KBRA: More K-Series Borrowers Paying Off Early–Or Borrowing More
Many Freddie Mac K-Series borrowers are unlocking the equity resulting from years of strong multifamily investment demand and price appreciation, said Kroll Bond Rating Agency, New York.
“In doing so, many have turned to defeasance while others have chosen to avail themselves of the agency’s supplemental debt program,” the agency’s Freddie Mac K-Series Borrowers Move On, Or Top Off report said.
Freddie Mac Multifamily, McLean, Va., finances most of its multifamily loan purchases via K-Deals. The GSE purchases loans, assembles them into diversified pools and securitizes them. Until 2008 Freddie Mac retained most multifamily loan purchases in its portfolio, but K-Deals and other forms of securitization now dominate.
KBRA reviewed 75 K-Deals with a nearly $100 billion current outstanding principal balance. Just over $63 billion of that figure was eligible for either defeasance or for incurring supplemental debt. Defeasance allows a borrower to substitute new collateral–generally Treasury securities–to pay off a securitized loan early. The Treasurys replicate the loan’s cash flows to make the lender whole.
In total, nearly 30 percent of the studied K-Series eligible first mortgage population has either defeased or taken on supplemental debt, KBRA reported. Just under 9 percent of the first mortgages were defeased and 19.9 percent incurred supplemental debt.
KBRA observed that both defeasance and supplemental debt accelerated in recent years as rent and property values climbed. “Both defeasance and supplemental debt activity began to accelerate in 2014 following 2013’s double-digit percentage increases in both the CoStar U.S. multifamily and prime multifamily index,” the report said. “Following on the heels of 2013 and 2014, both 2015 indexes posted double-digit price growth, stimulating pent-up demand for defeasance and supplemental debt.”
More recently, defeasance continued to climb year-over-year while supplemental debt additions actually fell by 16 percent, KBRA noted. “For those property owners selecting defeasance, their belief may be that property prices are at or near the peak and gains should be locked in through a property sale or refinance,” the report said. “On the other hand, borrowers seeking supplemental debt may believe that their properties can appreciate further, but may have turned more cautious and hesitant to re-leverage their existing equity.”
KBRA recently upgraded five classes of K-Series certificates in three transactions, primarily due to defeasances, the report said.
