Education

FRESB Guide

In this guide we describe how Freddie Mac’s Small Balance multifamily financing program “FRESB” offers 5, 7 and 10 year fixed and hybrid ARM mortgages for smaller multifamily properties. FRESB transactions contain bond classes supported by each loan type; allowing investors to select specific WAL bonds. Limited historical default and prepayment experience means these guaranteed bonds price at a conservative 5% CPB, a market convention that somewhat understates potential prepayments and disregards extension benefits that may increase spread for the shorter hybrid ARM directed bonds. In Exhibit 6 we conclude by comparing our FRESB prepayment adjusted spreads to other Agency CMBS products, and find these guaranteed bond classes provide fairly short stable cash flows that offer a nice spread pickup to most other Agency CMBS alternatives.

Credit Classification Approach for CMBS

This article provides a CMBS credit methodology to help screen credit CUSIPs. The approach would classify CMBS 2.0 pools based upon NOI DSCR along with debt yield, from which we create two scenarios: i. A Moderate Recession and ii. An Extreme 2007-2010 Recession. Applying these consistent scenarios allows us to quickly triage credit lists with a universal approach. After applying this type of methodology investors can focus in on the troubled loan categories and hand underwrite specific credit issues. The report creates summaries of 2014, 2015, and 2016 conduit issuance in Exhibits 5, 6 and 7. The second half of the report discusses relative value and how CMBS have now moved to fair value. Please give us a call, if you would like to discuss the results.

2019 CMBS Outlook Video

In this link Darrell Wheeler provides our 2019 CMBS Outlook. After clicking the link the video will be blank for the first 3 minutes but after that the slides will advance. Hope you enjoy the video.

Written 2019 CMBS Outlook

Our outlook reviews Commercial Real Estate and related Securitized Products coming into 2019. The report provides several one page summaries for the CRE securitized products. Exhibit 5 provides a short summary of all 2018 conduit issuance and discusses the disconnect between the high underwritten DSCR and the rating agency stressed standards. SASB investors will want to review Exhibit 7, which provides several measures of transaction quality including our calculated total LTV and the issuance BBB to AAA credit slope. The relative value section discusses how CMBS and Agency CMBS seemed to sell off during the market turmoil. Yet in Exhibit 10 we compare CMBS super senior spreads to swap yield, single-A corporates, and BBB REITs and find they are actually rich coming into 2019. Given that relative analysis, CMBS has been outperforming as the market looks for stable safe havens. The last section of the report looks at real estate fundamentals and discusses how commercial real estate should perform in a 2019 recession or if interest rates rise.
We hope you enjoy the report. Feel free to call us if you have any questions.

GUIDE – Fannie Mae DUS CMBS

Given that the market sell off may be foreshadowing a 2019 recession, it may make sense to consider this guaranteed collateral bond sector.  This guide explains why we like the current strong multi-family fundamentals and reviews the Fannie DUS structure.  Exhibit 11 provides a default sensitivity analysis that demonstrates the stability of DUS A1 and A2 bonds.  Exhibit 12 shows how Fannie spreads have remained relatively stable in the early 2016 crisis, the last time fixed income sold off.  This stability analysis suggests that after the recent Agency CMBS spread widening, the DUS bonds are attractively priced relative to CMBS and other fixed income alternatives.

Freddie KF Speed Guide

Our Freddie KF Speed Guide reviews Freddie Mac floating rate program and analyzes realistic prepayment speeds for the underlying collateral.  These borrowers frequently opt for 10 year floating-rate loans in order to obtain a 60 month IO period with the intent to prepay before the loan starts amortizing in month 61.  Applying realized historical speeds to these pools creates only a 3.2 year average live, but when we consider how those speeds could change in a recession that may extend to create a 5 to 6 year guaranteed bond.  Given our 3 to 6 year WAL expectation the recent LIBOR plus 39 to 41bp coupon offers a nice floating-rate carry regardless of potential economic outcomes.

Ginnie Mae Project Loan CMBS Guide

This Ginnie Mae primer reviews Ginnie Mae’s Project Loan CMBS structure.  Project loan bonds initially price at 15% CPJ and the report discusses the market may be overcompensating when adjusting from that initial speed.  We look at various WAL life bonds and suggest different speed analysis ranges for short, medium and long term bonds. If market recession concerns become reality, then Ginnie’s guarantee should convert loan defaults to early bond prepayments, highlighting how these discount bonds could provide some level of recession credit hedge.

Freddie K CMBS Guide

We expect that Freddie K collateral and guaranteed bonds should outperform if the economic cycle is winding down.  The article explains why we like the current strong multi-family fundamentals and reviews the Freddie K bond structure. Exhibit 11 provides a default sensitivity analysis, that demonstrates the value of the Freddie guarantee, should the economy enter a recession.  Exhibit 12 shows how K-spreads remained relatively stable in early 2016, the last time fixed income sold off due to interest rate concerns.  These muted movements suggest Freddie K bonds should show good stability as the economy slows down.