By the Numbers

Low issuance and tight spreads in agency CMBS

Mary Beth Fisher, PhD | June 24, 2022

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

A slowdown in commercial real estate transactions has had a pronounced impact on the multifamily sector, with Fannie Mae and Freddie Mac both likely to come in significantly below their multifamily issuance caps for the year. The slowdown has kept a lid on agency CMBS spreads despite other sectors in securitized products touching recent wides. For banks and insurance companies that need the lower risk weighting and agency guarantee, the better relative value is currently in 10/9.5 DUS, thanks to a recent modest widening compared to 10-year K-deal A2 and AM classes. Some vintages of fixed-rate DUS are also prepaying a bit faster than historical averages, so these pools could potentially produce a bit of excess return.

Commercial real estate transaction volumes have slowed, and multifamily properties are no exception. Fannie Mae DUS issuance is $20 billion year-to-date through May, with total issuance of $25 billion. Agency multifamily issuance is traditionally a bit backloaded in the fourth quarter, but it is unlikely to accelerate much with the Fed in a hiking cycle through year-end. The multifamily loan purchase caps are $78 billion for each enterprise for 2022. At the current rate, projected DUS issuance for 2022 would be $48 billion; Fannie’s total multifamily issuance would be $60 billion, or 23% below the $78 billion cap.

Exhibit 1: A slowdown in Fannie Mae multifamily issuance

Note: Data through May 2022.
Source: Fannie Mae, Amherst Pierpont Santander

Freddie Mac’s multifamily pipeline is tepid as well, with a single 10-year fixed-rate K-deal coming to market in each of May and June. The WI certificates for the K148 deal were the most recent to price on June 6. The K148 deal is on the calendar to be completed on September 8, but there are no new fixed-rate deals pricing in the interim. Two floating rate K deals are scheduled to come to market over the summer, along with a few small balance and supplemental deals.

Low issuance has kept a lid on spreads

Spreads across most securitized products market have widened against a backdrop of volatile rates, high inflation and recession fears. Agency CMBS spreads, with their ‘AAA’ rating and guarantees, have only modestly moved higher as issuance has declined (Exhibit 2). Freddie Mac K-deal spreads at issue widened out early in the year, peaked in mid-March, then tightened and have held those levels. Part of the widening was possibly due to the integration and expansion of the WI program into the regular issuance cycle. Some investors who had previously backed away from buying WI certificates have gradually gained approval or become more comfortable with the product, and have ramped up their participation. This has arguably contributed to WI A2 spreads remaining tight while DUS 10/9.5 spreads have widened by 10 bp to 12 bp since early May. This widening puts 10/9.5 DUS back in-line with the AM as opposed to the A2 classes of Freddie K deals, which is where they tended to historically trade prior to the introduction of the WI program in the second half of 2021.

Exhibit 2: 10-year K-deal and DUS spreads

Note: Beginning in 2022, spreads at issue have been converted from SOFR back to LIBOR swap spreads.
Source: Bloomberg, Fannie Mae, Amherst Pierpont Santander

Investors hoping or waiting for agency CMBS spreads to widen are likely to be disappointed, at least while origination volume remains depressed. Fixed-rate DUS investors can often pick up some extra return when loans prepay. The yield maintenance payments on discount pools aren’t meaningful, as they’re typically zero, but having a discount pool pay off at par can generate some excess return. Prepay speeds for 10/9.5 DUS are very slow the first two years, then begin to rise gradually (Exhibit 3). DUS 10/9.5 pools from 2017 thru 2020 are currently paying off faster than historical levels, at 4 CPR up to 10 CPR. This is likely due to the strong property price appreciation of the past several years. There could be a flurry of prepayments as some investors look to sell properties if the market begins to weaken, which its already showing signs of doing.

Exhibit 3: DUS 10/9.5 CPR by vintage by WALA

Note: Data through May 2022.
Source: Fannie Mae, Amherst Pierpont Santander

DUS ARM investors face a considerably different prepay picture (Exhibit 4). Prepays are historically low at 3 CPR during the first year, then tend to climb quickly to 18 CPR to 25 CPR during the following years. Similar to Freddie K floaters, the duration of DUS ARMs tends to be 3 to 4 years as borrowers tend to use the product for shorter-term financing, or wait for an easing cycle to lock in lower fixed rates.

Exhibit 4: DUS 10/9.5 ARM CPR by vintage by wala

Note: Data through May 2022.
Source: Fannie Mae, Amherst Pierpont Santander

Mary Beth Fisher, PhD
marybeth.fisher@santander.us
1 (646) 776-7872

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