Freddie Mac Selling $410 Million of

Delinquent Home Loans

By Heather Perlberg and Clea Benson Jan 23, 2015 4:20 PM ET

Government-backed mortgage company Freddie Mac (FMCC) is selling $410 million of deeply delinquent U.S. home loans in its second sale of the debt.
Buyers are bidding on three pools of loans, with unpaid principal balances of
$160 million, $141 million and $109 million respectively, according to loan broker
Mission Capital Advisors. Offers on the debt are due Feb. 4.
Freddie Mac has been saddled with soured mortgages, bought from bonds the company guaranteed, after a wave of defaults in the housing crash. Demand for defaulted mortgages increased last year, when Freddie Mac held its first loan sale, as Wall Street firms sought to profit from rising home prices. Banks and
the Department of Housing and Urban Development were the biggest sellers of the debt.
“The loans involved in this transaction are deeply delinquent, including a large share that are more than two years delinquent,” Tom Fitzgerald, a spokesman for McLean, Virginia-based Freddie Mac, said in a telephone interview. “This transaction is consistent with Freddie Mac’s continued goal of reducing illiquid assets from its investment portfolio.”
The Federal Housing Finance Agency, which regulates Freddie Mac and Washington-based Fannie Mae, is requiring the companies to reduce the number of severely delinquent loans on their books this year.
The FHFA is working with the companies to ensure that their debt sales provide the best outcomes for Fannie Mae and Freddie Mac as well as for borrowers, said Peter Garuccio, a spokesman for the agency.

Modified Mortgages

Freddie Mac, which owns or backs $1.9 trillion of housing debt, held $161 billion of loans on Nov. 30, according to monthly disclosures. It’s also started repackaging re-performing and modified mortgages into new bonds that it guarantees.
The company sold $659 million of non-performing loans in its first transaction in July. Oak Hill Advisors LP bought the debt, two people with knowledge of the sale said in August.

Fannie Mae (FNMA), which held $293 billion in mortgages on Nov. 30, backs about $3.1 trillion of housing debt. The company hasn’t yet offered any bulk sales of delinquent loans.

Investment firms including Lone Star Funds, One William Street Capital Management LP and Ellington Management Group have been buying bad home loans as foreclosures diminish and the housing market recovers, pushing up prices of the debt.
The Freddie Mac loans sold for 76 cents on each dollar of unpaid principal balance, according to Mission Capital. That compared with average non- performing loan prices of 64.5 cents on the dollar at the end of 2013 and 49 cents at the beginning of that year.
To contact the reporter on this story: Heather Perlberg in Washington at hperlberg@bloomberg.net

To contact the editors responsible for this story: Kara Wetzel at kwetzel@bloomberg.net Christine Maurus, Daniel Taub

www.debtwire.com

Residential NPL, RPL sales to rise 12%–32% next year — Mission Capital by Al Yoon

December, 17 2014

Bulk sales of residential whole loans ebbed this year but are likely to grow by 12%–32% in 2015, according to broker Mission Capital Advisors.
The supply will come from HUD, commercial and regional banks, according to Mission. Rumblings are also growing louder that Fannie Mae and Freddie Mac will weigh in with significant sales of non- and re- performing loan sales, said an investor and a whole loan source.
Mission Capital, in a forecast provided exclusively to Debtwire ABS, expects bulk non-performing and re- performing loan sales will accelerate to USD 38bn–USD 45bn in 2015 after slipping about 3% to USD
34bn this year, said Luis Vergara, managing director and head of residential trading at the New York firm that also brokers commercial loans.
The additional supply will likely come from commercial banks, which have grown more comfortable with the oversight of the Consumer Financial Protection Bureau, which requires scrutiny of the counterparties in any trade, he said. Earlier this year, banks had trouble deciphering CFPB regulations, slowing the pace at which they offloaded loans, he said.
Mission’s expectations come close to the base case forecast of Compass Point Research & Trading, which calls for USD 37.7bn in annual supply through 2016, about half from commercial banks, as reported (see article, 10 December).
Access to cheap financing through warehouse lines and securitization will also encourage more bulk sales, according to the investor.

