Freddie Maps More Single-Loan Transactions
Freddie Mac is ramping up issuance of securities backed by single loans that don’t match the profile of its main K-Series securitization program.
Freddie plans to sell as much as $8 billion of so-called guaranteed participation certificates in 2020, or twice the amount it sold last year. In 2018, its output of “multi-PC” deals totaled just $1 billion.
The transactions are similar to those issued by Fannie Mae under its Delegated Underwriting and Servicing (DUS) program, insofar as each offering consists of a single tranche of guaranteed notes backed by one multi-family mortgage. While Fannie sells a lot of that paper to investors, it retains some of its DUS deals and periodically bundles them into commercial MBS transactions with exposure to multiple borrowers.
Freddie takes a different approach, securitizing the bulk of the multi-family mortgages it purchases from authorized lenders via structured transactions encompassing a large, diverse pool of loans. That includes the K-Series, whose deals are backed by mortgages with mostly identical maturities — seven, 10 or 15 years.
Freddie began expanding its multi-PC program early last year out of a need to securitize an increasing volume of 12-year mortgages that don’t align with the maturity profiles of the K-Series. While it occasionally sprinkles 12-year loans in the collateral pools of its K-deals, Freddie has found investors in those transactions are uncomfortable with the maturity mismatch.
Instead, Freddie has been securitizing an increasing number of 12-year mortgages via guaranteed participation certificates. And it now plans to do the same with callable loans as well.
“It’s all about pipeline management,” said senior vice president Robert Koontz, the agency’s head of multi-family capital markets. “This is just another tool for transferring risk.”
Koontz added that having multiple funding options could prove especially helpful under adverse market conditions — or when Freddie and Fannie eventually are released from conservatorship.
Ling Xu, a senior director in Koontz’s group, said a spike in market volatility in the fourth quarter of 2018 prompted Freddie to take a closer look at using multi-PCs to lessen the risk of holding loans that can’t be securitized as quickly via its K-Series. “We constantly look at how we manage the balance sheet and risk effectively,” Xu said. “That kind of volatility can expose us to higher mark-to-market risk that is unhedgeable, so we had to rethink our strategy.”