March 25, 2011

Structured Products Research
Chris van Heerden, CFA (704) 715-8321
Landon Frerich (704) 715-8376

The Agency CMBS Primer
Executive Summary
Agency CMBS is taking on new significance as new issue nonagency deals have returned largely in the form of deals with lopsided property type and borrower concentrations. Agency CMBS describes multifamily mortgage-backed securities (MBS) that are guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. Aside from providing diversification away from the heavy retail concentration in nonagency deals, a further benefit of agency CMBS has been the lower spread volatility. The spread performance for agency deals diverged dramatically from conduit transactions during the credit crisis. In general, agency CMBS bonds are characterized by sound collateral performance, stable cash flow profiles based on loan-level prepayment protection, guaranteed interest and principal payments, lower spread volatility compared with nonagency CMBS, and higher yields versus agency debentures and other comparable investments. There are numerous ways to participate in the agency CMBS market. Securities range, from the guaranteed single-property pass-through Fannie Mae DUS structure to BBB-rated Freddie Mac K certificates with features including structured credit support, the use of a master and special servicer and a controlling class. The securities in the agency market are publicly issued in contrast to the nonagency CMBS primary market, which is currently dominated by 144A private placements. Contents An Introduction to Agency CMBS ......... 2 Freddie Mac KCertificates ............ 3 Fannie Mae DUS MBS ............... 7 Ginnie Mae Project Loans ................... 17

Please see the disclosure appendix of this publication for certification and disclosure information
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The Agency CMBS Primer March 25, 2011


An Introduction to Agency CMBS
Agency CMBS is taking on new significance with CMBS investors because new issue nonagency CMBS has returned largely through deals that are lopsided in property type and borrower concentrations. Non-agency conduit CMBS deals issued after 2008 have been lacking in multifamily collateral. In fact, multifamily loans made up only 1% of the collateral for multi-borrower CMBS deals in 2009 and 2010, compared with a 46% retail component on average. Agency CMBS describes multifamily MBS that are guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. This primer provides a detailed analysis of Freddie-Mac K certificates, the Fannie Mae DUS program, and Ginnie Mae project loans. Aside from providing diversification away from the heavy retail concentration in recent non-agency CMBS, a further benefit of agency CMBS is the lower spread volatility. The spread performance for agency deals diverged dramatically from conduit transactions during the credit crisis. Spreads on Fannie Mae DUS paper, for example, widened 215 bps during the course of 2008 to peak at 275 bps to swaps in November 2008. Over the same period, 2007 vintage 10-year 30% subordination superseniors widened 1,450 bps to a peak of 1,535 bps to swaps. The long-term outlook for Fannie Mae and Freddie Mac continues to evolve. There is agreement that large lending portfolios, shareholder earnings growth and a government backstop cannot continue to coexist as it has in the past. Within this debate, government support for affordable rental housing has received less criticism. In fact, the goal of affordable “home ownership” has been replaced by a broader mandate to provide “affordable housing.” The delinquency rate for both Fannie Mae and Freddie Mac multifamily loans remain below 1%. For multifamily securitizations, we believe the most significant outcome from GSE reform is already evident, namely the rundown of the GSE portfolios and a reliance on private investors to absorb the supply. As a result, borrowing costs may increase over time. Exhibit 1: Share of Multifamily MBS Volume by Agency
2009 2010

Freddie Mac 11% Fannie Mae 55%

Fannie Mae 35%

Freddie Mac 28%

Ginnie Mae 34%

Ginnie Mae 37%

Note: Fannie Mae only includes 10/9.5 mortgage loans, Ginnie Mae only inlcludes GNR Remic transactions and Freddie Mac only includes K-Certificates. Source: Wells Fargo Securities, LLC, Fannie Mae and Intex Solutions, Inc.


The Agency CMBS Primer March 25, 2011


Freddie Mac-K-Certificates
Since 2009, Freddie Mac has been using the Structured Pass-Through Certificates (K Certificates) program to securitize multifamily mortgages. These transactions largely resemble conventional CMBS deals by featuring time-tranched cash flows, structured credit enhancement and the use of master servicer, special servicer and directing certificate holder roles. Senior bonds receive a guaranty of timely payment of interest and payment of principal at loan maturity guaranty provided by Freddie Mac. The program is growing; eight K deals priced in 2009 and 2010, and 10 may be brought to market in 2011. The K Certificates program has proven to be versatile, as evidenced by the funding of a single-asset deal in 2010 and a transaction backed entirely by seven-year mortgages in 2011. Finally, the dearth of publicly registered CMBS deals over the past two years may steer investors that have a constrained 144A mandate to consider K Certificates. Exhibit 2: Summary of K Certificate Deals
Deal COMM 2009-K3 FREMF 2009-K4 FREMF 2010-K5 FREMF 2010-K6 FREMF 2010-K7 FREMF 2010-K8 FREMF 2010-K9 FREMF 2010-KSCT FREMF 2011-K10 FREMF 2011-K701 Total:

Orig. Pricing Bal. ($mm) Date 984.8 6/5/09 994.6 10/7/09 1,024.3 1/26/10 1,081.1 3/24/10 1,012.4 6/11/10 1,010.9 9/16/10 1,089.0 11/17/10 476.0 2/25/10 1,009.5 1/12/11 1,877.6 2/11/11 10,560.4 Average:

WAC 5.85 5.56 5.68 5.55 5.63 5.54 5.26 5.77 4.89 4.58 5.43

Loans 62 46 70 68 83 72 70 1 76 44 59.20

WA LTV 68.77 69.16 67.68 70.04 70.06 69.24 70.55 68.70 70.59 69.21 69.40

DSCR 1.67 1.35 1.56 1.39 1.36 1.35 1.39 1.25 1.54 1.47 1.43

Largest Top 3 Loan % Loan % 5.71 4.41 14.19 6.71 11.35 2.83 7.35 4.44 10.31 2.85 12.03 3.73 7.20 6.88 100.00 0.00 11.36 3.52 23.76 5.34 20.33 4.07

Partial IO % 64.10 39.15 40.37 38.55 27.29 35.61 30.66 0.00 43.74 53.95 37.34

Full IO % 2.78 0.00 18.28 3.66 1.35 3.75 14.41 0.00 6.74 10.03 6.10

Yield Maint.1 22% 0% 2% 2% 6% 4% 5% 100% 6% 0.16

Defeasance 78% 100% 98% 98% 94% 97% 95% 0% 94% 0.84

Includes loans that require a static prepayment premium charge. Source: Bloomberg, LP. and deal documents.

Collateral Characteristics
Freddie Mac K Certificate loans are originated directly through the Freddie Mac Capital Markets Execution (CME) program. All Freddie Mac loans are underwritten in house by Freddie Mac employees. This provides meaningful continuity in loan quality and loan risk assessment. In-house underwriting is unique to the Freddie Mac program as Fannie Mae and Ginne Mae utilize designated third-party underwriters that adhere to specific guidelines. Freddie Mac underwriting criteria balance flexibility to the borrower against standardization for efficient securitization. To this end, leverage and coverage terms are keyed to the loan term, amortization schedule and loan type (e.g., acquisition or cash-out refinance). Prepayment protection most commonly takes the form of a two-year lockout period with defeasance thereafter.