NPL-RPL RMBS volume seen steady

Non-performing loan securitizations have represented the fastest growth in the non-agency RMBS market. Issuance has grown to USD 12bn this year from USD 6.9bn in 2013 and USD 2.4bn in 2012, according to Deutsche Bank in a 10 December report. Along with re-performing loan securitizations, volume should be steady next year at about USD 10bn–USD 14bn, the analysts said.
Demand for NPLs has eased since mid-year, however, potentially limiting the prices that investors will want to pay for collateral in future sales. Caliber Home Loans, a frequent issuer controlled by private equity giant Lone Star Funds, paid 4% yields on the senior class of its latest NPL RMBS, a 50bps premium to bonds sold just a month earlier. Investors are concerned about thin liquidity in the deals, which could harm pricing if credit markets were upset by geopolitical events or rising interest rates.
In any event, much of the flow appears to be shifting to re-performing loans, which have grown as loan servicers complete modifications and the economy improves. Re-performing loans make up about 21% of all non-agency loans today, more than four times the share at the beginning of 2010, JPMorgan data show.
“Interestingly, sales volume composition has shifted to involve more re-performing loan trades due to

enhanced pricing and capital relief relative to heavily discounted NPLs,” said Vergara, of Mission Capital.

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Re-performing loans have been about 35%–40% of supply by deal count, a trend that will continue into
2015, Vergara said.

GSEs expected, finally

In addition to routine sales from HUD and money center banks, Vergara expects regional banks will
reduce their holdings of “cost-prohibitive balance sheet assets” to meet stricter capital requirements.
What’s more, the GSEs will be bigger players next year, potentially adding “large volumes” to supply, the investor said. Freddie Mac completed a pilot program sale of USD 659m in August, deeming the sale well received and vowing to find more opportunities to reduce its less-liquid assets as directed by the FHFA.
The GSEs are also still understood to be considering securitizations of NPLs, a source said. Instead of selling loans outright, the GSEs could retain an interest that would allow them to share in some upside, the source added.

In November 2013, Wanda DeLeo, deputy director of the FHFA’s conservator division, said the regulator was looking at ways for the GSEs to securitize some of their loans, as reported. The following May, the FHFA charged Fannie and Freddie with developing and implementing plans for “targeted” non-performing loan sales but did not mention securitization.

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The Never-Ending Story of CMBS

October 30, 2014

By Erika Morphy | National

A funny thing happened as the CMBS market picked itself up after the financial crisis of 2008 and vowed never again. The measures that were put in place to prevent another meltdown—some, admittedly at the insistence of regulators— have helped to usher in a resurgence in lending and increase in competition. Take, for example, the documentation now required for a CMBS loan. These guidelines are much more standardized, says Jordan Ray, managing director of New York City’s Mission Capital Advisors. Transparency has increased, as was intended, as well as easier poaching of borrowers, which was not.
“It has made it much easier for conduits to accept other conduits’ loan documents to win business,” Ray says. “The end result is that the plain vanilla CMBS is now very much a commoditized business and those who want to get deals done need

to do something special.” Besides the usual—interest only terms, floating rate transactions—Ray has seen lenders originate mezzanine loans and keep them on their balance sheet, as the extra edge. Or offer stronger subordination levels or shorter-term loans.
“It can be little things, but more lenders are willing to go out of the box somewhat to win business as competition intensifies.”
Of course it’s not just standardized paperwork that is driving this trend. In general, the CMBS market is hitting new post-crisis high notes thanks to improving fundamentals, an improved economy and the prolonged low-interest rate environment, which has also fueled alternative and competing forms of finance.
“Conduits are competing for every last scrap,” Ray says.
If this sounds painfully familiar, that’s because it is yet another chapter in the never-ending story of CMBS (well, all markets actually). The market moves— sometimes dramatically, sometimes not—between risk and safety depending on larger macroeconomic conditions, fundamentals in commercial real estate and what the competition is doing.
For now, the center appears to be holding sway.
“You want issuance to climb and a steady pace and not spike—and so far that is what is happening right now,” says Steve Renna, CEO of the Washington, DC- based CRE Finance Council. Third quarter 2014 saw a robust $22 billion in CMBS issuance, he says, and puts the industry on track to meeting a psychological post-crisis high-note of $100 billion. “That will exceed by a healthy margin the $81 billion we saw in 2013,” Renna says.

The State of the Market

This is not just a numbers story, though. CMBS is clearly on more solid footing than it has been since the crash. Originators are using more prudent assumptions in their underwriting and credit enhancements have risen to reflect declining credit profiles and the rise in leverage levels.

