Recently, there has been much talk about the impact of some pending changes to the highly regarded Barclays Capital Aggregate Bond Index. The index, maintained by Barclays Capital, is often used to represent investment-grade bonds being traded in the United States. Plans to change the index were announced in late 2013, and for those of us in the multi-family sector, this was welcome news. Barclays is adding agency commercial mortgage-backed securities (CMBS) issued by Fannie Mae and Freddie Mac to its U.S. Aggregate and Global Aggregate indices. This new action goes into effect on June 30, 2014, and will benefit both Fannie Mae and Freddie Mac. Furthermore, it is likely to produce benefits for borrowers raising capital in this space through tighter loan spreads.
For those who may be unfamiliar, the Barclays Index is a market capitalization-weighted index, which means the securities in the index are weighted according to the market size of each bond type. Today, most U.S.-traded investment-grade bonds are represented. The index includes Treasury securities, government agency bonds, mortgage-backed bonds, corporate bonds and a small amount of foreign bonds traded in the U.S. Municipal bonds and Treasury Inflation-Protected Securities are excluded, due to tax treatment issues.
As mortgage lenders, we see several reasons why these changes are important to the multi-family industry. First, by accepting agency CMBS paper, it ostensibly elevates and “legitimizes” this paper in the marketplace. Also, it may lead to new sources of liquidity in the market. This potential increase in appetite from a broader investor base widens the multi-family investor universe, attracting new liquidity into the system. For a borrower who is investing in multi-family, this influx of capital could result in tighter loan spreads. The benefits are clear.
Last November, Fannie Mae announced that it priced $1.28 billion in multi-family DUS REMIC (FNA 2013-M14) under its Fannie Mae GeMS (Guaranteed Multi-family Structures) program and that it would be eligible for inclusion in Barclay’s U.S. Aggregate and Global Aggregate indices. According to Josh Seiff, Fannie Mae director of multi-family capital markets, “that buzz helped drive strong demand for our most recent deals, which had something for everyone—short bonds, a floater/inverse IO and solid 10-year cashflows.” Based on the market’s attractive response, Barclays decided to broaden the index to include agency CMBS paper.
With the inclusion of these agency securities in the Barclays Aggregate Bond Index, investors who historically do not invest in agency securities will now be able to. This step alone will add significant liquidity and demand for these investments. With more liquidity, the cost of funds will likely fall.
This achievement marks the culmination of many years of effort on the part of Fannie Mae and Freddie Mac multi-family management to broaden the interest in these securities. While it is too soon to predict with accurate precision what this step will mean, Centerline believes the addition of these agency securities to the Barclays Index will significantly benefit the multi-family borrowers and the sector overall.
William Hyman is senior managing director of Centerline Capital Group.