Pressure Busts Pipes

No doubt you may have heard that Fannie unloaded about 2 yards of A1A CMBS recently as it joins the ranks of large bailed-out institutions who are looking to take part in the extraordinary structured products rally.

1. UBS: WAVE CDOs - May 2012
2. AIG: Maiden Lane - February 2012
3. Lloyds Banking Group: RMBS - May 2013
4. Fannie Mae: A1A CMBS - May 2013

And while we're at it, who could ever forget Merrill's infamous deal with LoneStar back in 2008.  I remember as I, a young neophyte in the game at the time, was perplexed by the twenty-cent handle and the fact that MER financed 75% of the deal.

But as you can tell by today's picture at the top of this page, this beloved blog is going to focus on Fannie's particular type of bond that it sold into the market.  If you want to know how the sale went, I recommend this rather robust piece by Real Estate Finance Intelligence.

In other words, "price talk for the bonds ranged from low 70s basis points for higher quality items to 200 basis points for less attractive securities."

Today's lesson will be for the newbs and for the intermediates.  There is some ground to cover here in terms of understanding what exactly these kinds of securities are and how they came to be.  The goal is to understand what Fannie's multifamily loan business is, and then try to grasp the idea of securitizing those loans into the special "A1A' bonds that I mentioned above.  Please take a seat and make sure you have your glass of water handy.

 The following is a primer I picked up via Fannie and it covers what their multifamily business is. Give it a quick read or you may proceed if you're already familiar:

1. Fannie Mae: Multifamily Overview - May 2012

Good, so hopefully now you understand how and why FNM is a  MAJOR player in the market.  Interesting how in 2008, as multifamily contracted, Fannie and Freddie stepped in to counterbalance the sudden dearth of capital and their market share went from less than 1/2 to nearly 3/4.

"The market share held by Fannie Mae and Freddie Mac (“GSEs”) expanded significantly from less than 40% historically to more than 70% in 2009".

Interesting.

We're halfway there people.  The first half of structured-product investing is to understand and make assumptions about the collateral; that being the multifamily loans that serve as the assets for the CMBS bonds.  The second half, and dare I say, sometimes the most important, is understanding how much cash will be generated from those assets and how much cash YOU (the individual tranche) is due to receive.

Please remember this important piece from the Multifamily Overview pdf that I linked to above:

1. In MBS executions, lenders deliver loans to Fannie Mae in exchange for an MBS that is backed by the mortgage loan.

The A1A class is the MBS that is backed by the multifamily mortgage loans contributed to the CMBS trust by the originators (typically banks, such BAML, Wells Fargo, etc).  In a lot of deals, the A1A class is essentially stuffed into the deal and that tranche carries no guarantee by Fannie Mae, but is instead supported by subordination from the entire pool of assets in the Trust (including non-Multifamily assets).  

From Nomura:

1. The A1A Class: The practice of "carving-out" a multifamily tranche started in approximately 1998, and still happens in selected deals today. 
1. The collateral is split into two groups, and a AAA-rated bond is created that is primarily backed by 100% multifamily loans.
2.  Freddie Mac and Fannie Mae are the only known buyers of this tranche, and the bond is created to conform to the investment rules specified in their charters.

Seriously, take a look here, as to how this all looks when jammed into the securitization.  Notice how in the "Notes" column, it says "multifamily carve-out."

Hopefully that makes a little more sense.  But what initially perplexed me the first time I heard of A1As was why they were there to begin with and also, if they received credit enhancement from the subordinate bonds in the deal?  In most cases, they do.

1. In response to investor worries about falling subordination levels in CMBS conduit/fusion deals, dealers started to break up the triple-A rated class into super-senior, "mezzanine," and "junior parts. In the structure shown in Figure 3, classes A1, A2, A3B, A3FL, A4, ASB, and A1A have 30% credit support from subordination and are called "Super Duper Seniors." 

Basically, since Fannie and Freddie are the only real buyers of A1A bonds (and hence, they finance the multifamily housing collateral), these particular tranches are made AAA in order to protect Fannie and Freddie from default risk.  Pretty good trick.  

Do remember however that:

1. Because of its position on the capital structure, if there are defaults in the multifamily loans, generally the bond will get cash from other property types as well, so the name “multifamily carve-out” can be slightly misleading. 
2. Also, if other property types default, cash may be taken from the “multifamily carve-out” to help make other AAA rated bonds whole. 

Honestly, a round of applause to Nomura for consistently doing a good job on structured products primers.  Cheers.

Hopefully the Real Estate Finance Intelligence article makes more sense at this point.  I suggest you give it another look.

Until next time.

~ Jingle Male

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!