Multifamily Conditions Start to Weaken in Freddie Mac’s Portfolio

Article originally posted on Globe St. on August 10, 2023

Multifamily delinquency rates rose from 13 basis points to 21 basis points.

Freddie Mac CEO Michael DeVito acknowledged the difficulties apartment owners are having during the GSE’s second quarter earnings call. Rising mortgage rates are contributing to downward pressure on apartment values nationwide, forcing up the cost of financing properties, and slowing the volume of multifamily originations, he said.

Some of these dynamics appear to have seeped into Freddie Mac’s earnings, a change from previous years when multifamily was often among the strongest elements in its balance sheet.

During the period, Freddie Mac set aside $101 million for multifamily credit losses, “driven by a credit reserve build due to deterioration in forecasted multifamily market conditions and current loan performance,” according to comments by CFO Christian Lown. That allowance, 50 basis points, was up from 11 basis points a year earlier.

Multifamily delinquency rates rose from 13 basis points in the first quarter to 21 basis points at the end of 2Q 2023, largely driven by higher delinquencies in the seniors housing portfolio.

Despite the deteriorating conditions, multifamily is still a strong component of Freddie Mac’s business though. Lown also noted higher net income of $563 million for the multifamily component. Higher guaranteed income and investment gains totaling $751 million in the multifamily segment helped partly offset the agency’s overall decline in net revenue to $5.3 billion. Also, with higher interest rates reducing demand for multifamily mortgage financing, the agency’s multifamily new business activity fell 13% from the previous year to $13 billion for the second quarter. However, in the same period its multifamily mortgage portfolio rose 3% to $427 billion, of which 94% was covered by credit enhancements, Lown said.

Meanwhile, the agency has continued with its mandate to finance affordable housing. In the second quarter, DeVito noted, Freddie Mac financed 114,000 rental units, with 90% being affordable to low-to- moderate-income families.