In fact credit enhancement levels in US CMBS are close to double those in 2006 and 2007, a recent Fitch Ratings report noted.CMBS has also been bolstered by improving fundamentals, which is reflected in the overall improvement in asset performance.
Commercial real estate performance and macroeconomic measures have slowly improved over the past few years, Fitch Ratings noted, “providing stable occupancy and, for hotels and multifamily properties especially, significant improvement in revenues.” Besides the general economic improvement, Fitch also pointed to the limited new property construction as playing a role in asset performance.

“Standardized documentation has made it much easier for conduits to accept other conduits’ loan documents to win business. The end result is that the plain vanilla CMBS is now very much a commoditized business and those who want to get deals done need to do something special.” —Jordan Ray, Mission Capital Advisors

Also, pool structures have become simpler in many cases. Fitch Ratings notes that we are seeing less “hyper-tranching” and that operating advisor and controlling class calculations have been introduced to better manage potential conflicts of interest. Finally, senior bondholders are better protected in that they now recover principal before junior bondholders receive interest when assets are liquidated.

If there is any room for angst in this cozy picture, it is the competition. Give or take, there are about 43 active conduits in the market now—each, as Ray says, scrambling for scraps.
The potential problem, simply put, is this: as competition increases, underwriting standards drop.
We saw it in the past and even now, in this CMBS 2.0 environment, we are seeing shades of it not just in such metrics as LTV and DSCR, but also in more subtle aspects such as weaker loan structures, Fitch said. It points to, as an example, the increasingly common feature of having specific dollar amount caps on so-called “bad boy” carveouts.
The competition is coming from not only new entrants in the conduit market, but also other lenders that have been used to a meek CMBS market of the past few years. Life insurance companies, for example, no longer have the market to themselves anymore. As a result, says Shelley Magoffin, SVP of Grandbridge Real Estate Capital, “they’ve gotten very creative in how they differentiate themselves from the newfound competition, including such tactics as “providing funding before a property is stabilized, offering IO and earnouts, things that they weren’t doing three years ago.”
Still, it is a fine line between weakening loan structures and more aggressive underwriting and a robust capital market that has developed the necessary chops to take on more risk with the goal of furthering development. In October, as one example of the latter, Prudential Mortgage Capital Co. loaned the Jacksonville,
FL-based 22 Lantern LLC $18.1 million in a CMBS structure for Lantern Square Apartments, a failed condo conversion that the company was turning into a multifamily project.
Lantern 22 initially acquired the property in 2006. Just before the economic crash, the owners converted the apartment complex into a condo and began trying to sell units. Lantern is using the CMBS loan to refinance an existing condo conversion mortgage loan and reacquire units from third parties in the building. Also, much of the new competition entering the market has been around the
block more than once and not likely to try extreme structures. Walker & Dunlop, a

Bethesda, MD-based real estate finance firm, is about to originate its first round of CMBS transactions under a new platform it launched last year.
At the end of September, the company announced it contributed its first $58 million of collateral in multifamily and retail loans for an upcoming securitization with Wells Fargo. W&D’s CMBS platform is on track to contribute $200 million in collateral to future securitizations by the end of 2014. Meanwhile, its CMBS originations are likely to accelerate with Walker & Dunlop’s recent acquisition of Johnson Capital, which has a respectable footprint in the CMBS market.
The origin of W&D’s CMBS deal is telling, though, for the market. The main reason the firm got into this space was to diversify its offerings away from its core platform of GSE executions, and in this respect it appears to have succeeded. During a recent earnings call, CEO Willy Walker described how the deal came about: “We quoted a three-property, multifamily deal in June for execution with
the GSEs. The borrower requested more proceeds than an agency loan could provide. So we quoted the deal for our conduit.”
Then, in the process of quoting the deal for the conduit, the borrower asked W&D to look at three transitional properties that needed bridge financing, which also wound up being funded. “A year ago we would have lost the deal after providing the GSE quotes,” Walker said. “Today, due to our new CMBS conduit and scaled balance sheet lending operation, we financed these six properties, totaling $67 million.”
It is, in other words, how CMBS was meant to operate in the capital markets: as a complementary backstop when other lending doesn’t quite fit the borrower’s needs. All courtesy of a new provider in the market.

Preparing for the Refi Wave….

