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Servicer Evaluation: Freddie Mac

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Servicer Evaluation: Freddie Mac

Ranking Overview
Subrankings
Servicing category Overall ranking Management and organization Loan administration Outlook
Commercial master ABOVE AVERAGE ABOVE AVERAGE ABOVE AVERAGE Stable
Financial position
SUFFICIENT

Rationale

S&P Global Ratings' ranking on Freddie Mac Multifamily Asset Management and Operations (AMO) is ABOVE AVERAGE as a commercial mortgage loan master servicer. On May 11, 2021, we affirmed the ranking (please see "Freddie Mac ABOVE AVERAGE Commercial Mortgage Loan Master Servicer Ranking Affirmed; Outlook Stable," published May 11, 2021). The outlook for the ranking is stable.

Our ranking reflects AMO's:

  • Experienced and tenured senior management team;
  • Effective and comprehensive employee training and development program;
  • Continued low levels of multifamily mortgage loan delinquency rates, albeit supported by an extensive forbearance program during 2020;
  • Integrated and effective technology systems;
  • Comprehensive subservicer (seller/servicer) oversight program;
  • Sound audit and control environment, albeit with a longer-than-average internal audit cycle compared with those of most servicers;
  • Homogenous multifamily property portfolio, with limited exposure to other commercial property types;
  • Financial support and implicit guarantee from the U.S. government; and
  • Continued position under the conservatorship of the Federal Housing Finance Agency (FHFA) limiting the ability to control its future.

Since our prior review (see "Servicer Evaluation: Freddie Mac," published Aug. 15, 2019), the following changes and/or developments have occurred:

  • In November 2020, the FHFA issued its annual Conservatorship scorecard, which provides for a multifamily lending cap at $70 billion for Freddie Mac for 2021; at least 50.0% of that cap must include mission-driven affordable multifamily acquisitions. In January 2021, Freddie Mac, acting through FHFA, and the U.S. Department of the Treasury entered into a letter agreement to further amend the Senior Preferred Stock Purchase Agreement and terms of the senior preferred stock. The January 2021 Letter Agreement, among other things, capped multifamily loan purchases at $80 billion in any 52-week period, subject to annual adjustment by FHFA.
  • The "serviced by others" portfolio increased to $102 billion as of Dec. 31, 2020, from $82 billion as of Dec. 31, 2018, and the traditional K-Deal (i.e., capital market execution) portfolio balance increased to approximately $295 billion as of Dec. 31, 2020, from nearly $235 billion as of Dec. 31, 2018.
  • As of Dec. 31, 2020, AMO was the appointed master servicer on securitized transactions aggregating $42.3 billion in unpaid principal balance (UPB), including 40 nontraditional K-Deals for a total of $10.7 billion in UPB, 81 small-balance deals for a total of $23.9 billion in UPB, 12 Q-Deals for a total UPB of $3.3 billion, and 10 "other" transactions for a total UPB of $4.4 billion.
  • In November 2020, the CEO tendered his resignation and the head of investments and capital markets was appointed interim president, while also maintaining his existing duties.
  • The CEO departed the company in January 2021 and a board member was appointed interim CEO in March until a permanent replacement was hired.
  • In June 2021, the newly selected CEO, with extensive industry experience, started with the company. The interim CEO then returned to his position on the board.
  • In December 2020, the chief human resources officer/chief diversity officer resigned and an internal candidate will serve as acting officer until a permanent replacement is hired.
  • In December 2020, a new senior vice president (SVP) was hired as chief information security officer (CISO), replacing the previous CISO who left the company in June 2020.
  • The head of production was promoted to SVP of multifamily production and sales in November 2019.
  • From March 1, 2020, through Sept. 30, 2020, 18 AMO employees accepted early retirement packages, which were previously offered, and exit dates were staggered during the year. Management states that all vacated positions have been filled, except one based on need.
  • The company continues to invest in its five-year digital transformation plan (which began in the fall of 2018), including increasing responsiveness, optimizing data, providing portable access, and easing the user experience.
  • In January 2020, the company held an in-person inaugural compliance forum with representatives from each servicer to review and discuss compliance requirements.
  • In the summer of 2020, Freddie Mac made their multifamily seller/servicer guide available for free access, instead of the previous paid subscription format on the All Regs® website.
  • Freddie Mac implemented its disaster recovery and business continuity plan in the spring of 2020 due to the COVID-19 pandemic. Management reported that there were no disruptions to the company's operations or data facilities and that they have continued normal operations with no issues.

The outlook on the ranking is stable, which reflects our view that the company is expected to remain a competent master servicer for commercial mortgage loans. As previously noted, the company recently experienced a change in leadership at the CEO level. Freddie Mac filled the role on an interim basis with a board member. The newly selected CEO started with Freddie Mac on June 1, 2021, and the interim CEO returned to his position on the board. The operational core leadership of AMO has remained stable and has extensive experience and tenure with the company.

Further, although housing finance reform and the future existence and/or role of Freddie Mac has been under discussion internally within Freddie Mac and externally within various levels of the U.S. government under the previous administration, we expect at this time, that operations will continue as usual for the foreseeable future.

In addition to conducting a remote meeting with servicing management, our review includes current and historical Servicer Evaluation Analytical Methodology data through Dec. 31, 2020, as well as other supporting documentation provided by the company.

