.
So far this year, Freddie Mac has made several changes to our Multifamily credit policy in areas where we saw a need for more clarity or had concerns. For example, because potential future interest rate volatility could make loans difficult to refinance when they mature, we tightened up on the amount of interest-only available in our loans and adjusted our future interest rate forecast to a more conservative estimate in our refinance test. We also updated the insurance requirements for our borrowers to take into account changes in the industry. In aggregate, policy changes resulted in modest tightening of credit.
Our vigilance pays off. Since the start of 2010, Freddie Mac has purchased $47.5 billion in multifamily mortgages, financing almost 750,000 rental units. Our delinquency rate consistently has been among the lowest in the industry. At the end of second quarter 2012, it was 27 basis points (bps). Compare that to the multifamily commercial mortgage-backed securities (CMBS) delinquency rate of 1,057 bps. Keeping delinquencies low has added to our profitability. Since the start of 2010, Freddie Mac Multifamily has generated more than $3.2 billion in earnings for U.S. taxpayers.
- Executive Perspectives blog posting, “How Multifamily Creates Value”
- Research paper, “Multifamily Property Valuations”
- Video, “Our Partnership With You: Service for the Life of Your Loan”