Similar to traditional CMBS.If the loan is $5 million or more. . Timely interest payments and principal payments at loan maturity are guaranteed by the agency to the senior classes.If loan is not securitized within first year. No penalty for final 90 days.40x Note: The DSCR for Partial Interest-Only and Interest-Only period uses an amortizing payment. purpose-built student housing. subject to requirements specified in the CME Security Instrument Source: Freddie Mac. then yield maintenance applies for the life of the loan . 30/360 available Lockout Period 2 years Prepayment Provisions . Corporations. The guaranty provided by Freddie Mac 4 . General partnerships (no individuals may be general partners). each Tenant in Common must be an SPE Loan Size $5 to $100 million (Loans as low as $3.5 million will be considered in certain strong markets) Loan Terms 5-30 years Maximum Amortization 30 years Amortization Calculations Actual/360 standard.35x 60% / 1. seniors housing. 2011 WELLS FARGO SECURITIES. The senior classes benefit from the Freddie Mac guaranty in addition to the loss protection provided by the subordinated tranches.5% credit support. cooperative housing. Exhibit 4: Minimum DSCR and Maximum LTV (Fixed-Rate CME Mortgage) Fixed-Rate Mortgage Amortizing Partial Interest-Only Acquisition and No Cash-Out Refinance 80% / 1. However. . while losses flow in reverse order starting at the bottom. LLC STRUCTURED PRODUCTS RESEARCH Exhibit 3: Freddie Mac CME Product Overview Product Summary Financing Eligible for Securitization Multifamily fixed-rate mortgages.30x 60% / 1. Transactions are structured with an A1 amortizing front-pay bond and an A2 balloon bond. these collapse to a pro rata principal priority. . Limited liability companies. defeasance thereafter. Source: Freddie Mac.35x Same as IO Interest-Only 65% / 1. the borrower must be a Single Purpose Entity (SPE): See Section 33 of the Security Instrument for basic SPE requirements.25x > 7 Year Term < 7 Year Term 70% / 1. and Targeted Affordable Housing cash mortgages. the borrower may be a SPE with some additional restrictions: Limited partnerships. interest and principal flows through the capital structure in sequential order starting at the top. However.30x > 7 Year Term < 7 Year Term 65% / 1.30x 75% / 1. K Certificate Transaction Structure Freddie Mac K Certificate deals largely resemble conventional CMBS deals.25x 80% / 1. not a trust).35x 65% / 1. Borrowing Entity . should losses reach the A1 and A2 classes.The Agency CMBS Primer March 25.If the borrower is structured as a Tenancy In Common (TIC). Real Estate Investment Trusts (must be a corporation.Yield maintenance until securitized followed by 2-year lockout.Yield maintenance is available for securitized loans for an additional cost Tax & Insurance Escrow Required Replacement Reserve Deposit Required Recourse Requirements Non-recourse except for carve outs Supplemental Loan Availability Yes. Principal distributions are made sequentially for all classes. conventional structured finance pools. the interest distributions among the A1 and A2 tranches are made on a pro rata basis.30x Same as IO Supplemental Loan or Cash-Out Refinance 75% / 1. These transactions issued after FHMS K006 generally also include an unguaranteed credit bond with 7.If the loan is less than $5 million. Section 8 HAP.

58 0. Similar to traditional CMBS.4% ---7. defaulted loans are resolved within the trust. Non-performing loans are transferred to a special servicer that is compensated through a running special serving fee of 25 bps and a workout or liquidation fee of 1%. 5 . the IO classes would receive additional cash flow if loan maturities extend. These factors combine to create a stable cash flow stream. 3) the reimbursement of realized losses or allocated expenses and 4) the ultimate payment of interest. Bal. Freddie Mac K certificate deals are structured with IO classes. The sponsor and geographic diversity of loans within the pool diffuses investor exposure to idiosyncratic loan prepayment risk. Finally.5 87.0% -- Source: Freddie Mac.8 695.60 9.71 0. which varies according to the collateral composition and structure of each transaction. Exhibit 5: FEMF 2011-K10 Snapshot Class A1 A2 X1 X3 X2 B C R Orig. which have typically been retained by Freddie Mac.7 1.The Agency CMBS Primer March 25.60 9. For the K-006 transaction. this structure offers the special servicer a clean incentive to pursue a speedy loan resolution to the highest achievable recovery. Furthermore. Freddie Mac receives a monthly fee for its guarantee.4 1.50 4.00 0.0 Tranche % of Deal Bal.76 0. LLC STRUCTURED PRODUCTS RESEARCH covers 1) timely payment of interest.00 4. For non-agency CMBS deals.4% 13. Cash flows are stabilized through 1) prepayment penalties.00 9. Because the timely payment of principal upon loan maturity is guaranteed. 2011 WELLS FARGO SECURITIES. In our view. performing loans are serviced by the master servicer. 2) loan diversity and 3) the resolution of defaulted loans within the trust. the exposure to multifamily collateral is a diversifier in CMBS portfolios as new issue deals of 2010–2011 have not included multifamily collateral. Relative Value Freddie Mac K Certificates offer investors access to publicly issued securities with stable cash flows and sound collateral performance. For the preceding transactions. 27% 60% ---6% 8% -Coupon OWAL 3.42 8. ($mm) 313.165. the guarantee fee was 34 bps. which may delegate responsibilities to a sub-servicer.00 Fitch Rating AAA AAA AAA NR NR ANR NR Credit Support 13.20 8. One notable difference between non-agency CMBS and K Certificates is the controlling Class B-pieces in the K-series transactions are paid principal only. the guarantee fee was 14 bps on the outstanding principal balance.4 68.5% 0.32 5. rather than bought out as in the case of Fannie Mae DUS. the return profiles of these IO classes differ from those of nonagency CMBS IO tranches. Prepayment penalties most often take the form of defeasance.5 87. the payment of principal at the maturity date of each mortgage. K-series transactions are differentiated in terms of default-driven prepayment risk.009.4 0.51 0.33 9.48 4. Compared to DUS. 2) to each class as entitled.

which had an overall delinquency rate of 9. Freddie Mac deals are issued publicly and benefit from structured credit support. As of 3/24/11 Source: Wells Fargo Securities.5% as of Q4 2010. 2011 WELLS FARGO SECURITIES.5 2005 AAA 10 Yr CMBS 2010 AAA 5Yr CMBS Agency Unsecured Debt . LLC STRUCTURED PRODUCTS RESEARCH First. unlike Fannie Mae DUS securities. LLC Conclusion We expect the Freddie Mac K Certificates program to continue to expand. Moreover.The Agency CMBS Primer March 25. Exhibit 6: Relative Value Matrix for Agency CMBS Product Agency CMBS 5 Yr* Agency CMBS 10 Yr* FNMA Dus 10/9. may dampen some of the default-driven prepayment sensitivity compared with DUS. a more diversified collateral pool should diffuse the prepayment exposure. Within each deal. Second. The delinquency rate of Freddie Mac’s multifamily portfolio at 26 bps as of Q4 2010 is clearly differentiated from nonagency CMBS.FHLMC 10 Yr Spread to Swaps (bps) 58 64 82 130 115 6.8 *Agency CMBS includes both Freddie Mac K-Series and Fannie Mae remics. complemented with insured timely interest and principal at mortgage maturity during the workout period. the presence of an amortizing first-pay class would also alleviate cash flow variability to the second-pay senior. 6 . These securities provide access to multifamily collateral. The resolution of loans within the trust. the use of a master and special servicer and a controlling class—features that CMBS investors are well familiarized with. because prepayments are not interest-rate driven. defaulted loans are not bought out of the pool. which has been largely absent from 2010 and 2011 vintage nonagency CMBS deals.