Profile

Servicer Profile
Servicer name Federal Home Loan Mortgage Corp. (d/b/a Freddie Mac)
Primary servicing location McLean, Va.
Parent holding company(i) Federal Housing Financing Agency (September 2008)
Loan servicing system Multiple (see the Systems And Technology section)
(i)Federal Housing Financing Agency is the conservator of Freddie Mac (not a parent holding company). d/b/a--Doing business as.

Freddie Mac was chartered by the U.S. Congress in 1970 with a public mission to provide liquidity, stability, and affordability to the U.S. housing market. Freddie Mac fulfills its mission by conducting business in the secondary mortgage market and purchasing loans through a national network of mortgage lenders; it does not make loans directly.

Freddie Mac Multifamily's mission is to promote an ample supply of affordable rental housing by purchasing mortgages collateralized by apartment buildings with five or more units. Freddie Mac has been funding and servicing multifamily mortgages since 1993 and, as of Dec. 31, 2020, it had cumulatively provided more than $763 billion in financing for over 11.3 million multifamily units.

Freddie Mac purchases multifamily mortgages from approved seller/servicers and targeted affordable housing correspondents according to Freddie Mac guidelines. The multifamily division has over 1,000 employees, and it is supported by more than 200 additional Freddie Mac employees across finance, technology, legal, enterprise risk management, and human resources departments. The majority of Freddie Mac employees are typically headquartered at the McLean, Va., campus, with additional multifamily staff located in four regional offices (Arlington, Va., Chicago, Los Angeles, and New York), along with nine field offices. However, due to concerns about the COVID-19 pandemic, the majority of Freddie Mac's staff have been working from home since March 2020.

On Sept. 6, 2008, FHFA placed Freddie Mac (and Fannie Mae) in conservatorship, under which it continues to remain. The conservator assumed all powers of the board, management, and shareholders. During conservatorship, the FHFA has made an effort to distinguish the government-sponsored enterprise's (GSE's) multifamily division from the residential loan single-family businesses, which suffered losses during the housing crisis, whereas the multifamily business weathered the crisis and continued to generate positive cash flow while providing liquidity to the multifamily mortgage industry. Freddie Mac Multifamily uses its K-Deal securitization model, which was adopted in 2009, as the primary vehicle to transfer credit risk.

In November 2020, the FHFA issued its annual Conservatorship Scorecard, which provides for a multifamily lending cap at $70 billion for Fannie Mae for 2021; at least 50.0% of that cap must include mission-driven affordable multifamily acquisitions. In January 2021, the FHFA and Treasury Department amended the preferred stock purchase agreement to include an $80 billion cap to be calculated in any 52-week period.

Freddie Mac Multifamily sources its loans from approximately 26 approved seller/servicers (an additional 22 are approved for servicing only or negotiated transactions), which are licensed in either conventional, small-balance, and/or affordable housing loan products. The seller/servicers must meet Freddie Mac's standards for both origination and servicing of multifamily loans, including maintaining minimum financial requirements and satisfactory annual audit results. After Freddie Mac Multifamily purchases a loan from a seller/servicer, the servicer typically maintains the loan servicing and asset management duties. The servicer's roles and responsibilities are clearly defined in the Freddie Mac Multifamily Seller/Servicer Guide (SSG). In the event of a loan default, the servicer prepares an initial package for Freddie Mac to review; Freddie Mac then controls the resolution process.

In addition to loans securitized in K-Deals, Freddie Mac Multifamily has various other product types that make up more than $346 billion (see table 1) as of Dec. 31, 2020 (for more information about these portfolio/product types, see the Appendix of this report). Consistent with the goal to migrate to a securitization model, the percentage of such transactions in the portfolio has increased since our last review (81.9% of UPB as of Dec. 31, 2020, compared with 80.6% as of Dec. 31, 2018).

Table 1

Multifamily Portfolio(i)
As of Dec. 31, 2020
Product Type Loan/bond count Loan/bond count (%) UPB (mil. $) UPB (%)
Participation certificates (45- and 75-day) 208 0.7 138 0.0
Participation certificates (55-day) 614 2.1 12,179 3.5
TEBS 660 2.2 6,411 1.9
Bond credit enhancements 453 1.5 10,775 3.1
Retained portfolio (for sale) 1,380 4.7 23,789 6.9
Retained portfolio (for investment) 612 2.1 9,618 2.8
K-Deals(i) 14,622 49.8 255,919 73.9
Q-Deals 1,485 5.1 3,602 1.0
SB-Deals 9,270 31.6 21,430 6.2
R-Deals 43 0.1 2,672 0.8
Total 29,347 100.0 346,533 100.0
(i)Includes loans where Freddie Mac is guarantor or the master servicer. (ii)K-Deal info also includes ML deals (securitized tax-exempt loans [TELs]). UPB--Unpaid principal balance. TEBS--Tax-exempt bond securitization.

Management And Organization

The management and organization subranking is ABOVE AVERAGE.

Organizational structure, staff, and turnover

The multifamily division's long-tenured executive vice president (EVP) oversees a staff of over 800, including employees within operations, investments, strategic planning, data management initiative, and business support operations and execution. There are seven lines of business (headcounts as of Dec. 31, 2020):

  • Production and sales (137 employees);
  • Affordable sales and investments (27);
  • Underwriting and credit (247);
  • Chief Market Risk (8);
  • Capital markets (90);
  • Business and offerings management (33); and
  • AMO (264).

