Once a rumor, by nowwe have learned the basics of how the program will work. Briefly, Freddie originates a first mortgage with a fixed rate and themezz lender provides another 15% at either a fixed or floating rate.We also know who Freddie's target audience will be this time around--properties whose values have dropped and need refinancing.

That latter point is going to be driven home when Freddie announcesthe four lenders participating in the program sometime next week. "I think people may be a little surprised at who we have chosen," saysDavid Brickman, vice president of multifamily and CMBS Capital Markets at Freddie Mac. They are not traditional debt players as one might expect, he adds. Rather "these are companies that are conventionally known as real estate equity investors," he tells GlobeSt.com. The point of choosing them, he says, was to ensure that an entity with deep expertise in multifamily will be ready to take the helm should a transaction go sour.

Indeed, mezz lenders have been--either by designor circumstances--increasingly finding themselves as owners ofproperties in which they had invested, as capital stacks foroverleveraged deals collapsed under the weight of the recession.

Over time, Freddie Mac's mezz lenders may include more traditionaldebt players, Brickman says. "Right now, though, in this particular environment we want folks who understand the value of the property and know what to do with it." To think of this program in terms of leverage is a mistake, he adds. "These are going to be recapitalizations of a property and in somesense, a deleveraging." Once the program is ramped up, Brickman expects annual volume will run between $2 billion to $3 billion in senior debt with a "few hundred million" in mezz loans.

Not surprisingly, given the still-sparse capital markets, Freddie Machas been receiving a lot of inquires from mortgage banks, Brickmansays. In fact, demand is so strong for the product that rumors have begun to circulate that Fannie Mae is preparing torelaunch its own mezz lending program. Brickman declined to commenton the Fannie Mae rumors. And the government-sponsored entity did not return a call to GlobeSt.com in time for publication.

LaFonte Nesbitt, a partner with Holland & Knight's Real EstatePractice Group, tells GlobeSt.com he has heard only general rumorsabout Fannie once again offering mezzanine lending in connection withits mortgages, but nothing specific. "It would not be that surprisingsince loan programs introduced by one of the GSEs are often followedby the other GSE introducing a similar or competitive loan program."

Nesbitt surmised that it would be easy enough for Fannie to re-establish operations. "Years ago, Fannie had a very well-established mezzanine lending program focused on the rehab of affordable housing projects, so the GSE and many of its lenders/servicers are very familiar with underwriting mezz financing. Also, many of the documents have already been drafted, and they might just need a few tweaks to be used for mezz lending rather than rehab."

Instant Insights /

Equity Investors Tapped for Freddie's Mezz Program

Related Stories

Recommended For You