MCLEAN, VA--(Marketwired - Apr 25, 2014) - Freddie Mac (OTCQB: FMCC) is announcing a new initiative -- the Direct Purchase of Tax-Exempt Loans -- to help keep rental housing affordable for lower income families and increase cost-effective financing for tax-exempt multifamily properties. Freddie Mac Multifamily now will purchase from its Targeted Affordable Housing (TAH) lender network multifamily tax-exempt loans, and aggregate and securitize them into a new series called M-Deals.
These are tax-exempt loans issued by a city, county or state housing finance entity for apartments that have affordable rents for lower income individuals. This new execution provides another option for TAH Seller/Servicers and borrowers that is more efficient and costs less than publicly offered credit enhanced bonds.
"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," said 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."
Kimball Griffith, Freddie Mac Multifamily vice president of affordable sales and investment, added, "This execution can lower a borrower's issuance costs and ongoing cost of capital significantly, as well as simplify the closing process. It is an alternative financing solution to our bond credit enhancement execution and is particularly attractive for 4 percent Low-Income Housing Tax Credit (LIHTC) developments."
Benefits of using Freddie Mac's Direct Purchase of Tax-Exempt Loans execution:
- Reduced legal fees due to simplified documents and processes.
- About a 40 percent reduction in closing costs due to private purchase efficiencies when compared to a publicly offered credit enhanced bond.
- Same underwriting and credit standards as the Freddie Mac credit enhanced 4 percent LIHTC bond [PDF] financing.
- 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.
- Expected offering size of about $300 million of aggregated direct purchase tax-exempt loans and related taxable securities.
How Freddie Mac's 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.
- 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.
Direct Purchase of Tax-Exempt Loans is an alternative to the company's existing tax-exempt bond credit enhancement activity.
Freddie Mac was established by Congress in 1970 to provide liquidity, stability and affordability to the nation's residential mortgage markets. Freddie Mac supports communities across the nation by providing mortgage capital to lenders. Today Freddie Mac is making home possible for one in four borrowers and is one of the largest sources of financing for multifamily housing.