The multifamily division is further supported by in-house legal, accounting, finance, technology, enterprise risk management, human resources, and communications staff.

The AMO group is headed by the SVP of multifamily operations and operational risk for Freddie Mac. The SVP has been with the company almost 25 years and has extensive experience in the industry. She reports directly to the aforementioned EVP of Multifamily.

AMO is organized into four distinct areas with tenured executives managing each area as described below:

  • Asset Management – headed by a vice president (VP) with almost 10 years with the company and prior industry experience with a servicer as well as a rating agency. Her group manages and monitors borrower transactions, structured transactions, and risk ratings, and performs master servicing asset management and reporting. The unit also oversees investor support, insurance, physical risk guidance, loan boarding, and compliance and property assessments collections.
  • Multifamily Operations – headed by a VP with 21 years at the company and prior industry experience in banking. His group manages and reconciles servicer reporting and remittance, the Multifamily (MF) cash desk, monthly operational closing activities, retained portfolio servicing and master servicing (post securitization), and fund administration. The unit also authorizes loan/bond purchases, performs loan sales/securitization document activities, handles the MF data program, and manages the document custody process.
  • Operational Risk – headed by a VP with more than 15 years at the company and prior industry experience with another GSE in the capital markets area. His group is the centralized governance for MF over operational risk, departmental procedures, and business continuity management. In addition, the unit is responsible for the MF contract and vendor management process and reporting, as well as for providing management reports and analytics for AMO.
  • Customer Compliance Management – headed by a senior director with 24 years with the company and prior industry experience. Her group monitors the MF seller/servicers' eligibility and compliance, performs audits of MF seller/servicers and primary servicers, and assesses counterparty risk of seller/servicers and other non-borrowers. The unit also manages the SSG and interfaces with rating agencies for master, special, and operating advisor ratings. It is also the main channel for seller/servicer communications and relationships.

As of Dec. 31, 2020, there were 202 employees in the AMO group who had roles in master servicing with the majority based out of the McLean, Va. office (although most are currently working from home due to the COVID-19 pandemic). AMO continues to utilize outsourcing for assistance when volumes are high, but it does not outsource any remitting or reporting functions.

For 2020, AMO reported 20.7% overall turnover, which is slightly greater than the 17.0% for year-end 2019 and 15.0% for year-end 2018. We note that contributing to the 2020 turnover were the aforementioned retirement packages offered to those who qualified in 2019, with scattered departure dates throughout 2020. We believe the overall turnover is average for the industry.

Table 2

Years Of Industry Experience/Company Tenure(i)
Senior managers Middle managers Asset managers Staff
Industry experience Company tenure Industry experience Company tenure Industry experience Company tenure Industry experience Company tenure
Master 23 12 13 7 N/A N/A 4 3
(i)As of Dec. 31, 2020. N/A--Not applicable.

We believe AMO's organizational structure provides appropriate oversight and accountability, while supporting the master servicing duties and requirements associated with the various Freddie Mac Multifamily product portfolios.

Training

Freddie Mac provides its management and staff with a diverse array of ongoing, formal internal and external training programs. Other training highlights include the following:

  • Freddie Mac employs full-time dedicated training personnel, and employee participation hours are formally tracked.
  • AMO utilizes a training task force to develop on-site training opportunities and provide resources for individual training opportunities. This includes department-specific education and preparing in-depth sessions on certain MF loan product types and the securitization process for employees.
  • AMO recently revised their annual training target, and it is now based on the employee's commercial real estate experience. Depending on industry experience, annual requirements range from 40 hours for those with under 5 years' experience, 30 hours for individuals with 5-10 years' experience, and 20 hours for those with over 11 years in the industry.
  • Freddie Mac University (FMYou) is an integrated learning platform where employees can search and register for development opportunities in any of the four general knowledge centers: business expertise, managing people, personal effectiveness, and tools and technology. FMYou also offers employee performance management resources, multifamily divisional training, certification curriculums, and advanced programs.
  • Industry training opportunities are made available to AMO employees, including from the MBA School of Multifamily Mortgage Banking (MBA). Internal training is provided by various Multifamily groups, including Capital Markets and Freddie Mac Legal.
  • Training includes web-based and instructor-led courses. Employees also have access to LinkedIn learning, over 100 on-campus MBA classes, and 179 learning management Ted Talks.
  • In 2020, the company offered two remote securitization classes and a commercial mortgage-backed securities (CMBS) credit risk course that focused on technical skills. AMO employees also received training on Excel, Tableau, and technical and business writing.
  • Overall, management reported employees averaged 36 hours of training during 2020. Management reviews employee progress quarterly so that employees are positioned to meet their year-end targets.
Systems and technology

We believe Freddie Mac has solid and effective technology to meet its master servicing requirement. The company has well-designed data backup routines and disaster recovery preparedness. According to management, they continue to make updates as necessary, including enhancements to technology systems, providing staff with effective up-to-date tools, improving and streamlining efficiencies, and helping investors access information on the K-Deals.

