Multifamily Lending – Freddie Mac (FHLMC)

Freddie Mac (FHLMC) Multifamily Mortgages


Loans  that don't go to Fannie Mae or a conventional lender may go to Freddie  Mac. These are referred to as FHLMC mortgages, a type of multifamily loan that is secured by a first-position mortgage on a traditional, student housing, senior housing, or affordable housing property. These mortgages may be held in the FHLMC portfolio (10% of mortgages) or sold to bond investors (90% of mortgages). The loan may be fixed or floating (which may or may not include an interest-only period) and is typically amortized over 25-30 years, with a balloon payment due at the end of the term unless it is a self-amortizing portfolio loan.


Fixed-Rate Loan: The fixed rate product may be used for the acquisition or refinance of all major multifamily project types. Typical loan amounts are $5-100 million and may include interest-only options. Maximum available LTV is 80% and minimum debt service coverage ratio is 1.25x.

Fixed-Rate Loan Options and Requirements
Eligible Products Multifamily housing, purpose-built student housing, seniors housing, cooperative housing, and Targeted Affordable Housing.
Loan Size $5 million+
Term 5- to 10-year terms
Max Amort 30 years
Min DSCR  1.25x
Amortization Calculations Actual/360 standard; 30/360 available
Lockout Period 2 years
Prepayment Yield maintenance until securitized followed by 2-year lockout; defeasance thereafter. No prepayment premium for final 90 days. If loan is not securitized within first year, then yield maintenance applies for the life of the loan. Yield maintenance without defeasance is available for securitized loans for an additional cost.
Tax & Insurance Escrow Typically Required
Replacement Reserve Deposit Typically Required
Recourse Non-recourse except for standard carve-out provisions
Prepayment Options Yield maintenance and other graduated prepayment options
Supplemental Financing Yes, subject to requirements specified in the Loan Agreement
Lock Options Early rate-lock option available for varying durations, typically ranging from 60 to 120 days until Freddie Mac purchase.

Floating-Rate Loan: The fixed rate product may be used for the acquisition or refinance of all major multifamily project types except for cooperative housing. Typical loan amounts are $5-100 million and may include interest-only options. Maximum available LTV is 80% and minimum debt service coverage ratio is 1.25x.

Floating Rate Loan Options and Requirements
Eligible Products Multifamily housing, purpose-built student housing, seniors housing, and Targeted Affordable Housing.
Loan Size $5 million+
Pricing Index 1-month LIBOR index
Early Spread Lock Options Early spread lock option available for varying durations, typically ranging from 60 to 120 days from spread lock until Freddie Mac purchase, as well as our Fast Track Early RateLock option for conventional transactions for 90 or 120 days until Freddie Mac purchase; Sellers should consult with their regional Freddie Mac representative to determine eligibility.
Term 5-, 7-, and 10-year terms
Interest Rate Cap Borrower may obtain its own cap coverage from a third-party provider.
Interest-Only Period Partial-term and full-term interest-only available; see chart below and related footnotes
Max Amort 30 years
Min DSCR  1.25x
Amortization Calculations Actual/360
Lockout Period 1 - 2 years
Tax & Insurance Escrow Typically Required
Replacement Reserve Deposit Typically Required
Recourse Non-recourse except for standard carve-out provisions
Prepayment Options Graduated prepayment options
Supplemental Financing Yes, subject to requirements specified in the Loan Agreement

Student Housing Mortgage: The student housing product is for the acquisition or refinance of purpose-built student housing with 12 month and parental guaranteed leases preferred. Residence halls or other multiple occupancy rooms with a shared common bathroom and centralized food service areas or dining halls do not qualify. Typical loan amounts are $5-100 million and may include interest-only options. Maximum available LTV is 80% and minimum debt service coverage ratio is 1.30x.

