UPDATE 2-Freddie Mac to start new multifamily funding program

(Adds investor comment)

NEW YORK, May 26 (Reuters) - Freddie Mac FRE.NFRE.P in June will expand mortgage funding for multifamily buildings with a new debt program, aimed at managing its risk and improving liquidity in a turbulent real estate sector, the second-largest U.S. home funding company said on Tuesday.

The government-controlled company has previously bought multifamily loans and held them in its investment portfolio rather than repackage them for sale to investors.

Freddie Mac plans to sell $1 billion of “K Certificates” backed by 62 recently originated multifamily mortgage loans. These are publicly offered senior securities with a Freddie Mac guarantee, as well as a privately placed subordinated class, Freddie Mac told Reuters.

“First and foremost, it’s about liquidity” to the mortgage market, David Brickman, vice president of Multifamily and CMBS Capital Markets for Freddie Mac, said in an interview.

“Certainly in the background is the recognition that going forward we’re going to have to be more focused on managing our capital, managing our risk, and working potentially within a constrained retained portfolio,” he added.

Freddie Mac and Fannie Mae FNM.NFNM.P, the top U.S. mortgage funding company that is also controlled by the government, are being relied upon heavily by the government to step up their mortgage purchases and help break the U.S. housing logjam. But the companies also have a federal mandate to start winding down their investments next year as a way of limiting risks to taxpayers.

Pricing for the new deal is expected between June 8 and June 11 through underwriters led by Deutsche Bank. Settlement is likely between June 18 and June 20.

A syndicate source did not immediately return phone calls.

“We have not seen a clear indication of price as of yet, or even what the collateral looks like. When we get more details, and can make a comparison to other multifamily or commercial offerings we will then make a decision on whether to buy some in the secondary markets,” said William Chepolis, a managing director at Deutsche Bank unit DWS Investments.

“My first reaction is this is the first of many offerings like this for both agencies -- a reason to be patient -- but first issues are usually priced aggressively so that the offering goes well,” he added

The multifamily loans backing the bonds were purchased specifically for the new securities program and never were in the investment portfolio.

The subordinated class represents 7.5 percent of the face value and has already been sold, Brickman said.

“We have sold the subordinate bond, so there is somebody buying unguaranteed bonds and buying into the credit story here,” he said.

This is an added layer of protection to Freddie Mac, as it sells off the riskier piece of the bonds, and to the other investors.

Although this deal has the backing of Freddie Mac, which has special government status, the company said the structure of this new security could be used by other issuers to open up funding in the ailing commercial mortgage market.

“This is a model that could be replicated by other large financial institutions as a way to bring structured finance back, as far as selling risk on the bottom and providing a guarantee and structure on the top,” Brickman said.

Historically, Freddie Mac has purchased at least $20 billion of multifamily loans annually. It hopes that as much as half of its purchases of this loan type going forward, as that market segment recovers, will be securitized through the new and potentially related programs.

Freddie Mac expects investors to include large money managers, life insurance companies and pension funds.

The program provides “critically needed support to the multifamily housing market during these difficult economic times,” Mike May, Freddie Mac senior vice president of Multifamily, said in a statement. (Additional reporting by Caryn Trokie in New York, Patrick Rucker in Washington)