Servicing system applications 

Highlights of AMO's systems and technology include the following:

  • Freddie Mac uses Enterprise! v.2015.4.5 as a secure repository for loan-level master servicing and investment fund processing.
  • Multifamily processing system (MPS) is an internal Freddie Mac system that processes the purchase and accounting of multifamily loans.
  • MPS Loan Accounting is the system of record for all loans.
  • MPS Cash Management provides accounting for funds due and received by Freddie Mac for all multifamily products (excluding CMBS, which uses an external banking application); the application interfaces with the corporate treasury group.
  • MultiSuite for Bonds is the system of record for active bonds; it monitors Freddie Mac credit-enhanced bonds.
  • MultiSuite for Bonds Tax-Exempt Bond Securitization (TEBS) is the system of record for active TEBS bonds.
  • MultiSuite for Bond Wires is used to submit trustees' draw requests; it is integrated with MPS to capture approval of the wire requests.
  • Integrated Loan Servicing (ILS) provides seller/servicers with a consolidated loan servicing portfolio in a single-platform experience.
  • In November 2020, Multifamily Eligibility System (MES) Release 7 was deployed, which added an internal control questionnaire (ICQ); management noted it eliminates manual processes and increases efficiency.
  • The Property Reporting System (PRS) is used by seller/servicers to submit annual property assessment data, including operating statements, property inspections, and borrower compliance analyses.
  • PRS SBL 2.0, the small-balance loan enhancement, incorporates assessment collection and post-securitization master servicing assessment collection into PRS.
  • The Insurance Compliance Tool submits and tracks insurance compliance and waiver requests.
  • Multifamily Securities Investor Access is a web-based interface that provides investor access for K-Deals, including Commercial Real Estate Finance Council Investor Reporting Package and select deal documents.
  • The Consent Request Tracker (CRT) is a web-based tool that tracks and monitors primary, master, and special servicer performance on borrower requests (i.e., loan assumptions and property management changes).
  • The Streamlined Management Analytical and Reporting Tool (SMART) is used for loan and portfolio surveillance to develop business plans and assign loan risk ratings.
  • The Document Management System is a web-based solution that enables electronic and paperless transmitting and sharing of documents for mortgage originations, underwriting, post-closing loan activity (i.e. servicing documentation), and investor delivery.

In the fall of 2018, the company initiated a five-year multifamily digital transformation project. This project is facilitating a move forward with modernization and automation of processes and systems to increase responsiveness, optimize data processes, allow for portable access, and simplify the user experience. To date, per management, the project is currently on target.

Overall, we believe AMO has a solid integrated technology platform to effectively analyze, monitor, and report on loans, collateral properties, and seller/servicers.

Business continuity and disaster recovery 

Freddie Mac's enterprise business continuity group works with the business lines to mitigate the risk and impact of business disruptions. It is responsible for identifying recovery solutions consistent with Freddie Mac's recovery time objectives (RTOs). Notable features include the following:

  • Freddie Mac performs disaster recovery testing quarterly, which is more frequently than most ranked servicers.
  • Each Freddie Mac Multifamily department, including AMO, maintains their own business continuity plan. Written updates to the plan are made at least annually and are required to comply with corporate policy.
  • The annual full business continuity test was completed in August 2020, with no significant issues identified.
  • Each department has a documented business impact analysis along with a systematic assessment of the potential financial, reputational, and operational impacts caused by critical incidents and disruptions. The plan identifies recovery timeframes and requirements and helps allocate resources during an event. Updates are conducted at least annually.
  • Freddie Mac's RTO is two hours for cash remittance processing and investor reporting. RTO for all other servicing functions is three days, which is greater than other ranked servicers.
  • Freddie Mac stores their backup data tapes in multiple locations across the US. Physical papers are stored in Sterling, VA and other regional locations. The disaster recovery data has been moved to an AWS Cloud site.

Cybersecurity 

Freddie Mac maintains a formal cybersecurity protection plan. Features include the following:

  • A stand-alone cybersecurity insurance policy is maintained and access to specialized cybersecurity legal counsel is readily available.
  • Employees are sent phishing emails at least quarterly to maintain cyber threat awareness.
  • Updates are continually made to the network perimeter firewalls and intrusion detection. A layered network is used to protect critical assets with anti-malware for incoming emails and desktops.
  • Security risk testing is regularly performed and patches are installed to address vulnerabilities as needed.
  • Sensitive data is encrypted and masked to ensure its protection and confidentiality.
  • A third-party vendor performs penetration testing annually to evaluate potential cybersecurity risk. The company also performs internal penetration testing on a quarterly basis. The last penetration test was conducted in the spring of 2020, with no material issues identified. With the previously noted organizational changes in information technology (IT), the penetration test planned for April 2021 is on hold until further notice.

Internal controls 

We believe that Freddie Mac's risk management efforts, including its policies and procedures and audit processes, demonstrate a comprehensive and sound approach to maintaining a controlled servicing environment. Freddie Mac's governance and business services group provides a range of services to support AMO. A centralized operational risk management area assists AMO with crisis management, business continuity, fraud prevention, information security, risk assessment and testing, and Sarbanes-Oxley-related compliance. They also provide the EVP of multifamily and the president of Freddie Mac an executive summary covering the aforementioned areas. We view this level of reporting favorably and believe it provides an additional level of control and dedication to oversight.