Student Housing Financing Options and Requirements
Term 5-10 years
Loan Size $5 million+
Max Amortization 30 years
Financing Uses Acquisition or refinance
Eligible Properties - Purpose-built student housing properties; must have a minimum of one bathroom for every two bedrooms, and each apartment must have a separate full kitchen.
- Stabilized garden, mid-rise, and high-rise apartment properties that are greater than 50 percent- occupied by student tenants.
- Supporting college/university has 8,000 or more students; student housing properties located within close proximity to multiple schools that have a combined student body of 8,000 students or more will be considered.
- Property is located less than two miles from college/university or on a public transportation route.
Ground Lease Ground lease for land owned by a college or university may be permitted with prior approval
Lease Parameters - Individual tenant lease by the apartment, bedroom, or by the bed.
- Rent under a master lease may be permitted with prior approval.
Lease Term 12 months preferred
Lease Guaranty Parental guaranty preferred
Recourse Non-recourse except for standard carve-out provisions
Supplemental Loans Available
Tax & Insurance Escrow Typically Required
Min DSCR 1.3x

Lease-Up Loan: The lease-up product is for traditional multifamily properties only with substantially complete construction that is in need of stabilization; this is not available for student, senior, or affordable housing. Maximum leverage is a 75% LTV with a 1.30x debt service coverage ratio (with a letter of credit or reserve); otherwise, there is a max LTV of 65% and debt service coverage ratio of 1.25x.

Premier Lease-Up Standard Lease-Up
Description Financing for newly constructed properties in Tier 1 and Tier 2 markets for qualifying sponsors Financing for newly constructed properties that do not meet our Premier Lease-Up requirements and parameters
Types of Loans - Fixed- and floating-rate loans
- Interest-only available during the lease-up period as provided for in credit policy
Eligible Properties - Conventional newly constructed multifamily properties in lease-up
- Non Eligible properties include student housing, seniors housing, manufactured housing, and affordable housing
Max LTV 65% 75%
Min DSCR DSCR Calculator 1.25x 1.30x
Minimum Credit Enhancement Requirements None Letter of credit or reserve sized to:

  • 5% of the underwritten value for loans with LTVs less than or equal to 70%
  • 10% of the underwritten value for loans with LTVs greater than 70%
Rate Lock
  • Greater than or equal to 40% of units occupied
  • Greater than or equal to 50% of units leased
  • Greater than or equal to 50% of units issued Certificates of Occupancy
  • Greater than or equal to 50% of units occupied
  • Greater than or equal to 60% of units leased
  • Greater than or equal to 60% of units issued Certificates of Occupancy
Appraisal Report The appraisal report must provide the as-is and as-stabilized value for the property; the underwritten value will be based on the as-stabilized value (unless there is an adjustment for something other than construction or income until stabilization)
Funding Requirements
  • 1.0x interest-only DCR (or amortizing DCR, if applicable)
  • Greater than or equal to 55% of units occupied
  • Greater than or equal to 65% of units leased
  • All units issued Certificates of Occupancy
  • 1.05x interest-only DCR (or amortizing DCR, if applicable)
  • Greater than or equal to 65% of units occupied
  • Greater than or equal to 75% of units leased
  • All units issued Certificates of Occupancy
Release of Credit Enhancement Requirements Not applicable
  • Minimum 90% occupancy and underwritten net rental income must be achieved for three consecutive months
  • Expenses must be based on the greater of:
    • Underwritten expenses at the time of origination, or
    • Annualized, actual expenses from the time the property reached underwritten occupancy at stabilization
  • Stabilization and/or release of credit enhancement will occur once the property has achieved 1.25x amortizing, policy compliant DCR for 3 months
  • No new third-party reports required
  • Up to 12 months to reach stabilization; if the property does not achieve the 1.25x stabilized DCR during this time frame, then the credit enhancement will be used to resize the loan and recast the payments

Manufactured Housing Community Loan: The manufactured housing product is for existing, stabilized, high-quality, professionally managed manufactured housing communities (MHCs), with or without age restrictions. Loan amounts are $1 million+ and may include interest-only options. Maximum available LTV is 75% and minimum debt service coverage ratio is 1.25x.

