Today's a big day: We issued our 80th K-Deal, tallying $100 billion in these commercial mortgage-backed securities (CMBS) since June 2009. Thank you to everyone who contributed to this achievement. It's inspiring and a little dizzying to think about all that this milestone represents – and what's possible from here.
Our K-Deal securitization model helps us increase market liquidity, lower the cost of capital, and promote housing that's affordable to renters nationwide, while shifting the vast majority of our credit risk away from taxpayers, to private investors. Our guarantee essentially serves as catastrophic insurance.
Many proposals for housing finance reform call for a similar model. Having built a solid foundation, Freddie Mac Multifamily continues to innovate and help lead the industry into the future.
We began to explore securitization as an alternative to holding loans to maturity in our retained portfolio in 2006 with a prototype transaction that we called K-1. In that transaction, we successfully employed a CMBS-like structure with certain traditional portfolio features, such as the availability of supplemental debt. The experiment was successful, with strong investor interest and solid execution as proof; however, it highlighted for us the need to build a more robust infrastructure if we indeed wanted to accommodate an active securitization program.
We also observed through this early experience that the CMBS model had significant room for innovation and improvement. While we concluded that the structured securitization model of CMBS would be the most effective in enabling us to shift a substantial amount of the credit risk to private investors, we saw a strong need to change the credit profile and borrower experience. Furthermore, we believed that continued emphasis on our credit philosophy, diligent in-house underwriting, and standards for servicing loans would differentiate us. We were right.
By the time we started to execute on our new, improved version of multifamily securitization, the financial crises had hit. Instead of impeding our progress, it only increased our sense of urgency to implement a new model. And that model gained support based on our business strengths and performance, even though the market was suffering.
We launched an initial loan product intended for securitization, the Capital Markets Execution (CME), in April 2008. Because we had made so much progress before going into conservatorship that September, we were able to issue the first K-Deal as we know it today in June 2009, close to our original plan.
Back then, we thought:
Everybody wins as a result – renters and communities across the country, property developers and owners (our borrowers), our seller/servicers, our company, our investors, and U.S. taxpayers.
People have asked, "Why are they called K-Deals?" My reply, take your pick: A) The K has a meaningful shape – from one come two, like the K-Deal's structure, which comprises senior and subordinate certificates; B) the arms also form a "greater than" symbol; C) the Greek word for beauty starts with K: kallos; or D) none of the above. (Sadly, the real reason is more mundane.)
With all of the changes and enhancements we've made over the last few years, we have a firm platform for continued growth. If we can transfer the risk – take taxpayers off the proverbial hook – we can apply more innovation to our processes and offerings. However, we won't sacrifice quality.
For example, our newest executions, Q-Deals (securities backed by loans that were not underwritten in-house at origination but were confirmed to meet our current underwriting standards) and M-Deals (securities backed by Tax-Exempt Loans), take advantage of the K-Deal technology and enable us to securitize loans that otherwise would have to be held in portfolio along with all of the related risk.
The Freddie Mac Multifamily team is committed to sharing our leadership, expertise, and innovation to support the multifamily market to the greatest extent possible. The need for affordable rental housing has never been greater. To help address it, we continue to enhance and expand our repertoire and to work in partnership with our customers. Together, we're creating a better, stronger future.
Looking forward to celebrating the next $100 billion.
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