Saturday, September 18, 2010

No Problems at Fannie & Freddie due to Multifamily?

The Wall Street Transcript had an interview with Michael Levy titled "CMBS Risk Even Fannie And Freddie Would Not Underwrite" that got picked up by a few outlets. They kind of glaze over some of the facts and imply that the Enterprises (or Agencies, whatever you want to call them) are not exposed to the multifamily in CMBS?!? Obviously, we all know that there was a directed tranche (A1A) in every Conduit deal that contained all the Multifamily loans, and it was solely purchased by Freddie and Fannie.

The fact they skip this little factoid makes you question the entire article.

A good example of that would be Peter Cooper Village and Stuyvesant Town - that was something that the agencies wouldn't issue a traditional mortgage for because it was underwritten with very little equity and at a relatively low debt service coverage ratio. That's really the prime example of where an apartment operator wouldn't go to Fannie and Freddie to get a mortgage at the peak of the market because they couldn't, because it didn't meet Fannie and Freddie underwriting standards. So they went to the CMBS market, and that's why, in my opinion, to some degree apartment CMBS has had weaker performance than non-apartment CMBS debt.

Uh, all the current problems aside, and even realizing that many (most) questioned the viability of the sub-1% cap rate trade of PCV/ST, the original LTV was something like 54% on the senior debt in question. That was not the issue. Further, guess who is exposed directly to the senior mortgage of PCV/ST, wait for it, wait for ... Freddie Mac and Fannie Mae, of course. They bought up the A1A notes on the CMBS deals that contain the mortgage.

So, let's leave aside their multifamily "portfolio" lending for a second and focus on their CMBS-like exposure. Freddie has a multifamily shelf called FHLMC Multifamily Structured Pass Through Certificates, off which they've issued $7.7 billion since late 2006, with $6.6 billion of that done since the crisis began (they just closed a deal this week run by BankofAmerillwide). Fannie has their DUS program (Delegated Underwriting and Servicing) - I don't know how bit it is, but I'll take a guess it is $50 billion-ish, and I'd be surprised if I were off by more than 20% (sorry not more firm).

Finally, let's look at their actual exposure to pure CMBS Conduit deals. Since 2003, virtually every Conduit deal had an A1A tranche that was purposefully designed and pre-sold to one of the Agencies. Guess how many deals Freddie/Fannie bought virtually all of the multifamily exposure (approximately 16% of the total deal size) from? 221 deals worth $562 billion dollars!

The current outstanding balance of the A1A bonds on their balance sheets is approximately $75 billion (the factor is just 0.90838 because most of the underlying loans have not started to mature yet). In all fairness, the A1A does have a 30% subordination, giving them additional protection as well.

The Enterprises were part of the problem. They deserve no slack, and you especially can't congratulate them for "avoiding" the problems with the CMBS multifamily mortgages, when they were the only two companies investing in them!


Anonymous said...

Good points. Archstone buyout by TS and Lehman wouldn't have happened w/ out the GSE's taking a huge piece of the debt.

crabsofsteel said...

Neither would Riverton Apts., Villas Parkmerced, Savoy Park, the Alliance loans, the list goes on and on and on. But they probably won't take any hits, as they now can make new loans for these properties with taxpayer money.

Anonymous said...

this is just as superficial as the original article. For example on the Freddie "shelf", you have to look at the b-piece (if any) they retain and whether it is sufficient to absorb the loss. For their CMBS portfolio, you have to look at the tranches they hold and credit support underlying. simply saying they issue bonds, so are 20% hit, or they took down the A1A is meaningless. you should know better.

Dark Space said...

"simply saying they issue bonds, so are 20% hit". I was simply stating that the total size of the portfolio is around $50 billion, give or take 20% because I don't know the size. I wasn't implying a loss percentage.

"For their CMBS portfolio, you have to look at the tranches they hold and credit support underlying.". I discussed this point, but frankly I don't have a research staff currently and the topic could use more thorough examination. At the end of the day, they're probably fine on all of their CMBS holds and will have minimal realized losses - but that's just a guess.

I don't think it was meaningless, though, to point out that the original interview and the "official" commenting both apparently are oblivious that Freddie and Fannie didn't play a part in the CMBS multifamily loans. However, I'm so sorry the entry didn't live up to your expectations, please send a donation and we'll add some seasoned CMBS veterans to our staff.

Anonymous said...

re: 20% -- fair point, I absolutely mis-read this.

with respect to the rest. BS. Youd state "they were the only companies investing in them" which is just absolutely wrong.

Sure they were active in the MF business and the CMBS market. They had to be per regulatory order to meet their affordable housing targets. So are you going to blame them for distorting the market or Congress?? and did they actually distort the MF market? The CMBS Market? Again, sure they were active in the market but were they distorting the market through their participation as you imply?

Would the Stuy town loan have gotten done the way it did without FRE/FNMA participation? I would argue yes, look at the Lembi deals held on the I-banks balance sheets...

Also, one could argue convincingly that buying the AAA's from the CMBS bonds backed by these loans was not the crucial piece of the puzzle that enabled the loans to get made at the levels they did. The simplistic conclusion that archstone/riverton et al were due to AAA buyers is simply wrong. the critical piece has always been the placement of the BBB and below, with the mezz & preferred equity.

Sure FRE/FNMA AAA bid at tight levels was very helpful to the economics, but those AAAs were sold regardless of the agency bid, look at all the other CMBS deals without agency tranches.

You admit here they are probably going to realize minimal losses on their CMBS, which of course contradicts the original point of "congratulating them for avoiding the problems of CMBS". but if they have minimal losses in their portfolio, and they have minimal lossed from their CMBS, they met the affordable housing targets they were mandated to meet...ah well.

And finally, I am sorry you don't have the time or resources.

Dark Space said...

The rest is absolutely not BS - who else bought A1A tranches? To our knowledge they were 100% sold to the Agencies. In fact, a quick look at their 2009 Annual Reports, even after Freddie's change that buries their CMBS holdings number, you see that they had at least $46bln (transferred to level III in 2009) and Fannie has $25 bln, which adds up to over 90%. I'd assume the remainder is on Freddie's balance sheet as level II, but if you know someone else who holds A1A tranches that would be news to me - news I'd be interested in, so pray tell.

The initial post pretty clearly states that "partial" blame rests with them. I think you accurately lay out the other people we can point fingers at - bankers, congress, b-piece buyers, etc.

Anonymous said...

" who else bought A1A tranches? "

A lot of CMBS deals were done with MF assets and no agency directed they are not the entire market.

crabsofsteel said...

I have to side with Dark Space here. Group 2 loans (i.e. those for which FH/FN provided funding) dwarf the group 1 kickouts. There's nothing like a robot bid to inflate MF prices. Why do you think MF (along with HT) assets dominate delinquencies?