Before the DUS program. with $64. in which the lender bears one-third of the losses and Fannie Mae the remaining two-thirds. Since then. DUS issuance surged in 1996. Bid/offer spreads range from 5 bps–10 bps for the two primary bonds in the market (seven-year final maturity/6. Similar to other fixed-income products. and rose again in 1998 when average monthly issuance hit $576 million. In most cases. 1 Call protection has consisted primarily of yield maintenance agreements and.5-year yield maintenance).9 billion issued as of December 2010. the loss sharing is a pari passu arrangement. A stable cash flow profile because of call protection and a guaranteed final maturity. The DUS program allows approved lenders to underwrite. reflecting a number of active market makers. LLC STRUCTURED PRODUCTS RESEARCH Fannie Mae DUS Mortgage-Backed Securities Introduction Fannie Mae Delegated Underwriting and Servicing (DUS) mortgage-backed securities (MBS) have been issued since 1994 to fund multifamily loans. issuance tends to increase when rates fall. 7 . Fannie Mae created its DUS program in 1988. issuance doubled again to nearly $1 billion per month as rates hit record lows following the recession and 9/11 attacks. DUS MBS characteristics include the following:  DUS lenders enter into loss sharing agreements with Fannie Mae. The primary purpose was to accelerate Fannie Mae’s origination process and increase its participation in the multifamily housing market. Approximatley $65 billion of DUS MBS have been issued. 2011 WELLS FARGO SECURITIES.5-year yield maintenance and 10-year final maturity/9. of defeasance with Fannie Mae debentures.The Agency CMBS Primer March 25. In August 1994. the program has grown steadily. the issuance in 2009–2010 has benefited from Fannie Mae’s shift from portfolio lender to liquidity provider. As an investment vehicle. increasingly in recent years. qualifying for a 20% risk-based capital requirement for banks. Fannie Mae began securitizing and issuing DUS MBS. DUS MBS swap spreads had a standard deviation of 57 bps in 2008 compared with 234 bps for 10-year AAArated supersenior CMBS. pricing remains favorable to historical levels and Fannie Mae provides backing to term and balloon defaults. Higher yields than Fannie Mae debentures and other comparable investments.1 Consistent liquidity. liquidity and business infrastructure. averaging $328 million per month. close and service loans that meet set eligibility guidelines. Fannie Mae DUS issuance remains active. In addition to the effect of low rates. close and sell loans in accordance with Fannie Mae credit and underwriting criteria.      Fannie Mae DUS MBS are backed by multifamily mortgages. A triple-A rating based on the timely interest and principal guaranty from Fannie Mae. Low spread volatility compared with AAA CMBS. lenders had to go through the more time-consuming process of having Fannie Mae underwrite and approve loans. Fannie Mae delegates the underwriting and servicing to lenders that have been qualified based on criteria that cover capital. These lenders underwrite. In 2001. Prepayment lockouts and fees have also been used.

5 multifamily mortgage loans backing MBS. however.0 ($billion) 6.0 8. are fully amortizing loans with 20-. Loan sizes range from $1 million to $50 million. regardless of the amount recovered from the borrower. Fannie Mae. In the event of a default. The buildings must already exist.5 years of prepayment protection. Other mortgage types. Source: Fannie Mae.5 years of prepayment protection. Adjustable-rate mortgages generally have maturities of five.0 4.0 0. The two primary Fannie Mae DUS MBS are 10/9. LLC STRUCTURED PRODUCTS RESEARCH Exhibit 7: Fannie Mae Multifamily MBS Yearly Origination (10/9. occupancy rates must be a minimum of 90%.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 Note Annual Issuance of 10/9. Fannie Mae DUS MBS qualify for a 20% bank risk-based capital weighting. As such. 10-. seven or 10 years. 15. DUS loans are underwritten on a nonrecourse basis and are generally assumable.5 bonds. may also repurchase a loan out of a pool at par if it is delinquent for several consecutive months.and 18-year terms.5 loans) 12. The Fannie Mae Guarantee and Credit Risk Fannie Mae guarantees the timely payment of principal and interest of DUS MBS. DUS MBS are often backed by a single loan. DUS MBS are on occasion backed by adjustable-rate mortgages and second liens. Fannie Mae also guarantees the final principal payment on the balloon date.5 and 7/6. the latter have a seven-year final balloon maturity and 6. DUS-eligible properties include income-producing multifamily rental and cooperative buildings with at least five units. DUS Mortgages and Properties DUS securities largely consist of fixed-rate mortgages with balloon maturities of five-. or 30year terms. In the event of repurchase or foreclosure.0 2. This guarantee is identical to Fannie Mae’s guarantee on Fannie Mae residential MBS. 8 . Generally. 2011 WELLS FARGO SECURITIES. seven-. addressing the risk of extension. Fannie Mae would continue to pass through scheduled principal and interest. The former bonds have a 10year final balloon maturity and 9. Fannie Mae pays the outstanding balance to investors. be recently completed or need modest rehabilitation.The Agency CMBS Primer March 25. although less common. In addition.0 10. 25-.

in part. the loss sharing arrangements vary between transactions. subject to periodic review. Inc. 9 . The historical delinquencies of Fannie Mae’s entire DUS loan portfolio have been consistently below those of nonagency conduit commercial mortgages (Exhibit 8). DUS loans are underwritten to a static grid. In contrast.22% for multifamily properties in non-agency CMBS deals. Fannie Mae’s loss sharing arrangement with lenders further differentiates DUS underwriting. compared with 60+ day delinquencies of 14. To participate. Exhibit 8: Fannie Mae Multifamily 60+ Day Delinquency Rate 16% 14% 12% 10% 8% 6% 4% 2% 0% 6/97 6/98 6/99 6/00 6/01 6/02 6/03 6/04 6/05 6/06 6/07 6/08 6/09 6/10 CMBS Fixed-Rate Conduit Fannie Mae Multifamily Note: Fannie Mae Multifamily deliinquencies include owned and securitized loans. Intex Solutions. Source: FannieMae. serious delinquencies as of Q4 2010 stood at 71 bps for multifamily loans in its portfolio and loans underlying MBS. According to Fannie Mae. the lender must meet criteria that cover capital and liquidity levels. in our view. The quality of Fannie Mae DUS loans is due.. Differentiated collateral performance can be attributed to stringent underwriting. Fannie Mae licenses DUS lenders that originate and sell multifamily mortgage loans. according to Fannie Mae. LLC STRUCTURED PRODUCTS RESEARCH Underwriting The credit quality of the underlying mortgages is high.The Agency CMBS Primer March 25. reflecting an intensely competitive lending environment. The most common loss sharing arrangement requires that the lender bear a third of the losses from the loans it underwrites on a pari passu basis with Fannie Mae. Under the DUS program. However. to the admission qualifications to become a DUS lender. Conduit CMBS lending has in the past been subject to underwriting drift. and Trepp LLC. 2011 WELLS FARGO SECURITIES.