Manufactured Housing Loan Options and Requirements
Eligible Properties Existing, stabilized, high-quality, professionally managed manufactured housing
Loan Size $1 million+
Term Up to 10 years
Max Amort 30 years
Min DSCR  1.25x
Interest Rate Fixed- and floating-rate options
Prepayment - Fixed-rate mortgages: Yield maintenance until securitized followed by a 2-year lockout; defeasance thereafter. No prepayment premium for final 90 days. If loan is not securitized within first year, then yield maintenance applies for the life of the loan. Yield maintenance without defeasance is available for securitized mortgages for an additional cost
- For floating-rate mortgages: Yield maintenance at 1% or yield maintenance with step down
Recourse Non-recourse except for standard carve-out provisions
Tax & Insurance Escrow Required
Replacement Reserve Deposit Typically Required
Supplemental Financing Available
Early Rate and Spread Lock Options Early rate and spread lock options available, typically ranging from 60 days to 120 days

Revolving Credit Facility: The revolving credit product is a 5 year secured line-of-credit on any of the major multifamily property types; borrower can move assets in and out of the facility for rehabilitation/upgrade, acquisition, or refinance. Typical loan amounts are $100 million+ and are interest-only. Maximum available LTV is 75% and minimum debt service coverage ratio is 1.45x.

Revolving Credit Facility Options and Requirements
Description Secured line-of-credit; borrower can move assets in and out of the facility while adhering to the defined credit parameters
Type of Funding Continuous funding as assets are moved in and out of the facility, non recourse basis
Collateral - Conventional first lien mortgages for acquisition rehabilitation/upgrade, acquisition, or refinance
- No minimum occupancy rate is required
Facility Amount - Initial commitment of $100 million or more
Facility Term 5 years
Pricing Floating rate; full-term interest-only; the facility will be indexed to a 1 month or 3 month LIBOR
-Spreads locked for life of facility for three debt coverage ratio (DCR) levels and one LTV level
Available for Securitization No
Min DSCR 1.45x
Cross-Collateralization Under one or more notes, assets will be cross-collateralized and cross-defaulted
Release of Collateral Allowed
Assumptions Non-assumable
Interest Rate Cap Available through third-parties
Annual Valuation Applicable
Fees Transaction, application, legal, unused capacity and commitment, seasoning, termination and release fees may apply

Supplemental Loan: The supplemental loan product is for stabilized properties with Freddie Mac first lien mortgages in place. Loan amounts are $1 million+ and may include interest-only options. Maximum available LTV is 80% and minimum debt service coverage ratio is 1.25x.

  Split Supplemental Loans Seasoned Supplemental Loans
Description A supplemental loan placed at the same time as a newly originated Freddie Mac first loan A supplemental loan placed at least 12 months after origination of the first loan or the previous supplemental loan
Eligible Loans Loans with a minimum of $1 Million related to individual mortgages to be purchased through the Conventional Cash Mortgage Purchase Program, Targeted Affordable Housing Cash Mortgage Purchase Program and conventional structured transactions that are not scheduled for securitization Loans with a minimum of $1 Million that are behind existing first loans related to individual mortgages to be purchased through the Conventional Cash Mortgage Purchase Program, Targeted Affordable Housing Cash Mortgage Purchase Program and conventional structured transactions
Standard Loan Terms Coterminous with first loan; 30-year maximum Coterminous with first loan or may exceed first loan by up to 24 months
Prepayment Structured as a yield maintenance loan
Reserve Requirements - Origination of a supplemental loan behind a securitized loan will trigger collection of any deferred reserves for that first loan
- Real estate tax reserve, even if not required for the first loan
Min DSCR 1.25x

Value-Add Loan: The value-add loan is an acquisition loan offering a short-term, cost-effective financing option for moderate property upgrades. It has a floating interest-only rate with an 80% max LTV and a debt service coverage ratio based on 7-year fixed rate at current pricing.