Policies and procedures 

Freddie Mac's policies and procedures are extensive, thorough, well-organized, and reviewed annually for potential updates or changes.

  • The Multifamily Credit Policy department makes policy for the corporation. The business unit approves procedure changes and updates.
  • Credit policy governance updates are also captured and approved electronically through SharePoint Workflow.
  • Procedures are available online to all staff via SharePoint and AllRegs® software.

Compliance and quality control 

Freddie Mac has three lines of defense to manage its operational risk. The first line of defense includes leaders from the revenue-producing business units and IT. The second line includes leaders from the enterprise risk management and compliance departments, as well as the chief risk officer, providing oversight of the first line of defense. Internal audit (discussed below) is the third line of defense, providing independent oversight of both the other lines of defense.

Internal and external audits 

The internal audit group is an independent oversight function established by Freddie Mac's board. The general auditor reports functionally to the audit committee of Freddie Mac's board and administratively to the president. A Uniform Single Attestation Program (USAP) audit is conducted annually by an external auditor. Additionally:

  • Internal audit uses a risk-based planning approach and completes a comprehensive risk assessment of the inherent risks related to each auditable line of business while independently evaluating how the first and second line achieve risk management and control objectives.
  • Risk is scored based on operational, credit, and market risks, as well as strategic, reputation, regulatory, and legal issues. The resulting risk score is then used to determine the audit frequency based on a cycle between one and four years.
  • Audit risk assessment opinions are expressed in one of four categories: very high, high, medium, or low, based on the likelihood of a risk event occurring.

Management reported that its 2020 multifamily audit universe encompassed 15 auditable entities, of which eight were risk-rated high (two-year audit cycle), and seven were risk-rated medium (three-year audit cycle). Of the audits that were completed in 2020, four of them involved the AMO group in some respect, including operational risk governance, cash desk operations, data integrity and rules management, and seller/ servicer compliance management. Three of the four audits had minimal or no findings, while the operational risk governance audit contained a major issue finding in compliance with the new corporate standard on the risk and control testing framework and the manner of escalating issues. AMO worked to correct the issues and will be re-audited for compliance in summer 2021 to verify that all issues have been corrected. The group will also have another full audit covering operational risk governance in 2022.

The USAP audit report for year-end 2020 had no issues noted. Freddie Mac is not subject to, nor does it perform, a Regulation AB review.

While the internal audit cycle of AMO is somewhat less frequent than those of similarly ranked peers, we believe the overall audit plan is rigorous and suitable given the well-designed three lines of defense that Freddie Mac utilizes under a highly regulated regime. Further, the internal controls and compliance framework at AMO appear to be robust and effective.

Vendor management

Freddie Mac engages and monitors outsourced service providers (i.e., systems, tax administration, etc.) and third-party vendors--which may include appraisers, property managers, and environmental engineers--in a controlled manner.

  • All vendors are subject to a competitive bid process and stringent corporate procurement requirements.
  • Business units provide a quality score that is based on a five-point scale to assess performance for each vendor quarterly.
  • Vendor contracts are tracked for compliance with the contract terms and expiration to ensure timely renewal where appropriate.
  • Freddie Mac performs risk assessments on vendor security practices as it relates to the procurement of services.
  • As a part of the vendor risk assessment, vendors undergo a review of their cyber hygiene; with their System and Organization Controls 2 (SOC 2) audits reviewed, if applicable.
  • AMO targets staffing levels to ensure that core business operations can be performed by its employees and it occasionally utilizes service providers for overflow capacity in processing borrower consent requests.
Insurance and legal proceedings

The company has represented that it maintains adequate directors and officer's coverage that is in line with the requirements of its portfolio size. It does not maintain an errors and omissions policy because it does not provide professional advice or opinions. Although the company faces a broad array of litigation from its ordinary course of business, as of the date of this report, there were no material servicing-related pending litigation items.

Loan Administration

The loan administration subranking is ABOVE AVERAGE.

AMO performs servicing and asset management activities for the Freddie Mac Multifamily portfolio (see table 3). It has established processes and systems designed to complete the following traditional master servicing functions:

  • Boarding and tracking each loan on MPS;
  • Aggregating and reconciling loan data and funds from subservicers;
  • Portfolio accounting;
  • Advance tracking and recovery;
  • Investor reporting and remittance;
  • Collateral, loan, and portfolio-level surveillance;
  • Subservicer performance and compliance monitoring; and
  • Credit-related borrower consent requests management.

Table 3

Master Servicing Portfolio
UPB (mil. $) YOY change (%) No. of assets YOY change (%) No. of staff YOY change (%)
Master servicing
Dec. 31, 2020 101,754.8 16.5 15,744 8.9 202 (0.5)
Dec. 31, 2019 87,380.0 7.1 14,456 12.5 203 6.8
Dec. 31, 2018 81,591.3 11.8 12,848 20.9 190 5.0
Dec. 31, 2017 72,971.1 4.9 10,631 27.9 181 5.2
Dec. 31, 2016 69,574.3 N/A 8,313 N/A 172 N/A
YOY--Year-over-year. UPB--Unpaid principal balance. N/A--Not applicable.