These new providers and the solid macroeconomic environment and commercial real estate fundamentals suggest that the CMBS ecosystem is ready for what is expected to be one of its biggest challenges post the 2008 financial crisis: refinancing the $600 billion or so of loans made during 2005-2006 time period.

Certainly this bonanza is one driver for these new entrants. In September, when the Macquarie Group and Principal Real Estate Investors announced they were partnering on a new CMBS platform the upcoming wave of refis was cited. “There will be a substantial volume of commercial mortgage loans maturing over the
next few years,” says Timothy Gallagher, New York City-based managing director and head of commercial real estate markets at Macquarie. “That provides Macquarie with a sound opportunity to establish a CMBS debt platform in the US.”

…With New Underwriting Standards in the Background

However, there’s one tiny glitch for some of these hopeful borrowers in waiting:
standards have changed considerably since that time.

“You want issuance to climb at a steady pace and not spike—and so far that’s what is happening right now. The industry is on track to meeting a psychological post-crisis high-note of $100 billion exceeding what we saw in 2013.” —Steve Renna, CRE Finance Council

It’s a CMBS 2.0 world now and besides the statutory changes to the model, underwriters are not likely to forget the lessons of 2008. Yes, there is more aggressiveness in the underwriting, but it is nowhere close to previous iterations. “This is a major issue: a lot of these loans that have been locked up in CMBS for the past 10 years are looking to refinance out, and there have been a lot of changes,” says Matthew McGovern, a 20-year industry veteran, who recently joined the Irvine, CA-based GRS Group as director of its national leadership team.

The economic landscape changed in values, and underwriting standards have changed in some cases dramatically, he said, noting that “loans that met the underwriting criteria in the old phase 1 may not meet that same bar today.”
GRS is seeing it already, “as some of these loans are being pulled forward and are being prepaid; we’re seeing them with existing due diligence on them that was acceptable at that time, but borrowers are stunned at the increased reserve and environmental requirements.” Referring to the latter, McGovern said he has run into existing contaminated sites under monitoring programs, and even no- further-action letters are now subject to much more stringent standards.
“Unfortunately, borrowers don’t always understand why it’s an issue now when it wasn’t back when they financed. So, we’re helping them understand and work through that. It’s not without pain in some respects. Hopefully, it doesn’t impact a lot of properties, but there will certainly be enough that it will impact.”

Lather, Rinse, Repeat

Other borrowers—many in fact, as the economy continues its recovery—won’t have such concerns. They will be happily tapping the conduits to lock in low interest rates and take out proceeds, if possible.
That was the driving force behind two CMBS loans Marcus & Millichap Capital Corp. recently secured to refinance the Hampton Inn Crystal City in Arlington, VA and the Holiday Inn Capital Square in Columbus, OH. The $25-million CMBS
debt placement for the Crystal City property had a fixed interest rate of 4.76%
and a 65% loan to value. The Holiday Inn’s $5.8-million CMBS loan’s interest rate was 4.8% and a 70% LTV. Both loans were maturing and the borrowers wanted
to advantage of the lower interest rates and take out equity.
Certainly for the rest of the year and into 2015, depending on the direction of interest rates, it will be lather, rinse, repeat, with only the end-use of the proceeds differing by borrower.
Real Capital Solutions secured a $16.5-million CMBS loan to refinance its 244- unit Eden’s Edge multifamily property in Jacksonville. The Louisville, CO-based

investment and development firm wanted the five-year loan “to continue strategic investment in their target markets,” the originator Greystone reported.
On the other end of the deal-size spectrum and the opposite end of the country is property investor David Werner, who recently secured a $700-million CMBS loan—a 10-year, fixed-rate, interest-only deal, specifically—to acquire the leasehold interest in New York City’s 1.8-million-square-foot Mobil Building. Morgan Stanley Mortgage Capital Holdings provided the financing, which was arranged by Meridian Capital Group and Eastdil Secured.
There was a lot of competition for the deal despite its size and complexity, insiders in the know told reporters. This is concerning to some, even as the CMBS market’s growing prowess is clearly a boon to commercial real estate.
Grandbridge Real Estate Capital’s Magoffin, for one, is worried, though not overly, about the growing aggressiveness of the market. “It’s great that there is CMBS money out there, though I think it’s still the loan of last resort. But it’s a little concerning that some of the CMBS money has gotten so aggressive so quickly. It might be a little too much a little too fast, but nowhere what it was in
2006.”