Value-Add Loan Options and Requirements
Loan Terms
  • 2.5 years; interest-only
  • Floating-rate; no cap needed
  • No prepayment during the first year
  • After the first year, borrower may pay off the loan at any time but must remit an exit fee of 2%; the exit fee will be waived if the loan is refinanced with a Freddie Mac fixed- or floating-rate securitized loan
  • Acquisitions only; not assumable
  • Loan documentation at origination will include the Value-Add Rider which will detail the terms/requirements of the rehabilitation
  • Escrows will include real estate taxes, insurance, and replacement reserves; escrows for rehabilitation are not required
Property Types
  • Must have more than 500 units. Tier 5 MSA or better markets.
  • Well-constructed properties requiring moderate repair
  • Market laggards that require capital infusion and new/improved management
  • REO properties in receivership that are capable of improved performance
  • Not eligible: seniors housing, student housing, manufactured housing, affordable housing
Loan Proceeds/Sizing
  • Max LTV of 80%
  • Debt service coverage ratio (DCR) based on 7-year fixed rate at current pricing and Treasury rate
  • Standard Freddie Mac underwriting based on as-is income and expense
  • Refinance Test not required at initial sizing
  • No pro-forma underwriting of future performance
Rehabilitation
  • Rehabilitation must commence within 90 days of loan origination
  • Budget should be no less than $5,000 per unit and no more than $15,000 per unit; increase in the budget will be reviewed on a case by case basis
  • At least 50% of the plan/budget should be spend directly on unit upgrades
  • Increases or decreases to the plan/budget less than or equal to 20 percent do not require notice to or approval by Freddie Mac; increases or decreases greater than 20 percent require notice to Freddie Mac; increases or decreases that go above $15,000 per unit or below $5,000 per unit require notice to and approval by Freddie Mac
  • Rehabilitation term should not exceed 27 months
  • Tenants will typically stay in place during the rehab; minimal disruption to property occupancy is expected
  • Minimum break-even occupancy calculated at origination based on the applicable 7- year fixed-rate
  • Servicer to provide standard performance/financial reporting and conduct annual inspections of rehab progress
  • Borrower to provide quarterly attestation/certification of rehabilitation progress
  • Guarantor to guaranty the lien-free completion of any work commenced in the manner required by the loan documents
At Loan Maturity/Refinance Final engineer review of work completion and quality is required Freddie Mac will re-underwrite the loan (akin to any loan maturity) according to then-current credit policy parameters

 

Loan features

Term Length/Amortization: FHLMC loan terms are typically 5-10 years unless the mortgages are held in the Freddie Mac portfolio, in which case the terms may go up to 30 years. Amortizations may also go up to 30 years, but amortization depends heavily on the product selected as well as the condition and type of the property.

Recourse: Mortgages are always Non-Recourse, except for standard carve-out provisions. What this means is that the Borrowers are not personally liable for the repayment of the loan and that the collateralized property and its cash flows would be the sole source of repayment of the debt in the event of a foreclosure. However, in the event the Borrower actively participates in an activity that could cause harm to the property, Lender, or investors, there could be springing recourse in some limited circumstances; this may include loan fraud, property transfer or subordinate financing without consent of the Lender, voluntary or collusive activity leading to a bankruptcy filing or failure to maintain SPE status, among other such actions.

Rate Lock: Borrowers will lock the interest rate in advance of the loan closing, but the type of rate lock selected will depend on how far the Borrower will need it completed before closing. FHLMC offers four types of rate lock options in order to meet whatever the Borrower’s needs are.

Loan Assumption: FHLMC mortgages are assumable, but the new assuming borrower (i.e. Purchaser) must qualified by meeting the original underwriting standards. Typically this occurs when the Borrower wants to sell the commercial real estate that secures the loan, and the Purchaser of the property wants to take the loan over. Once the property sale and assumption is completed, the Purchaser becomes the owner of the property and is bound by the original terms of the assumed loan and the original Borrower/Seller is released from its obligation to the property and the existing loan. The benefit of this structure is that the assumption of the loan allows the Borrower/Seller to avoid defeasance or other pre-payment costs and give the buyer the opportunity to assume a loan that may have favorable terms than what is market. Loan assumption is an especially attractive option in high interest rate environments or tight credit environments. In an attempt to expedite FHLMC loan assumption, processes have been streamlined for Buyers and Sellers.