Table 4

Master Servicing Delinquencies
Dec. 31, 2020 Dec. 31, 2019 Dec. 31, 2018 Dec. 31, 2017 Dec. 31, 2016
UPB (mil. $) No. UPB (mil. $) No. UPB (mil. $) No. UPB (mil. $) No. UPB (mil. $) No.
Master (SBO) loans 101,754.8 15,744 87,380.0 14,456 81,591.3 12,848 72,971.1 10,631 69,574.3 8,313
Average loan size 6.5 -- 6.0 -- 6.4 -- 6.9 -- 8.4 --
Delinquent (%)
30 days 0.06 0.02 0.01 0.01 0.01
60 days 0.03 0.04 0.00 0.00 0.00
90+ days 0.41 0.18 0.04 0.04 0.03
Total 0.50 0.24 0.04 0.04 0.04
Numbers may not add up due to rounding. SBO--Serviced by others. UPB--Unpaid principal balance.

As of Dec. 31, 2020, Freddie Mac's master servicing portfolio loans had a delinquency rate of 0.5% on all its master serviced loans subserviced by its licensed seller/servicers (see table 4). This is up from the 0.04% reported as of Dec. 31, 2018, with the increase attributed mainly to the current COVID-19 pandemic issues. We note that forborne loans are not included in the delinquencies in 2020, and due to their current forbearance status, they are technically not late. This naturally has a positive impact on the reported delinquency rates.

In March 2020, Freddie Mac released a relief plan for borrowers impacted by the COVID-19 pandemic. Shortly after, in April 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which Freddie Mac followed. Freddie Mac encouraged borrowers only to enter into a standard forbearance agreement if needed to continue business operations and repay forborne amounts over 12 months (with the option to repay early).

In June 2020, the CARES program was enhanced to provide up to three additional months of forbearance on multifamily loans and included tenant protections that would continue during the forbearance and repayment periods. In August 2020, the program was enhanced to include requirements for tenant protections. Those loans needing additional relief beyond a delegated forbearance are handled by the master servicing group on an individual basis.

Subservicer oversight

The Customer Compliance Management (CCM) team manages the seller/servicer assessments. Seller/servicers are expected to adhere to the servicing protocols and standards set forth in the SSG. Freddie Mac has made the borrower experience one of its key priorities, and compliance with the SSG is one way to drive high service levels. Highlights include the following:

  • The SSG is incorporated into the pooling and servicing agreements' definition of the "servicing standard", to which seller/servicers must adhere.
  • CCM updates the SSG as needed; changes and updates are communicated to all key parties (including seller/servicers, CMBS servicers, and investors via the AllRegs® subscription site) and bulletins are sent to the servicing community from Freddie Mac.
  • Including portfolio, structured transactions, and securitized loans, Freddie Mac oversees approximately 48 seller/servicers. CCM performs periodic reviews of seller/servicers, the frequency of which is determined by the level of counterparty risk the seller/servicer poses to Freddie Mac.
  • The audits assess the business operations, financial strength, and compliance with the SSG. CCM is responsible for reviewing annual seller/servicer certifications and monitoring ongoing program compliance and eligibility to service Freddie Mac loans.
  • In January 2020, Freddie Mac held its inaugural Compliance Forum at the company's headquarters in McLean, Va., which was attended by its seller/servicers, to discuss regulations and compliance. Management stated it was well attended and provided a successful overview of similar issues that arise with servicing.
  • The Counterparty Surveillance Report was developed to monitor seller/servicer's risk and exposure during the COVID-19 pandemic. Freddie Mac implemented a three-layer risk detection and evaluation mechanism during COVID-19, with daily alerts of any external rating downgrades, monthly servicer liquidity checks, and quarterly rating/limit updates. They also developed special reviews of Low-Income Housing Tax Credit (LIHTC) syndicators to monitor compliance.
  • CCM is also responsible for systems and applications associated with counterparty-level exposure tracking and monitoring, and it regularly adds new monitoring capabilities.
  • CCM performs full-scope reviews of seller/servicers considered "moderate risk" or "high risk" at least once every three years, covering all operational areas, controls, and financial stability (e.g., 10 such full-scope audits were completed during 2020).
  • Limited-scope audits (generally desktop; 17 occurred during 2020) utilize prior audit results and internal feedback to determine the audit scope. During 2021, the company plans to conduct 33 audits, including 12 full-scope and 21 limited-scope audits. We note that during the pandemic all audits have been conducted remotely.
  • The audit program tests the seller/servicers' overall control environment, underwriting, closing, loan administration, asset management, loan accounting, investor reporting, and compliance with documents and specific loan regulations.
  • Audit findings are classified as critical, major, or minor. Each seller/servicer is given an audit assessment score of satisfactory compliance, somewhat weak compliance, or weak compliance.
  • CCM prepares and delivers detailed servicer reviews to senior management and the seller/servicer. Those who score below satisfactory compliance on their review are audited more frequently.
  • CCM additionally reviews annual certifications submitted by seller/servicers for adherence to servicing standards.
  • The certification package includes audited financial statements, internal control structures, evidence of insurance, an external auditor's opinion, and net worth statement, to verify seller/servicers' compliance with Freddie Mac's eligibly requirements.

