Freddie Mac to Purchase Tax-Exempt M-F Housing Loans
- Apr 28, 2014
Freddie Mac has implemented Direct Purchase of Tax-Exempt Loans, a new initiative designed to help keep rental housing affordable for lower income families and increase cost-effective financing for tax-exempt multi-family properties.
The new program will see Freddie Mac Multifamily purchasing from its Targeted Affordable Housing lender network multi-family tax-exempt loans, and aggregating and securitizing 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.
“One of the things this new execution does is it creates efficiencies and lowers costs and also allows us to shift some of the risks from us and the tax payers to private investors,” Shaun Smith, Freddie Mac’s senior director, targeted affordable production, told Commercial Property Executive. “As federal, state and local sources of soft money have dried up, it’s been harder and harder to fill all the gaps so something that allows us to lower the cost and make it easier to do means that more use can be produced.”
Very similar to the credit enhancement of tax-exempt bonds, these are housing bonds that finance either the new construction or the rehabilitation of existing multi-family properties. They will have the same underwriting and credit standards as the Freddie Mac credit enhanced 4 percent LIHTC bond financing.
“We are trying to find ways to bring greater access to credit to the affordable world,” Smith added. “Clearly there’s not enough affordable housing being built and the demand is really high, so anything we can do is really good. The tax credit program allows private equity to provide the capital for a lot of the costs so it keeps the overall hard debt to a more modest level and in turn, they can charge a lower rent and make the economics work.”
This execution can lower a borrower’s issuance costs and ongoing cost of capital significantly. Other positives are reduced legal fees due to simplified documents and processes and the simplification of the closing process.
Freddie Mac has had a dedicated affordable housing group for over a decade, specializing in financing properties that have some component of government support, whether it is by federal, state or local.
“We do an awful lot of business in the low-income housing tax credit arena, primarily the 4 percent credit for bonds and now this tax-exempt loan execution,” Smith concluded. “Recently, we’ve been working with HUD on its new rental assistance demonstration (RAD) program to refinance and recapitalize older properties that have public housing components or other rental assistance programs.”