First Foundation in Irvine, Calif., has tapped into a largely overlooked program to clear space for higher-yielding loans.
The $6 billion-asset company recently completed a deal to securitize $622 million of multifamily loans through Freddie Mac’s Q-deal program. First Foundation, in an interesting twist, also agreed to buy $331 million of the securities Freddie issued.
Over time, First Foundation plans to replace the old loans, which had an average yield of 3.8%, with credits nearing 4.5%, said John Michel, the company's chief financial officer. At 3.2%, the yield from the securities will be about 100 basis points higher than the short-term investments the company has been holding in its investment portfolio.
Of equal importance: First Foundation is comfortable with the risk profile of the securities because it made the underlying loans.
“We have a lot of confidence because these are our loans,” Michel said.
The move comes at a time when banks of all sizes are looking to make the most of their balance sheets and widen margins in a rising interest rate environment. At the same time, multifamily originations are rising and
Larger banks are typically the ones to securitize and buy back commercial mortgage-backed securities, said Devin Swaney, a partner at Dechert, the firm that advised First Foundation.
Still, Freddie’s Q-deal program has started to attract a more community banks “that had not otherwise played in the CMBS space,” he said.
In addition to First Foundation, the $7.2 billion-asset
Overall, First Foundation's deal is just the seventh transaction for the 4-year-old Q-deal program and the first to close in 2018. Unlike deals under Freddie’s better-known K-deal program, Q-deal certificates include securitizations of multifamily mortgages that were not originated under Freddie Mac underwriting guidelines or purchased by Freddie before the securitization.
Freddie Mac did not respond to a request for comment.
The sell-buyback strategy that First Foundation employed has a long pedigree in residential mortgage securitizations, said Ron Haynie, senior vice president of mortgage finance policy at the Independent Community Bankers of America.
While common in the 1980s and 1990s, the practice stalled as interest rates bottomed out. With rates on an upswing, Haynie said he expects to see MBS issuers back in the market.
“It’s a good investment,” Haynie said. “You can use them as collateral for borrowing or for advances from the Federal Home Loan banks. It makes sense in a lot of ways.”
