Preparing For a Year of Competition in the Multifamily Market
February 20, 2014
It was great to personally thank some Seller/Servicers for their partnership and contribution to a headline year at our recent correspondent meeting. The Mortgage Bankers Association’s Commercial Real Estate Finance (CREF)/Multifamily Housing Convention & Expo allows us to spend time together with you, our customers, to recap the past year and set the tone for the next year. If you did not attend CREF, let me take this opportunity to provide some of the meeting highlights for you.
First things first. Let me clarify what I mean by “our customers.” You’ll notice that we always use the word customer. Often times in the lending community, borrowers and mortgage bankers are referred to as counterparties. You won’t hear this term from us. You’re our customers and we are proud that at Freddie Mac Multifamily we always do the right thing for our customers.
2013 Business Recap
Before I address 2014, let me look through the rearview mirror to recap the milestones of 2013. Together in partnership we accomplished everything we set out to do. We continued to meet our mission and produce outstanding results – yet again.
The business was managed well with the $26 billion capital amount we were given to maximize for the year. As you know, we were mandated to decrease volume by 10 percent in 2013. Even though I can’t yet provide full year financial results, our third quarter earnings and return on equity were at levels that really were outstanding when compared to prior years.
Affordable business is in our mission and our DNA. Even when we introduced the term and your goal for the share of Very Low Income (VLI) properties to many of you during the course of the year, you exceeded a very ambitious target. These are units that are affordable to people of limited means, which is very important in today’s economic climate.
There were milestone process improvements made with both Fast Track Early Rate-Lock (ERL) and Index Lock introduced during the fall season. Both have been wildly successful. Fast Track ERL allows you to lock the entire coupon and our Index Lock allows you to mitigate interest rate volatility by locking the underlying Treasury index.
We now have more field offices. In addition to the Atlanta office opened in 2012, we also opened offices in Austin, Texas and in Orange County, California. These field offices allow us to be closer to our customers and the local real estate markets, which translates to better and quicker credit decisions.
Multifamily Market Competition
Let’s look at 2014 now. We know the year is going to be challenging for you as well as us. The consensus is that Treasury yields and competition will likely increase through 2014. We are prepared for elevated competition from conduits on proceeds, life insurance companies on price and banks on floating-rate transactions.
Our challenge is to stay relevant with this level of competition. At the same time, here are the things that we are not going to do:
- Go outside our 80%/1.25% credit box
- Compromise on Sponsor quality
- Lend against properties that are not safe, structurally sound and do not have a stable and sustainable cash flows
So what are we going to do? We are going to be far more flexible in 2014 than in prior years. This means we are looking to you to identify good real estate deals. Humility aside, we’re pretty good credit decision makers and know what fundamentals make up a good real estate deal. When you bring us a good transaction, you’ll see us be smart and assertive to expand access to credit. When it’s appropriate to the transaction, you can expect us to color outside of the lines and be faster to respond and more competitive on pricing and structure.
To talk more about what you can expect from us in the coming year, David Brickman, Executive Vice President of Multifamily, hosted a panel discussion with me and the entire Multifamily executive management team.
- Mitch Resnick, Vice President of Loan Pricing and Securitization, addressed pricing of transactions and our grid system.
- Debby Jenkins, Senior Vice President of Underwriting, tackled credit policy decisions.
- Kim Griffith, Vice President of Affordable Sales and Investments, focused on access to affordable rental homes nationwide
- Michael Lipson, Senior Vice President of Asset Management and Operations, discussed the steps after funding and post securitization.
Sue Blumberg, Senior Vice President and Managing Director at Northmarq Capital, kicked off this part of the meeting by asking the panel about the highlights of our Affordable program and what makes it advantageous for a borrower.
Kim Griffith answered by explaining how cash mortgages for Preservation transactions fit well in a market where new construction has been the focus for the past year. He also offered the support of our Targeted Affordable Housing (TAH) staff to Sellers. TAH will invest in trips to go on the road and visit with you and your borrowers to explain Preservation. As Kim stated, “Trips equals deals.”
Michael Edelman, Senior Vice President of Beech Street Capital, asked me directly how we are going to manage customer expectations in the current regulatory environment. In answering, I referred to the fact that Freddie Mac delivers on what we promise. In instances when rates increase or occupancy or collections dip unexpectedly during the course of a transaction, we work with the Seller and borrower to come up with acceptable outcomes. You might be tempted with more interest only or more proceeds from a conduit, bank or life insurance company, but at the end of the day you might not get the same terms and conditions applied for. I urge you to focus on our strong history of exceeding.
I’m looking forward to working with you in 2014 as we continue to solve your needs.