35 65% Tier 4 1. The most prevalent form of DUS prepayment protection has been yield maintenance. With defeasance. but usually include yield maintenance or defeasance. However.55 55% Source: Fannie Mae.25 80% Tier 3 1. by prepayment protection. LLC) Dougherty Mortgage. WELLS FARGO SECURITIES. Inc. LLC Beech Street Capital. LLC Pillar Multifamily. Inc. N. There is a 1% assumption fee.A. DUS mortgage loan interest rates are set based on a three-tiered credit grid. LLC Wells Fargo Bank. Alternative loan types (e. there is no change to the principal and interest cash flows received. N. Inc. Red Mortgage Capital. because Fannie Mae DUS are priced and traded at a zero prepayment speed and Fannie Mae guarantees final maturities. the borrower must replace the principal and interest cash flows of the DUS MBS with those of Fannie Mae agency debentures. LLC Walker & Dunlop. LLC Source: Fannie Mae. if not eliminated. Each tier varies according to the debt service coverage and loan-to-value (LTV) ratio of the property. N. CWCapital LLC Deutsche Bank Berkshire Mortgage. the risk of an economically induced prepayment is greatly mitigated. LLC STRUCTURED PRODUCTS RESEARCH Greystone Servicing Corporation.A. DUS loans are generally nonrecourse to the borrower and assumable. KeyCorp Real Estate Capital Markets. if the loan is refinanced. JP Morgan Chase Bank. LLC Grandbridge Real Estate Capital. Prepayment protections may vary. the lower the guaranty fee paid to Fannie Mae.A. HomeStreet Capital Corporation HSBC Bank USA. the assumption feature has no impact on DUS MBS convexity.. In addition. LLC Prudential Multifamily Mortgage. because the possibility of a property default-induced prepayment has been 10 . DUS ARM pools. Citibank. 2011 Exhibit 9: DUS Program Lenders Alliant Capital Finance. The criteria for standard conventional multifamily loans are shown in Exhibit 10.The Agency CMBS Primer March 25. LLC PNC Multifamily Mortgage. The majority of DUS MBS are backed by Tier 2 and Tier 3 loans. which is not shared with the investor. Exhibit 10: FNMA DUS Underwriting Minimum Maximum DSCR LTV Ratio Tier 2 1. Prepayment Protection As in the CMBS market.g. LLC Arbor Commercial Funding.A. Inc (DB Mortgage Services. use a percentage-of-balance method. N. Inc Centerline Mortgage Capital. on the other hand. from the investor’s perspective. Inc M&T Realty Capital Corporation Oak Grove Commercial Mortgage. Thus. student housing or manufactured housing) are subject to stricter standards. The higher the tier. LLC Berkadia Commercial Mortgage LLC CBRE Multifamily Capital. Defeasance is one of the best types of prepayment protection available. LLC AmeriSphere Multifamily Finance.

LLC. the borrower may refinance the loan during the last 90 days before maturity without defeasing or paying a premium. no prepayment penalty is assessed. The early payment of principal may occur in the event of default. to waive the 1% premium. DUS MBS has traded an average 66 bps wide of Fannie Mae debentures. the DUS MBS spreads should not widen if the market rallies and the price of the DUS rises above par.5 FNMA DUS TBA Fannie Mae 10-Year Final 30-Year Schedule 9. 11 . How They Trade Fannie Mae DUS MBS tend to trade primarily.5 years. thereby mitigating extension risk. Default-induced prepayments pose a material performance risk for DUS MBS that trade at premium prices. Source: Wells Fargo Securities. There is no prepayment premium charged during the 90 days prior to loan maturity. 2011.5 bp–1. This risk contributes to DUS MBS spreads widening at higher dollar prices. casualty or a breach of lender representation and warranties. liquidity. against agency debentures and swaps. Fannie Mae has repurchased 100 10/9. callability and other features of DUS MBS with Fannie Mae debentures. The two products differ in terms of liquidity and the risk of default-induced prepayments. Voluntary partial prepayments are prohibited at all times. A pro rata portion of this premium is shared with the investor. 74 occurred in 2009– 2010. LLC STRUCTURED PRODUCTS RESEARCH eliminated. a 1% premium is due but is not shared with the investor. Fannie Mae has the right. Defeasance prepayment protection occurs on fixed-rate loans with maturities less than or equal to 10. In these cases.The Agency CMBS Primer March 25. triggering prepayments without yield maintenance. 2011 WELLS FARGO SECURITIES. because the prepayment is not at the discretion of the borrower. In the CMBS market. For prepayments occurring between the end of the yieldmaintenance period and 90 days prior to maturity. maturity. and are generally compared. have final maturities that are guaranteed by Fannie Mae. modifications have become more prevalent as borrowers sometimes negotiate with special servicers for maturity extensions or lower rates.0 bp Excellent None 8 bps/Swaps Credit Maturity Amortization Callability Bid/Ask Liquidity Call Risk Offer Spread As of March 24. Since 2002. but is not required. unlike CMBS. Exhibit 11 compares the credit. Yield maintenance agreements allow for a full loan prepayment at a premium. As with yield maintenance.5 loans. Of those repurchases. Over the past 12 months. Fannie Mae DUS MBS.5-Year Yield Maintenance 5 bps–10 bps Good Default Induced Prepayment 85 bps/Swaps 10-Year FNMA Debenture Fannie Mae 10-Year Final None 10-Year Noncall 0. Exhibit 11: Fannie Mae DUS MBS versus Fannie Mae Debentures 10/9. In addition to having low call or early prepayment risk.

Exhibit 13: DUS 10/9. DUS MBS prices tend to compress (i. DUS MBS traded at an average of around 14 bps spread to swaps.5 versus Fannie Mae Debentures (Past Five Years) Date Maximum Minimum Average Standard Deviation Current 12/11/2008 3/25/2010 Spread (bps) 216 21 71 39 77 3/24/2011 Source: Wells Fargo Securities. default-induced prepayment presents a material risk to price premiums for DUS bonds. LLC. LLC. As such.The Agency CMBS Primer March 25. LLC STRUCTURED PRODUCTS RESEARCH Exhibit 12: DUS 10/9. spreads tend to widen) as interest rates decline. Fannie Mae DUS MBS also trade against 10-year swaps.e. a default on the underlying loan would constitute a prepayment at par.. Because most Fannie Mae DUS MBS are backed by one property and because Fannie Mae does not compensate the investor for involuntary defaults.5 versus Fannie Mae Debentures 250 200 Basis Points 150 100 50 0 4/05 8/05 4/06 8/06 4/07 8/07 4/08 8/08 4/09 8/09 4/10 12/04 12/05 12/06 12/07 12/08 12/09 8/10 12/10 Source: Bloomberg LP and Wells Fargo Securities. 2011 WELLS FARGO SECURITIES. Over the past 12 months. 12 . Prior to mid-2007. As mentioned above. DUS MBS spreads have traded at an average spread of 83 bps to swaps.

The Agency CMBS Primer March 25. in our view.5 versus Swaps 300 250 200 150 100 50 0 2/05 6/05 2/06 6/06 2/07 6/07 2/08 6/08 2/09 6/09 2/10 6/10 10/05 10/06 10/07 10/08 10/09 10/10 2/11 Exhibit 15: DUS 10/9. DUS MBS also trade in relation to CMBS.535 bps over swaps in November 2008. LLC STRUCTURED PRODUCTS RESEARCH Exhibit 14: DUS 10/9. 3/24/2011 Source: Wells Fargo Securities. although this relationship weakened in 2008.5 versus Swaps (Past Five Years) Date Maximum Minimum Average Standard Deviation Current 12/11/2008 12/4/2006 Spread (bps) 275 10 75 59 85 Basis Points Source: Bloomberg LP and Wells Fargo Securities. and DUS MBS reached their wides of 275 bps to swaps in the same month. Lower spread volatility for DUS MBS. in addition to Fannie Mae’s guarantee of timely interest and principal and a guaranteed final maturity. CMBS spreads spiked to 1. 2011 WELLS FARGO SECURITIES. 13 . LLC. LLC. is attributable to a static underwriting framework that did not experience the underwriting drift of recent-vintage CMBS.

LLC. Exhibit 17: DUS 10/9. 2011 WELLS FARGO SECURITIES. the ability to structure a range of average lives.5 versus Super Senior 10-Year AAA CMBS (Past Five Years) Date Maximum Minimum Average Standard Deviation Current 2/19/2007 1/9/2009 Spread (bps) -59 -1. LLC STRUCTURED PRODUCTS RESEARCH Exhibit 16: DUS 10/9. LLC. Investors sometimes prefer Megas because the pools are diversified (DUS MBS pools are usually backed by one property) and large (size being attractive for liquidity and the large investment requirements of some investors). Multiple fixed-rate DUS pools with coupons within a 100-bp range may be pooled to create a Mega. and. in the case of REMICs.5 versus Super Senior 10-Year AAA CMBS 0 -200 -400 Basis Points -600 -800 -1000 -1200 -1400 12/06 12/07 12/08 12/09 12/10 3/07 6/07 9/07 3/08 6/08 9/08 3/09 6/09 9/09 3/10 6/10 9/10 Source: Bloomberg LP and Wells Fargo Securities.The Agency CMBS Primer March 25. 14 .298 -262 256 -103 3/24/2011 Source: Wells Fargo Securities. The result is a diversified collateral pool. greater transaction size. Mega Pools Mega pools and REMICs combine single loan DUS pass-through securities or other mega transactions.

