Freddie Mac is expanding its efforts to sell to private investors a portion of the credit risk on certain multifamily mortgage loans backing targeted affordable rental housing tax-exempt bonds guaranteed by the company.

Victor Pa
Victor Pa

It has settled its first offering of Freddie Mac Multifamily Structured Credit Risk (SCR) Debt Notes.

SCR Notes (pronounced Score Notes) are unsecured and unguaranteed corporate bonds that build on the company's multifamily securities offerings and single-family Structured Agency Credit Risk debt notes, and reduce taxpayers' exposure to mortgage default risk. With SCR Notes, the first-loss credit risk of a specified pool of mortgages is transferred to private capital markets credit investors. Freddie Mac retains the senior loss credit risk.

The program aims to help affordable housing developers.

“By bringing in more private capital into the space, we are increasing the liquidity level,” Victor Pa, vice president of multifamily investments for Freddie Mac, tells Affordable Housing Finance. “By increasing liquidity, that should over time bring the cost of capital down. That should translate into lower financing costs for borrowers over time.”

The program’s underlying collateral comes from Freddie Mac’s bond credit enhancement business.

The first transaction, the $52 million SCR Notes Series 2016-MDN1, Class B, is linked to the credit and principal payment risk of a reference pool of multifamily mortgage loans backing state and local housing finance agency tax-exempt bonds for which Freddie Mac provides credit enhancement. The SCR Notes are not backed or secured by the reference pool itself. Wells Fargo is the sole structuring agent, lead manager, and sole bookrunner. Systima Capital Management is the sole initial investor for the issued notes.

The underlying pool was over $1 billion, and the credit risk transfer portion that was sold is 5% of that amount, according to Pa.

The amount of periodic principal and ultimate principal paid by Freddie Mac is determined by the performance of the reference pool consisting of more than 50 multifamily mortgage loans originated between 2007 and 2015 with an approximate unpaid principal balance of $1.04 billion. The mortgage loans were primarily funded by the issuance of targeted affordable rental housing tax-exempt bonds guaranteed by Freddie Mac. The loans adhere to Freddie Mac's underwriting, internal fraud prevention and quality control standards.

Freddie Mac hopes to have one or two SCR offerings each year.