Prepayment Penalties

There are two prepayment penalty structures for fixed FHLMC mortgages – Yield Maintenance and Defeasance, and both include a 2 year lockout period. With a Yield Maintenance prepayment penalty, the loan is actually paid off and the mortgage note is cancelled, whereas a Defeasance is a substitution of one source of collateral (the property) with another (typically treasury bonds) which is then transferred to a special purpose entity (SPE) called a “Successor Borrower.” Both of the structures can cause the Borrower to incur significant monetary penalties if the loan is prepaid well before the maturity date or the US Treasury bonds fall substantially, so anticipated hold time and consideration of future markets should be taken into consideration when contemplating the term for this type of loan structure.

There are 4 prepayment penalty structures for floating FHLMC mortgages which include a flat 1% fee as well as 3 declining structures.

Yield Maintenance: Yield Maintenance. The goal of Yield Maintenance is to allow the bond investors to maintain the same yield as if the borrower made all scheduled mortgage payments until maturity. The penalty is typically calculated by a formula contained in the Note of the Loan Documents. The language will vary between different institutions, but will typically have the same two amounts to be repaid, namely: 1) The loan’s unpaid principal balance and 2) a prepayment penalty, which is typically determined by calculating the difference between the loan’s interest rate and the replacement rate (based on the US Treasury rate that most closely corresponds to the maturity date), with the remaining loan payments discounted back for the time value of money. One thing to keep in mind is that yield maintenance provisions usually contain a prepayment penalty “floor” of at least 1%.

Defeasance: With defeasance, the loan is not repaid and the note remains in place, but substitute collateral (typically in the form of bonds or other securities) is arranged by the defeasing firm and replaces the commercial real estate securing the loan so the property can be sold or refinanced. The cash flows generated from these new securities are in the form of coupons and maturing securities which will cover all future loan payments. When the average yield on the substitute collateral is higher than the loan, it is cheaper to purchase securities to cover the loan’s remaining principal and interested (P&I) payments. Unlike yield maintenance, defeasance provisions do not contain a floor. However, the third-party administrative fees in order to defease typically range from $50,000 to $100,000, depending on the loan’s size and complexity. For more specific detail, you may also review the Defeasance Rider to the loan documents.

Securitization/Loan Pools (K Deals)

After a loan is funded, it is put into a security pool of at least $1 billion which is sold to a bond issuer/depositor that puts the pool into a third party trust. This trust packages the pools into bonds, or “securitizes” the loans. FHLMC then purchases the senior, guaranteed bonds issued by the trust and securitizes them via the Freddie Mac Trust into K Certificates, which are guaranteed by Freddie Mac. These certificates are then sold on the open market to investors, which typically include life insurance companies, pension funds, money managers, mutual funds, and commercial banks for the investment grade pools. The subordinate and mezzanine bonds (which are not guaranteed by Freddie Mac) are sold to private investors by the third party trust. Investors choose which bonds or certificates to purchase based on the level of credit risk, yield, and duration that they seek.

Rating Agencies

FHLMC's mortgage securities are not rated separately by any of the main rating agencies (i.e Moodys, Standard & Poors, etc.). This is because they carry the implied AAA rating of Freddie Mac's Credit Rating and its reputation for default rates far below the rest of the industry.

Loan Servicing

The Freddie Mac lender or a third party may service the mortgages. The Master Servicer is responsible for day-to-day loan servicing practices including collecting loan payments, managing escrow accounts, analyzing financial statements inspecting collateral and reviewing borrower consent requests. All non-performing mortgages are usually sent to the special servicer. The special servicer is responsible for preforming customary work-out related duties including extending maturity dates, restructuring mortgages, appointing receivers, foreclosing the lender’s interest in a secured property, managing the foreclosed real estate and selling the real estate. Under some situations, master servicers subcontract some of their responsibilities to a primary or sub servicer in order to uphold the servicing standard when they need additional assistance. FHLMC is currently ranked above average for both master and special servicing.