Coupons and payments reset over either one. DUS ARMs have five-. In addition. they can offer an additional advantage to banks. MASTs restructure principal and interest payments cash flows into three classes: a bullet tranche maturing in about 10 years that receives only monthly interest payments during the term and then principal at maturity. insurance companies. and a third interest-only tranche that.or 10-year terms. and banks. investors who purchase Fannie Mae/FHLMC debentures should also consider Fannie Mae DUS MBS as an attractive way to pick up spread for liquidity. although not common. Who Buys Fannie Mae DUS MBS? A wide variety of investors have purchased Fannie Mae DUS MBS including corporate bond buyers. callprotected (by defeasance) securities backed by DUS MBS. they can be swapped into attractive synthetic LIBOR floaters. unlike most IO tranches. state funds. As some DUS bonds can help investors satisfy regulators’ Community Reinvestment Act (CRA) investment requirements. money mangers.or three-month LIBOR every one or three months. Schedule A can be found on Bloomberg within the DES page. Fannie Mae DUS ARMs Fannie Mae DUS MBS backed by adjustable-rate mortgages. Multifamily Assured Schedule Payment Trusts Multifamily Assured Schedule Payments Trusts (MASTs) are multiple-class. pension funds. Fannie Mae guarantees the payment of scheduled principal and interest through maturity. Because of their prepayment stability. agency debenture buyers. Non-U. ERISA Eligibility Fannie Mae DUS MBS certificates are ERISA eligible. a five-year tranche that receives monthly payments of interest and scheduled amortized principal. casualty or default. 2011 WELLS FARGO SECURITIES. seven. we believe they should be attractive to Federal Home Loan Banks. The schedule of loan information (Schedule A) discloses whether the property or properties backing a DUS MBS qualify as affordable housing. Interim caps and floors allow coupons to adjust by plus or minus 100 bps. exist.The Agency CMBS Primer March 25. The rents for these properties are typically subsidized by the government to keep them affordable. Investors should refer to the prospectus and consult with ERISA professionals for further details. with lifetime caps and floors available at 2%–6% above or below the underwritten interest rate. 15 . LLC STRUCTURED PRODUCTS RESEARCH CRA Investment Treatment Some DUS MBS qualify as Community Reinvestment Act (CRA) investments. regardless of what happens to the underlying loans. These DUS MBS are backed by loans used to finance properties with low-income occupancy requirements. has a predetermined cash flow. according to the Fannie Mae MBS Prospectus.S. including condemnation. because they are backed 100% by multifamily mortgages.

65 billion in 2009 resulted in DUS spreads drifting wider from 2009 to 2010 even as pricing on most other spread products then click on “Multifamily Securities” for information. Original loan and property information at the pool level as well as current WAC. Go to www. LLC STRUCTURED PRODUCTS RESEARCH Conservatorship Fannie Mae was placed in conservatorship and brought under the supervision of the Federal Housing Finance Agency (FHFA) on Sept. 1. Analytics are also available for most DUS fixed-rate pools along with delinquency information.9% of the common stock of each enterprise. according to the FHFA. Treasury effectively provides an explicit guarantee of Fannie Mae’s and Freddie Mac’s debt by ensuring that the GSEs maintain positive net worth.The Agency CMBS Primer March 25. Further Information Bloomberg. ranging from current loan and property information (including delinquencies and debt service coverage). product descriptions and current prospectus supplement narrative templates.S. 6.efanniemae. management and shareholders. Internet. the Treasury owns 79. Conclusion The shift in Fannie Mae’s mandate in 2009 ushered in a transitional period for the DUS market that must now adjust to a dramatic increase in issuance. Under the agreement. The supply technical may offer investors an attractive spread for a risk profile that has included sub-1% serious delinquencies through the credit crisis and the added benefit of a Fannie Mae guaranty. schedules of loan information (for pools closed after Sept. WAM and balance data are available on Bloomberg for all DUS MBS and Megas backed by DUS MBS. 2008. 16 . 2001). The conservator assumed all powers of the boards. The 15-fold increase in supply from $661 million in 2008 to $9. 2011 WELLS FARGO SECURITIES. A $200 billion Senior Preferred Stock Facility provided by the U.

Within this group. insurance companies. LLC. commercial banks. Project loans are backed by one or more mortgages.S. savings 2 The FHA was created in 1934 by the Federal Housing Act with the goal of making it easier for lower.8 billion to $49. marking 16 years of consecutive growth in Ginnie Mae’s multifamily housing program.The Agency CMBS Primer March 25.2 billion in multifamily MBS. Ginnie Mae guarantees the timely payment of principal and interest on the securities.3 billion of multifamily projects were insured by the FHA and funded by Ginnie Mae securities. the Multifamily Program portfolio increased by $7. $12.and middle-income families to finance homes. 2011 WELLS FARGO SECURITIES. In FY 2010. The Path to a GNMA Multifamily Deal The creation of a Government National Mortgage Association (GNMA. Since 1971. Ginnie Mae project loans often finance Section 8 rental housing. is insured by the Federal Housing Administration (FHA) and administered by the Department of Housing and Urban Development (HUD). from $41. These private institutions must provide the capital to repurchase loans for modifications and make principal and interest payments for delinquent loans. mortgage banks. Ginnie Mae) multifamily project loan deal involves essentially three steps: 1) the Federal Housing Administration guaranty. Ginnie Mae has guaranteed $123. instead. Low Income Housing Tax Credit (LIHTC) projects. helping to finance affordable and community-stabilizing multifamily housing developments across the nation. These differences in Ginnie Mae’s business model mean greater reliance on issuers in the program. Ginnie Mae is further differentiated because it does not act as a portfolio lender. Each mortgage. Freddie Mac and Ginnie Mae. FHA Approved Lender FHA Guaranty GNMA Guaranty Dealer GNMA Multifamily Deal Step 1: Federal Housing Administration (FHA) Guaranty The first step for any GNMA multifamily deal begins with the Federal Housing Administration (FHA). 2) the GNMA guaranty and 3) the creation of the GNMA deal. government. or Medicaid assisted nursing homes.7 billion. During fiscal 2010. in turn.9 billion. the agency acts only as a guarantor of federally insured or federally guaranteed loans. Ginnie Mae stands apart because it is wholly owned by the U. FHA-approved lenders can be.2 The FHA provides mortgage insurance for multifamily and single-family loans originated by FHA-approved lenders. 17 . but are not limited to. Exhibit 18: The Path to a GNMA Multifamily Deal Borrower Borrower Borrower Source: Wells Fargo Securities. LLC STRUCTURED PRODUCTS RESEARCH Ginnie Mae Project Loans Introduction Agency CMBS describes those securities that are issues or guaranteed by Fannie Mae.

