Freddie Launches Its Awaited Mezzanine Financing Program

March 31, 2010

Courtesy Flickr Creative Commons user cliff1066tm

From Multi-Housing News — Freddie Mac’s new mezzanine financing arrangement allowing mezzanine debt on qualifying senior multifamily mortgages (first mortgages) it purchases, has now officially been launched. MHN had previously reported on the impending program.

The agency is partnering with experienced multifamily players to help bridge the capital gap for borrowers who need to finance or refinance overleveraged multifamily properties whose value has declined.

This program is aimed at recapitalizing multifamily properties and easing the painful process of deleveraging. It is not intended 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,” says 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.”

Over the last few years, the apartment finance industry has undergone significant changes that have resulted in a capital gap for many owners. Tighter lending standards, declining property values, and fewer capital players have combined to put several apartments at risk of default at loan maturity. This program seeks to fill this gap for experienced borrowers in good standing.

Freddie Mac Seller/Servicers (multifamily lenders) will originate a first mortgage with a loan-to-value ratio (LTV) of up to 75 percent, then work with the mezzanine lender to provide additional leverage, up to another 15 percent for their borrower. This allows property owners to borrow up to 90 percent 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.

The mezzanine portion of the financing is backed by the borrower’s equity, not the property, so Freddie Mac is not taking on additional risk with this arrangement. 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

· Acquisitions

· Properties/assets in good physical condition and experienced sponsors

· Stabilized Class A and B conventional multifamily properties

· Capital Markets Execution loans (loans intended for Freddie Mac K Certificate multifamily mortgage-backed securities), portfolio executions and structured transactions

Additional Terms

· Minimum 10 percent cash equity in the property required

· Maximum 75 percent loan-to-value (LTV) ratio on first mortgage

· Maximum 90 percent combined LTV ratio

· First mortgage must be fixed-rate

· Mezzanine debt may be fixed-rate or adjustable-rate mortgage (ARM)