Freddie Mac announced a new initiative that will involve the direct purchase of tax-exempt multifamily loans.
The government-sponsored enterprise said it will buy the loans from its Targeted Affordable Housing (TAH) lender network and securitize them into a new series called M-Deals.
The effort will involve tax-exempt loans issued by a city, county, or state housing finance entity for affordable housing.
“Freddie Mac is further reducing its credit risk by securitizing more of its targeted affordable business volume and helping to increase access to credit for affordable rental housing borrowers,” says David Brickman, Freddie Mac Multifamily executive vice president. “Through our M-Deals, we will shift taxpayer risk to private investors who will have a first loss position. We are creating an agency alternative for investing in tax-exempt bonds whose collateral is from multiple borrowers.”
The direct-purchase program will be particularly attractive for 4 percent low-income housing tax credit developments, according to Kimball Griffith, Freddie Mac Multifamily vice president of affordable sales and investment.
Freddie Mac estimates the new program will provide about a 40 percent reduction in closing costs due to private-purchase efficiencies when compared to a publicly offered credit-enhanced bond.
PNC Real Estate is among the TAH lenders planning to take part in the program.
“The announcement from Freddie Mac notes a variation to Freddie's existing bond credit enhancements that we at PNC Real Estate have used for many years,” says Sarah Garland, senior vice president and head of production for Fannie Mae/Freddie Mac Affordable Housing for PNC Real Estate. “The difference is that this is a tax-exempt loan program as opposed to tax-exempt bonds. Without getting too granular, the new tax-exempt loan offers borrowers a lower interest rate and lower execution costs.”
This change permits Freddie Mac and its lenders, such as PNC, to compete against private-placement lenders. As a result, PNC can now compete for deals that we'd otherwise have had no opportunity to compete against the private placement lenders, according to Garland.
“For the affordable housing market in general, this change means more dollars for projects,” she says.
- Senior/subordinate structure with a guaranteed A-piece being publicly sold and the first loss B-piece being sold to private investors;
- Collateral backing the senior/subordinate securities are fixed-rate loans and up to 35-year amortization with up to an 18-year balloon; and;
- Expected offering size of about $300 million of aggregated direct purchase tax-exempt loans and related taxable securities.
How the Direct Purchase of Tax-Exempt Loan works:
- A Freddie Mac TAH Seller/Servicer (lender) will make a direct loan to a government entity such as a city, county or state housing authority in exchange for a tax-exempt note;
- Freddie Mac purchases the tax-exempt loan, as evidenced by the note, from the TAH seller/servicer, aggregates it with other tax-exempt loans and then securitizes the loans though its M-Deal structure; and
- The city, county or state housing authority that issues the tax-exempt note then lends the loan proceeds to a borrower to finance a multifamily housing community that has affordable rents.
Connect with Donna Kimura, deputy editor of Affordable Housing Finance, on Twitter @DKimura_AHF