In return. a dealer (investment bank) and the investors. of which $44. GNMA provided a guaranty on only a small fraction of FHA-insured loans.0 billion in 2009 and $3. For the guaranty. the last of which was Fannie Mae Multifamily REMIC Trust 2005-M1. government. 18 . Step 3: A Deal Is Born The final phase of a GNMA Multifamily REMIC deal involves three parties—an FHAapproved lender. the FHA receives a monthly premium from the lender. Early on in the program. it is given an FHA guaranty. which are discussed in more detail later in the report. LLC STRUCTURED PRODUCTS RESEARCH and loan institutions. up from $6. Once an FHA project loan is insured with a GNMA guaranty. If the loan qualifies for one of the FHA programs. the dealer structures a deal to be sold to investors. In addition. pension funds and trust companies. In 1968. a dealer may purchase the loan and place it with an existing pool of GNMA-insured loans. however. the FHA has insured $158. typically around 40–80. Since 1970. Although the majority of GNMA-insured loans are pooled and placed in REMIC structures. whereas today GNMA insures more than 90% of FHA-insured loans. GNMA charges a 13-bp fee. there have been 195 deals with a total original balance of $59. GNMA has insured $123. Congress created GNMA as a government-owned corporation within HUD with the intent of making a more liquid secondary market for mortgages.8 billion in 2008 (Exhibit 19). Since 2000. the first of which was Fannie Mae Grantor Trust 1995-T5. does not guarantee the timeliness of principal and interest payments. Issuance in 2010 was $11. Essentially.680 loans) of multifamily loans. This primer focuses on nonsingle-family mortgages that can be for the construction. 4 Prior to the GNR 2001-12 deal. purchase and refinancing of multifamily and healthcare facilities and make up what is often referred to as the ”Project Loan” market. The first GNMA multifamily deal to be launched under the GNR shelf name was in 2001 (GNR 2001-12). Step 2: GNMA Guaranty GNMA3 provides a second level guaranty for an FHA-insured loan. 3 The FHA became part of the U. rehabilitation. GNMA-insured loans were securitized and placed in a number of Fannie Mae REMIC Trust deals.4 From 2001 through February 2011. in the event of a default. 2011 WELLS FARGO SECURITIES. A public or private entity can receive financing from an FHA-approved lender as long as the project falls under one of the FHA programs also known as sections in the Fair Housing Act.5 billion. GNMA makes up for the inadequacies of the FHA project loans by guaranteeing both the timeliness of principal and interest payments and by taking care of the 1% assignment fee in the event of a default. Department of Housing and Urban Development (HUD) in 1965.The Agency CMBS Primer March 25. The FHA. This results in a 99% repayment of principal and one month of lost interest. only a handful of GNMA multifamily loans have been in Fannie Mae deals. The FHA guaranty means that the ultimate payment of principal and interest on the loan is backed by the full faith and credit of the U. When a dealer has enough loans. however. some are left as single loans and sold off individually to investors. Since 1971.1 billon. the FHA charges a 1% assignment fee and only begins accruing interest after the first month of missed payment.5 billion is currently outstanding.5 billion (36.S.S.2 billion of FHA project loans.

5 The penalty points typically decline 1% each year.9 3. accounting for nearly 60% of all GNMA loans securitized from 2001–2004 (Exhibit 20).The Agency CMBS Primer March 25.5 4. Underlying Collateral (Loan Characteristics) GNMA loans have fixed rates and accrue interest on a 30/360 day basis. The spread between the mortgage rate and the rate on the security cannot exceed 50 bps without written approval from GNMA. thus. 2% and 1% for years six through 10. 3%.5 6. The loans are monthly level pay and generally have 35–40 year fully amortizing schedules. however.0 6. 19 . Inc. typically a lockout period followed by penalty points for the remainder of the term of the loan.0 *2011 data is through February. LLC STRUCTURED PRODUCTS RESEARCH Exhibit 19: GNR REMIC Multifamily Issuance 12 10 Issuance ($Bil) 11.8 2.1 8 6 4 2 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2. Since 2005. Most GNMA loans have some form of call protection. the predominant structure was five years of lockout followed by five years of penalty points (we use a shorthand notation of 5_5) 5. a loan in the GNR 2006-30 deal has two years of lockout followed by penalty points of 8% for three years and then 5%.g. The 25 bps consists of 13 bps GNMA charges as a guaranty fee and 12 bps kept by the issuer as a servicing fee. One year of lockout followed by nine years of penalty points has also been common in recent years.6 5. 2% and 1% for the remaining years). a 5_5 is five years of lockout followed by penalty points of 5%.. 4%. respectively. The loans always have a minimum spread difference of 25 bps between the interest rate on the mortgage and the interest rate on the security. 2011 WELLS FARGO SECURITIES. accounting for 52% of the loans securitized from 2005-2010. There are many variations (e. the more common protection has been two years of lockout and eight years of penalty points (2_8).6 6. Until 2005. LLC and Intex Solutions. 4%.4 6.2 4. 3%. Source: Wells Fargo Securities.

7% 3_7 15.5% 2_7 1.0% 5_5 0.0% 1_3 0.8% 3_5 1. and as a project is completed or rehabilitated.8% Other 8.0% 2_5 0.2% 0_5 0.7% 1_9 48. 2011 WELLS FARGO SECURITIES. Inc.0% 2_7 0.9% 1_8 4.3% 2_7 2.6% 3_7 1.8% 1_8 3.1% 9_0 4.1% 1_9 27.3% 4_5 1.2% 5_0 2.8% Other 9.6% 3_7 16.3% 4_5 4.4% 2_8 53.7% 3_5 2. the descriptions of these can be found in Exhibit 21.9% 0_9 5.2% Other 11.9% 4_5 8.3% 3_7 1.6% 2_8 35.2% 1_8 1. GNMA loans are also categorized by the FHA program under which they are insured.7% 4_5 7.5% 5_5 1.0% 3_3 0.7% 5_5 67.6% 0_8 1.7% 9_0 7.4% 4_5 9.1% 5_3 0.9% 8_0 1.0% 0_9 2.8% 10_0 16.2% Other 4.8% 3_7 19.9% 1_4 1.7% Other 3. PLCs and CLCs can be further broken up into more detailed categories.0% 4_5 11.4% Other 9.1% 9_0 2.5% 1_9 4.2% 1_9 8.6% 4_5 6.8% 5_5 18.1% 0_3 0.1% 0_7 1.7% 9_0 1.0% Other 2.5% 0_9 2.8% 3_5 1.1% 2_7 1.2% 3_7 6.0% 3_7 6.6% 1_8 4.4% 0_9 1.1% 5_5 5.1% 4_5 3.1% 2_8 75.6% 0_8 1.8% 1_8 3.2% 10_0 15.9% 7_0 0.6% 1_9 7.5% Other 8.5% Other 6.5% 5_5 47. We take a closer look at those programs in the following section.6% Note: LO / PP stands for lockout and penalty points and are given in terms of years.2% 2_3 1.0% 2_0 1.1% 9_0 1.6% 5_5 2.7% 3_3 1.5% 5_5 55. LLC STRUCTURED PRODUCTS RESEARCH Exhibit 20: Call Protection in GNMA Deals by Vintage (Based on Balance) 2001 2002 2003 2004 2005 % of % of % of % of % of LO/PP Total LO/PP Total LO/PP Total LO/PP Total LO/PP Total 5_5 55. 20 .7% 0_5 1. Project Loans and Construction Loan Certificates GNMA loans can be classified as project loans certificates (PLCs) or construction loan certificates (CLCs). LLC and Intex Solutions.9% 10_0 4.4% 0_8 2.0% 2_8 23.4% 2006 2007 2008 2009 2010 % of % of % of % of % of LO/PP Total LO/PP Total LO/PP Total LO/PP Total LO/PP Total 2_8 42.7% 1_9 7.1% 5_0 1.0% 3_7 3. a borrower obtains longer-term financing in the form of a PLC.2% 2_7 2.3% 9_0 6.4% 3_5 2. Many loans begin as construction loans.1% 7_0 1.3% 1_8 0.7% 2_8 34. Source: Wells Fargo Securities.3% 0_10 1.7% 0_3 1.3% 5_0 3.2% Other 3.7% 10_0 2.The Agency CMBS Primer March 25.5% 5_5 7.8% 5_0 1.9% 1_9 23.3% 3_3 2.5% 10_0 2.6% 10_0 1.2% 0_9 5.1% 0_3 0.7% 8_0 0.8% 2_8 3.3% 3_5 1.

