KBRA Releases Research - Freddie Mac K-Series: First-Quarter 2023 Defeasance and Supplemental Debt Plummet After Record High in 2022

KBRA releases a new report on defeasance and supplemental debt, which climbed to an all-time high in 2022 for Freddie Mac K-Series deals. The numbers were very compelling, with defeasance rising 39% to $16.4 billion and supplemental debt up 73.4% to $2.1 billion on a year-over-year basis. This was despite a downward trend for both defeasance and supplemental debt throughout 2022 and continuing into Q1 2023. First-quarter 2023 recorded the largest decline on a quarter-over-quarter basis over this period for both defeasance (-58.5%) and supplemental debt (-35.4%).

Despite the decline in activity in 2H 2022, defeasance may have benefited from lower Treasury prices due to the rise in the 10-year note, as the cost to replace property cash flows with defeasance Treasury securities became cheaper. Supplemental debt activity may have also been influenced by borrowers who opted not to take out higher coupon first mortgages, keeping them intact while receiving additional proceeds through second mortgages.

In addition, as was observed with defeasance and supplemental debt trends, it was also in Q3 2022 when both price growth and multifamily transaction volume turned negative, which continued through Q1 2023. In light of the slowdown, borrowers may have been unable to obtain the price that they wanted due to wide bid and ask prices and turned more cautious, not wanting to re-leverage their existing equity through supplemental debt.

In the short term, until confidence returns to the property markets, elusive price levels will undermine multifamily investments, which in turn will influence defeasance and supplemental debt levels. However, once prices exhibit more transparency—albeit most likely at lower growth levels than previously experienced over the last decade—defeasance and supplemental debt should rise again given the sector’s track record and mortgage rate increases that have forced many out of the housing market and into apartment living.

Click here to view the report.

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KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

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