Borrower requests 

The asset management group is responsible for overseeing borrower consent requests that are submitted by the seller/servicer on the borrower's behalf. Seller/servicers perform initial reviews and produce a credit case that includes a recommendation on the transactions they submit to AMO either for acknowledgement or consent. Other process features include the following:

  • There were 5,865 consent requests processed during 2020, consisting of 1,614 forbearances, 1,277 repair escrow extensions and modifications, 577 transfer of ownership and loan assumptions, 533 defeasance, 431 property management changes, and 1,433 various other requests.
  • Freddie Mac has established challenging goals for their seller/servicers of 30-day and 15-day turnaround times for assumptions and other types of borrower consents, respectively.
  • Seller/servicers have been able to timely complete these requests at a 70% on-time rate through Dec. 31, 2020, much greater than our last review (58%) due to increased efficiencies related to the high volume of COVID-19 forbearance requests.
  • Each borrower request is evaluated for compliance with governing documents and credit policy, and any impact on collateral and associated risk (e.g., credit, interest rate, reputational, or operational). The goal is to preserve, protect and, if possible, improve Freddie Mac's risk position while providing outstanding customer service.
  • Delegated authority within AMO to approve the borrower consent requests is generally based on loan size and risk rating.
  • Freddie Mac's CRT system is used to track and monitor borrower requests processed by the seller/servicers. The system gives AMO visibility into the status of the process and allows them enhanced reporting and monitoring.

Asset and portfolio administration 

AMO takes a proactive approach to portfolio surveillance and has effective processes for identifying and managing high-risk loans. The loan surveillance group, functionally included in the asset management department, monitors loan portfolios' credit quality, overall loan performance, and guarantees relating to the Freddie Mac bond and securitization programs. It uses information from the seller/servicers (e.g., operating statements and property inspections) along with internal and external models to:

  • Risk-rate each loan and guarantee;
  • Revalue collateral properties;
  • Develop risk plans for higher-risk loans;
  • Coordinate with enterprise risk management and finance groups to establish adequate reserve levels;
  • Monitor equity investments and capital calls for LIHTC loans; and
  • Perform data analytics related to all portfolios.

In the surveillance group, the team is broken out among K-Deal master servicing, small-balance loan master servicing, and other reporting responsibilities. The group completed a pilot project to allow for annual inspection submissions via their Optigo portal for the MBA excel inspection form, which is expected to significantly streamline the uploading process.

The risk-rating process starts with an internally generated loan score, representing the life loss number associated with the loan. The SMART system further incorporates property-specific criteria such as inspection results, net operating income, debt-service coverage ratio trends, loan-to-value, compliance issues, borrower payment trends, vacancy factors, and pending maturities. Based on this information, a risk rating of one to 10 is assigned; ratings of six and below are considered low risk. A risk rating of seven means the loan has some element of heightened risk, but default and/or loss is not expected. Nonetheless, these loans require business plans from the seller/servicer and revaluation. Risk ratings from eight to 10 indicate a higher risk of default and losses are probable; loans in these categories are subject to revaluation, impairment recommendations, business plans, quarterly reviews, and possibly increased inspection frequency.

Freddie Mac Multifamily securitized $60.8 billion in UPB of multifamily loans in K-Deal transactions during 2020. Of those K-deal loans, 216 were on the watchlist, totaling $1.2 billion in UPB, or 2% of the total K-Deal transaction balance. We note that AMO is not the appointed master servicer on K-deals, as those are being handled by one of three large seller/servicers across the country.

As of Dec. 31, 2020, 166 balance sheet (portfolio) loans were on the various seller/servicer's watchlist, totaling $2.3 billion in UPB, or 4% of the outstanding loan balance of $60.4 billion.

Overall, where Freddie Mac is named master servicer, 1,739 securitized loans were on the watchlist, totaling $6.2 billion in UPB, or 15% of the outstanding securitized balance. Of the securitized loans, the K-Deals and small-balance loans (at 21% and 15% respectively) represent the highest number of loans on the watchlist by UPB (see table 5). Historically, 835 investors have participated in K-deal transactions, with 404 currently participating during the fourth quarter of 2020. As of Dec. 31, 2020, Freddie Mac had processed 1,489 forbearances across their K-deal portfolio. (The company does not include forborne loans in the delinquency totals, as they are not considered past due).

Table 5

Master Servicing
As of Dec. 31, 2020
Loan count UPB (mil. $) Watchlist loan count Watchlist UPB (mil. $) Watchlist % by UPB
Product type
SB-Deal 9,270 23,854.3 1,401 3,623.3 15.19
K-J 1,084 5,200.6 100 427.0 8.21
K-Deal 216 5,498.9 63 1,141.8 20.76
Other 1,428 7,681.5 175 1,056.3 13.75
Total 11,998 42,235.2 1,739 6,248.3 14.79
Portfolio 3,746 59,520.0 166 2,329.0 3.91
UPB--Unpaid principal balance.
Investor reporting and special servicer interaction

The investor reporting and special servicer interaction processes include the following notable features:

  • The process ensures that servicer investor reporting and remittances are reconciled to the principal, interest, and fee amounts that Freddie Mac is expecting.
  • Remittance reports are reviewed and approved by the MF loan accounting manager. The company is looking to move towards exception-based processing for investor reporting in the near future.
  • The company has separate staff to handle reporting and remitting duties.
  • Custodial bank credit ratings used by seller/servicers are tracked for compliance.
  • MF loan accounting does not have dedicated custodial accounts. The MF loan administration group reconciles amounts submitted by seller/servicers to what was reported each month.
  • Freddie Mac added an automated wire process where reconciliations are handled through Enterprise! for cash remittances to individual trustees. Additionally, as reconciliations are completed, an automated file is now generated, which is more efficient than the previous manual method and reduces the likelihood of manual errors.
  • Freddie Mac has updated their loan and securitization documents pending the phase-out of LIBOR index rates. New loan documents contain references to the secured overnight financing rate (SOFR) and an alternative index.
  • Calls may be held as needed with third-party special servicers in the case of loans not performing before an official transfer to special servicing is triggered.
Advancing

Depending on the product, AMO may advance funds for scheduled principal and interest payments, liquidity advances, credit enhancements, swap payments, full UPB payments at payoff, and other operating and property protection advances. Notable features include the following:

  • Freddie Mac has a formalized advancing committee process. On deals where Freddie Mac is the appointed master servicer, the AMO executive team, including AMO vice presidents and directors, meet monthly to review the status of all loans with outstanding advances.
  • Advance monitoring and recovery procedures are documented and all advances are tracked in Enterprise! by the loan accounting group.
  • The AMO special servicing group (with input from the third-party special servicer as well as the lender regarding property valuation) prepares an advance determination memo addressing the likelihood of recoverability, which is then provided to the advancing committee.
  • The memo to the AMO executive team includes, at a minimum, the advances to date, occupancy status, appraisal values, broker opinions of value, future capital expenses, and estimated timeline for recovery.
  • The committee then makes the recoverability determination.

Financial Position

The financial position is SUFFICIENT.

Appendix: Freddie Mac Multifamily Portfolios/Product Types

Participation certificates (PC)

A seller delivers a pool of multifamily mortgages and receives a Freddie Mac Multifamily PC with a principal amount equal to the aggregate principal of the delivered mortgages. The PCs are mortgage pass-through securities issued and guaranteed by Freddie Mac. While the 45- and 75-day products are no longer offered in the marketplace, Freddie Mac currently offers a 55-day product. Master servicing functions include reconciling servicer reports and payments, along with advancing funds.

Bond credit enhancements

Freddie Mac provides a credit enhancement for fixed- or variable-rate tax-exempt and taxable housing revenue bonds. The bonds that are credit-enhanced by Freddie Mac are secured by multifamily mortgages. Master servicing functions include advancing bond principal and interest (P&I), aggregating monthly bond draw requests for the bond trustee, aggregating all reporting and remittance data from servicers, and providing liquidity advances.

Retained portfolio

The retained portfolio consists of loans held for investment that were originated before the introduction of the K-Deals, and loans held for sale in the warehouse awaiting securitization. Master servicing functions include reconciling payments and servicer reports, delinquency monitoring, assessing loan risk ratings, maintaining watchlists, and making property protection advances.

TEBS

TEBS is a proprietary execution through which a sponsor transfers tax-exempt multifamily housing revenue bonds and related taxable bonds or mortgages to Freddie Mac, and Freddie Mac issues senior class A certificates that are sold to investors and subordinate class B certificates that are privately placed with the sponsor and pledged to Freddie Mac. Master servicing functions include aggregating reports and payments, reconciling bonds and P&I payments, along with confirming and allocating funds.

Freddie Mac K-Deals

Freddie Mac aggregates mortgage loans acquired from seller/servicers and sells them to a third-party depositor, which places the loans in a real estate mortgage investment conduit (REMIC) trust, which in turn issues various classes of bonds. Freddie Mac purchases and guarantees the senior bonds and certain subordinate interest-only bonds. The remaining bonds are purchased by third-party investors. Freddie Mac then deposits the guaranteed bonds into a structured pass-through certificate (SPC) trust and issues guaranteed SPCs backed by the guaranteed bonds. Freddie Mac performs administrator functions (for the SPC trust, not the REMIC trust) including remitting funds to senior bond investors and bond-level reporting.

Freddie Mac SB-Deals

Freddie Mac aggregates small-balance mortgage loans purchased from seller/servicers and sells them to a third-party depositor, which places the loans in a REMIC trust, which in turn issues various classes of bonds. Freddie Mac guarantees the senior securities issued by the REMIC trust, which are then publicly offered. The unguaranteed securities issued by the third-party trust are privately offered to third-party investors. In some cases, a third party may act as a loan seller and Freddie Mac may issue SPCs.

Freddie Mac Q-Deals

Similar to K-Deals, with the loans held in a REMIC trust, the key differences are as follows: individual loans are never purchased onto Freddie Mac's balance sheet (rather, Freddie Mac purchases and insures senior bonds, which are sold to investors) and the underlying loans are not underwritten by Freddie Mac at origination (rather, they contain seasoned loans that are presented to Freddie Mac and an underwriting plan is crafted based on the pool's risk profile). Master servicing functions performed are similar to K-Deals.

Related Research

This report does not constitute a rating action.

Servicer Analyst:Marilyn D Cline, Farmers Branch + 1 (972) 367 3339;
marilyn.cline@spglobal.com
Secondary Contact:Steven Altman, New York + 1 (212) 438 5042;
steven.altman@spglobal.com
Analytical Manager, Servicer Evaluations:Robert J Radziul, New York + 1 (212) 438 1051;
robert.radziul@spglobal.com

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