each of which is secured by a lien on a small project as determined by FHA or an RD-Section 538 guaranteed loan that has been used for the revitalization of the Section 515 loan portfolio. level payment FHA-insured project loan that has a first scheduled payment date no more than 24 months before the issue date of the securities and has not been modified subsequent to FHA's final endorsement. non-level payment FHA-insured or Rural Development. on the resulting project loan securities.The Agency CMBS Primer March 25. fall under both 232 and 223(f). on the resulting project loan securities. RD-guaranteed project loan that has a first scheduled payment date no more than 24 months before the issue date of the securities and has not been modified subsequent to FHA's final endorsement. fall into one of five groups. LLC and GNMA. 80%. We provide a brief description of the most common FHA programs below. PN LM LS RX CS Source: Wells Fargo Securities. for example. A breakdown of the FHA sections within the GNMA multifamily deals based on original loan balance is shown in Exhibit 22. Construction Loan Certificates CL A pool consisting of a single construction loan. the interest rate payable on the securities backed by a CS pool will differ from the interest rate payable. A considerable amount of loans. FHA Program Types GNMA loans qualify for certain FHA programs when underwritten. A pool consisting of one or more project loans. A pool consisting of a single. 2011 WELLS FARGO SECURITIES. upon conversion of the construction loan securities. the interest rate payable on the securities backed by a CL pool will also be the interest rate payable. Notice that some loans can qualify for more than one FHA program. 21 . A majority of the loans. LLC STRUCTURED PRODUCTS RESEARCH Exhibit 21: Descriptions of Project Loans and Construction Loan Certificates Project Loan Certificates PL A pool consisting of a single. each of which is secured by a lien on a Mark-to-Market project as determined by FHA and the Office of Affordable Housing Preservation (OAHP) and each of which has a first scheduled payment date no more than 24 months before the issue date of the securities. A pool consisting of a single project loan with a first scheduled payment date more than 24 months before the issue date of the securities or a loan that has been modified subsequent to final endorsement. or issuance of the RD permanent loan guarantee. upon conversion of the construction loan securities. each of which has a first scheduled payment date no more than 24 months before the issue date of the securities and none of which has been modified subsequent to final endorsement. A pool consisting of one or more project loans. A pool consisting of a single construction loan.

board and care homes. The goal of the program is to allow refinancing to lower the debt service or to purchase existing properties to maintain a sufficient amount of affordable housing. Section 213 provides insurance for loans backed by cooperative housing and allows nonprofit cooperative ownership housing corporations to develop the projects. intermediate care facilities. Section 207 provides insurance for FHA-approved lender loans for the construction or rehabilitation of multifamily properties and manufactured home parks. Section 241 provides insurance to finance property improvements that should enable the property to remain competitive. Section 221(d)3 applies to nonprofit borrowers.The Agency CMBS Primer March 25. 2011 WELLS FARGO SECURITIES. whereas Section 221(d)4 applies to profit-seeking borrowers. Section 220 provides insurance for loans collateralized by multifamily properties that are in federally aided urban renewal areas or areas experiencing redevelopment. 223(f) 18% Sections 221(d)4 and 221(d)3 provide insurance for the construction and rehabilitation of multifamily housing for low. resulting in the prepayment of the existing mortgage. Section 223(f) provides insurance for loans originated for the purpose of purchasing or refinancing multifamily complexes. LLC STRUCTURED PRODUCTS RESEARCH Exhibit 22: FHA Programs in GNMA Multifamily Deals (2001–2010) 232 6% 207/223(f) 7% Other 12% 221(d)4 27% 223(a)7 14% 232/223(f) 16% Source: Wells Fargo Securities. LLC and GNMA. Section 232 provides insurance on construction loans for new or rehabilitated nursing homes. and assisted-living facilities for the elderly. to extend its useful life and to replace dated equipment without having to refinance. The purpose of Section 220 is to promote quality housing in areas where revitalization is planned. hospitals and nursing homes that are not in need of major rehabilitation. Section 223(a)7 allows the FHA to refinance loans that are currently insured under any section. government actions or disaster.and moderate-income families that have lost their homes due to urban renewal. The refinanced loan cannot be greater than the original loan amount and is allowed a term equal to the unexpired duration of the previous loan plus 12 years. 22 .

63% Original Balance: $150 million B Tranche . Source: Wells Fargo Securities.WAL: 6. while the previous classes. An example of a GNMA Remic deal—GNR 2010-74. The average deal size in 2010 was $315.93% Certificate Rate: 4.87% Original Balance: $6.68% Ginnie Mae Pool # 719618 Property Name: University Village FHA Program: 223(a)(7) Location: Minneapolis. C and D are typically weighted average coupon classes. GNMA and Intex Solutions.8 Coupon: 4. The typical GNMA multifamily deal has six classes—A. are outstanding. proceeds are distributed to the IO class. Deal sizes are normally in the range of $250 million–$350 million.WAL: 21. Z and an IO with approximate weighted average lives of three. which closed in June 2010—is shown in Exhibit 23.WAL: 12. C.9 million Closing Date: 10/1/09 Stated Maturity: 11/15/44 Lockout Period: 19 Months Mortgage Rate: 4. although there have been outliers with as few as four loans and as many as 156 loans backing a deal. MN Original Bal: $10.1 Coupon: 3. B. TX Original Bal: $14.WAL: 6. the trustee can terminate the trust once the current principal balance is less than 1% of the original principal balance. at $302. A through D.WAL: 8.5 Coupon: 4. D.1 Coupon: 1. 23 . Exhibit 23: Example of a GNMA Multifamily Remic Deal (GNR 2010-74) GNMA-Insured Loans Ginnie Mae Pool # 734787 Property Name: North Lamar Apartments FHA Program: 223(f) Location: Austin. Most deals have 40–80 loans.62% Original Balance: $45 million Z Tranche .9 million Closing Date: 3/1/10 Stated Maturity: 3/15/45 Lockout Period: 23 Months Mortgage Rate: 4. LLC STRUCTURED PRODUCTS RESEARCH How Are the Deals Structured? GNMA multifamily deals are REMIC sequential pay structures with an interest-only (IO) class.WAL: 2.2 million IO Tranche . The Z tranche is an accrual class in which interest is accrued and added to the principal balance.24% Original Balance: $24 million D Tranche .The Agency CMBS Primer March 25. In the case where prepayment penalties are collected.81% Original Balance: $73 million C Tranche .5 Coupon: 2.9 million compared to $260.2 million Closing Date: 6/30/2010 A Tranche . eight. Inc. For GNMA deals. and tranches B. 2011 WELLS FARGO SECURITIES. 12 and 20 years. LLC.9 Coupon: 4.60% Certificate Rate: 4. The A tranche is typically a fixed-rate class.35% GNR 2010-74 Original Balance: $298. five. since 2001.5 million in 2009.6 million (Exhibit 24). with the average.47% Collateral 40 GNMA-Insured Mortgage Loans 38 Additional Loans Note: Information is as of the time of issuance.

