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Multifamily Viewpoints

Our First Deal: Direct Purchase of Tax-Exempt Loans

By Kim Griffith*
Published on September 3, 2014

We met a key milestone at the end of August: Freddie Mac Multifamily conducted our first transaction of a Tax-Exempt Loan.  This new loan execution was recently approved by FHFA, and is one of several initiatives we have been rolling out to better support the rental housing market. In this instance, we have financed the preservation of affordable units using a housing finance agency’s (HFA) tax-exempt obligations and 4% Low Income Housing Tax Credits.

You can read our press release here.

We are focusing on this execution as our preferred means of supporting the multifamily bond market for several reasons. First, we believe our simplified mortgage documentation will be easier for borrowers, lenders and our sellers to use, and in time will make for less costly closings.  Second, by purchasing a Tax-Exempt Loan rather than providing credit enhancement of a bond, we are using cash purchase procedures familiar to our staff and sellers. Finally, we will aggregate and securitize a pool of similar loans in the near future using our new M-structure. This will allow us to sell off substantially all our credit risk and provide loan terms to our borrowers that are cost effective and long term in nature. For instance, in our first deal, the loan term is 16 years.

The big winners: lower-income families, including the 417 households in the Lakewoods, OH community in our first Tax-Exempt Loan deal, who benefit from more liquidity coming into affordable rental housing. By expanding access to credit in underserved communities, our borrowers, lenders, investors and Freddie Mac Multifamily all are working in lock step to ensure quality housing for those of modest financial means.

Now, as with any new program, we are encountering a few first-user challenges.  For instance, the execution is premised on our private purchase of an HFA’s obligations. Until recently, HFA obligations were issued publicly only in bond form, and were rated by a rating agency. Recently, private purchases of unrated bonds have come in vogue, but each HFA has questions about a private purchase execution vs. a public offering.  In addition, our document language is based on the terminology of mortgages, not bonds. While the underlying legal basis and legal obligations are the same, using different language and documents can generate questions about our motivations and execution.

So far, we have been successful in explaining why we are buying and how we are documenting the Tax-Exempt Loans.  But inertia is a profound force and change is almost always difficult.  We are pretty far along in reaching out to HFAs in states where we expect Tax-Exempt Loan activity and, with our team of Targeted Affordable Housing staff, lawyers and others, we have begun to win converts.

We are now working with a number of our Sellers on this execution. But I need to give a shout out to Walker & Dunlop for working with the borrower and issuer through closing, and getting the first deal funded.  With the lessons learned and the momentum generated from this inaugural deal, we look forward to our next purchase soon and, in the near future, our first securitization of a Tax-Exempt Loan pool.

If you have any questions about our execution of Direct Purchase of Tax-Exempt Loans, please reach out to me or any of the Freddie Mac Multifamily affordable team.  We are very excited about this innovation and look forward to hearing from you.

*Kim Griffith left his position at Freddie Mac in February 2015. He was vice president of affordable housing production and investments.

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