Freddie Mac has formally announced its widely anticipated mezzanine financing arrangement, in which it will allow mezzanine debt on qualifying senior multifamily mortgages (first mortgages) it purchases.
The government-sponsored enterprise says it is partnering with experienced multifamily players to help bridge the capital gap for borrowers who need to finance or refinance overleveraged multifamily properties whose values have declined.
This program is aimed at recapitalizing multifamily properties and easing the process of deleveraging. It is not intended to increase leverage at the property level or fuel excessive risk-taking by investors, Freddie Mac said in a statement.
"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," explains Mike May, Freddie Mac senior vice president of multifamily. "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."
Under the new arrangement, Freddie Mac seller/servicers (multifamily lenders) will originate a first mortgage with a loan-to-value ratio (LTV) of up to 75% and then work with the mezzanine lender to provide additional leverage, up to another 15% for their borrower. This allows property owners to borrow up to 90% of a property's value. Freddie Mac 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.
Freddie Mac says the arrangement does not place additional risk on the company because the mezzanine portion of the financing is backed by the borrower's equity, not the property.
‘There is a market need for this,’ Freddie Mac spokeswoman Patricia Boerger told reporters last month.
The mezzanine providers also have the capability to bid on the B-piece of a Freddie Mac K-Certificate if the first mortgages are securitized.
Mezzanine financing is available for qualifying loans that meet the following criteria:
- loans refinanced from either Freddie Mac or non-Freddie Mac portfolio,
- take-out of existing construction loan financing,
- properties/assets in good physical condition and experienced sponsors,
- stabilized Class A and B conventional multifamily properties, and
- Capital Markets Execution loans (loans intended for Freddie Mac K-Certificate multifamily mortgage-backed securities), portfolio executions and structured transactions.
SOURCE: Freddie Mac