and Intex Solutions.5% 2. the Project Loan Default (PLD) curve is believed to have been developed by Donaldson.13% 1.0% 2. 24 . This assumes that no voluntary prepayments occur during lockout.6 million 373. LLC and GNMA. Exhibit 25: The Project Loan Default (PLD) Curve Loan Age (months) 0-12 13-24 25-36 37-48 49-60 61-72 73-84 85-96 97-108 109-168 169-240 241-maturity Default Rate 1.00% 0.3 260. but loans then prepay at a 15% CPR the first year lockout ends through the life of the deal.47% Default Rate 2.) 350 300 250 200 150 100 50 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 318. the most important considerations are the assumptions used when these deals are priced.5 273.3 315.3 284. The standard assumption used by the industry is the pricing speed of 15% CPJ.6 248.50% 0.30% 2. LLC .2 Avg.20% 2.2 315.9 Source: Wells Fargo Securities. Inc.0% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 3.46% 1.7 313. 6 While not specifically documented anywhere.5 437.The Agency CMBS Primer March 25.26% 0.$302. LLC STRUCTURED PRODUCTS RESEARCH Exhibit 24: Average Deal Size for GNMA Multifamily Remic Deals 500 450 400 Avg. 2011 WELLS FARGO SECURITIES. The second part of the 15% CPJ is the assumption that defaults (involuntary prepayments) follow the timing of the project loan default curve (PLD)6.0% 0.0% 1.51% 2.5% 1.25% 0. Lufkin & Jenrette in 2000 or 2001 and was based on historical default data. Deal Size . which is shown in Exhibit 25.57% 0.80% 0. Deal Size ($Mil.5% Year Source: Wells Fargo Securities. Trading GNMA Multifamily Bonds When evaluating GNMA multifamily bonds.

2011 WELLS FARGO SECURITIES. In the case of a modification. B. the loans are paid off and the impact to the bondholder is a prepayment. 25 . When a loan goes through an override. A final consideration for investors is the lack of readily available information regarding the collateral in GNMA deals. LLC STRUCTURED PRODUCTS RESEARCH The PLD curve assumes that involuntary prepayments begin immediately. A voluntary prepayment occurs when a borrower willingly prepays the loan after lockout and incurs penalty points to retire the mortgage. the FHA works with the borrower to refinance a lower rate of interest. delinquency and prepayment information is limited and difficult to access. Under a default.51% in year three before steadily declining to 0. the borrower works with the issuer/servicer and the terms of the loan are modified to provide some relief to the borrower.25% for years 15 through 20.30% in year one and then ramp up to 2. Investors should be aware that while prepayment penalties are passed through to the IO class. in which case the borrower may want to sell or b) lower interest rates such that the borrower is motivated to refinance the loan. When a GNMA loan defaults. The holders of the IO only receive the proceeds if they are received by the trustee. A GNMA loan can prepay in one of the following two ways: as a voluntary prepayment or a default. starting at 1. resulting from a default. The FHA has the ability to override lockouts and prepayment provisions if it is deemed to be in the best interest of the federal government to do so. Treasury curve (specifically the 30-year bond). which then liquidates the property. occurs when a property is struggling financially and can no longer maintain the debt service. the loan is given to the FHA. A prepayment. What Are the Risks? As the principal and interest for these securities are guaranteed. In all three cases. In a typical default situation. The sequential pay classes (usually A. there is the risk that the loans will actually pay off at slower or faster speeds. As the deals are priced at a speed (15% CPJ). the main concern for an investor is cash flow volatility and the linked reinvestment risk.The Agency CMBS Primer March 25. GNMA does not guarantee the payment of penalties by the borrower. one of the following three things occur: a typical default. C and D) are priced to the swaps curve while the accrual class (usually Z) is priced to the U. Also default. an override or a modification. In most cases. financial statements and appraisals for the properties are unavailable.S. the lockout period or prepayment penalties no longer apply. A voluntary prepayment is usually motivated by a) a rise in property values.

we found 203 instances of voluntary prepayments in 2009 with a total original loan balance of $1. Voluntary Prepayments and Defaults – Actual Performance For our prepayment and default analysis. Historically.8 18. Slow It Down In Exhibit 26.9 Z 35. we show changes in weighted average life (WAL) for the tranches in the GNR 2010-74 transaction when the voluntary prepayment rate is adjusted faster and slower. Unlike voluntary prepayments.4 4. we used loan data provided by GNMA and HUD.0 Source: Wells Fargo Securities.9 years. 2011 WELLS FARGO SECURITIES. respectively. LLC and GNR 2010-74 offering circular. The majority of voluntary prepays were loans that originally had five years of lockout. The 2002. When the CPR rate is slowed to 5% from the standard 15%.2 years. We found only 34 defaults in 2010 with a total loan balance of $230 million.3 2. Exhibit 26: Voluntary Prepayments Speeds and the Effect on WAL Class 0% CPR 5% CPR 15% CPR 25% CPR 40% CPR A 9. The bulk of the voluntary prepayments in 2010 came from the 2003. 2004 and 2005 vintages.5 6.0 IO 19. We are. defaults in GNMA remic deals remain low.4 and 9. the GNMA transactions have experienced very few defaults. In this section.9 1.The Agency CMBS Primer March 25.2 billion.5 14. LLC STRUCTURED PRODUCTS RESEARCH Voluntary Prepayment and Default Analysis of GNMA Multifamily Loans As discussed earlier. We also review actual voluntary prepayments and defaults within GNMA remic deals.6 billion.6 5. In comparison. we show the volatility when prepayment speeds are adjusted to slower and faster levels. 223(f).1 C 28.1 12.5 1. Speed It Up.3 3.7 31.9 10.8 and 2.0 4.1 D 31.9 6. We found 452 voluntary prepayments in 2010 with an original loan balance totaling $2.1 8.2 3. 2003 and 2004 vintages have accounted for the majority of GNMA loan defaults. which spiked in 2010. When the CPR rate is increased to 25% the WALs for Classes B and C shorten by 1.7 23. Voluntary prepayments for GNMA loans experienced a substantial spike in 2010.1 4.7 21. also starting to see loans from the more recent vintages with only a few years of lockout starting to prepay.8 8.6 12. the WALs for Classes B and C extend 6. The PLD curve is also applied to each of the scenarios. respectively.7 11. the main concern for investors is the amount of prepayments both voluntary and involuntary (defaults) within GNMA multifamily deals. however. 223(a)7 and 232. The most common program types in terms of defaults have been 221(d)4.5 B 24.8 6.1 4. 26 .

250 1. Defaults have remained low in GNMA remic transactions.S. 2011 WELLS FARGO SECURITIES. GNMA and HUD.619 Defaults Voluntary Prepayments 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Wells Fargo Securities. Investors need to be mindful of the shift in call protection to shorter lockout periods and the potential for faster prepayments.500 Loan Balance ($Mil) 2.000 750 500 250 0 481 326 275 197 74 5 6 55 34 632 170 144 206 275 230 849 1. LLC STRUCTURED PRODUCTS RESEARCH Exhibit 27: Prepayments and Defaults in GNMA Remic Deals (Loan Count) 500 450 400 350 Loan Count 300 250 200 150 100 50 0 22 85 41 14 133 104 42 43 37 53 36 34 41 34 220 227 203 452 Defaults Voluntary Prepayments 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Wells Fargo Securities. GNMA multifamily remic issuance topped $11 billion in 2010 and is on pace for another year of sizable issuance.185 1.000 2. As the principal and interest for these securities are guaranteed by the U.232 1. 27 . Conclusion Ginnie Mae project loan transactions provide another option for investors in the agency CMBS space. the main risk for investors is the timing of cash flows due to prepayments. GNMA and HUD.250 2. both voluntary and involuntary (defaults).750 2.The Agency CMBS Primer March 25. but voluntary prepayments saw a significant spike in 2010.500 1.185 2.750 1. Exhibit 28: Prepayments and Defaults in GNMA Remic Deals (Loan Balance) 3. government. LLC.000 1. LLC.

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