Freddie Mac Float To Fixed Multifamily Loans

Float-to-Fixed Execution

Provides borrowers with superior cash-on-cash returns through the first two years of the loan while locking in a historically lower coupon for the life of the loan

Overview

9-year loan comprised of 2 years with a floating rate and 7 years with a fixed-rate:
• Floating rate is interest-only (IO) and uncapped
• Fixed rate is locked at spread-lock of floating rate

Freddie Mac Float-to-Fixed Multifamily Loans Video Summary

Freddie Mac Float to Fixed Multifamily Loan Summary

Target Borrowers
Well-qualified borrowers
Eligible Products
Conventional products (not including student or seniors housing loans)
Target Deal Size
Maximum of $50 million
Delivery Options
Standard delivery only; no early rate or spread locks
How It Works
• Floating-rate period: 2 years
o Interest-only, uncapped, locked-out/no prepayments
o No supplemental loans during floating-rate period
• Fixed-rate period: 7 years
o Amortizing loan with defeasance; securitization-ready
o Supplementals are permitted as governed by existing requirements
• Underwriting
o Compliant with current credit parameters
o Sized based on fixed-rate
o Must pass Refinance Test using aggregated term (2 years floating plus 7 years fixed) with 2 years of IO
• Pricing
o Terms (subject to revisions due to market fluctuations)
. Floating rate: LIBOR + 300 bps (net spread)
. Fixed rate: 7-year fixed pricing + 50 bps
o Process / Approach
. Fixed rate is locked when the spread on the floating rate is locked; pricing includes the cost of locking the fixed-rate
. Includes cost of third party reports
. No future rate adjustments
• Conversion to fixed-rate
o New third-party reports ordered and reviewed (to be paid for by the borrower)
o Additional loan proceeds permitted via a supplemental mortgage (pari passu); any additional proceeds will be priced at then first mortgage pricing
o If transaction fails to meet Freddie Mac’s credit parameters, Freddie Mac retains the right to restructure the transaction via a split note if necessary

Freddie Mac Float To Fixed Multifamily Loan Example

As illustrated in the example1 below, our float-to-fixed execution produces superior cash-on-cash returns that are superior to either the 10-year or 7-year fixed-rate executions.

Product 3-Year Average
Cash-on-Cash
Returns		 Year 1 Year 2 Year 3
Float-to-Fixed 17.43% 19.62% 21.24% 11.43%
10-year Fixed 14.54% 14.99% 16.62% 12.00%
7-Year Fixed 13.39% 16.21% 11.14% 12.83%

Assumptions1
10-yr fixed note rate2 4.30% Rate Stack (7-yr) Rate Stack (10-yr)
7-yr fixed note rate2 4.00% 2.15% Current US Treasury 2.70%
“7-yr fixed note rate (float-to-fixed +
50bps)2” 4.50% 1.85% Gross spread 1.60%
1 month LIBOR rate 0.16%
Net spread 3.00% Year One Applied Growth Rate
Margin 3.16% Revenue: $3,000,000 3.00% (Income)
Loan amount $18,500,000 Expenses $1,500,000 4.00% (Expense)
Value $23,125,000 Net operating income: $1,500,000
Initial equity $4,625,000 Float-to-fixed debt service: $592,719
Amortization period (months) 360 10-yr fixed debt service: $806,549
Interest calculation Act/360 7-yr fixed debt service: $750,278
Discount rate 10.00%
Terminal cap rate 7.50%
Selling costs 3.50%
Cap rate 6.49%
1 Modeled on a sample/actual transaction.
2 Float-to-fixed and 10-year scenarios assume 2 years of interest only; 7-year scenario assumes 1 year of interest only.