Freddie Mac Bond Credit Enhancement Product
Freddie Mac offers a credit enhancement program for fixed-rate or floating-rate (weekly variable-rate demand) multifamily housing bonds. This program lets Freddie Mac serve as a liquidity provider and credit enhancer on newly issued or refunded bonds. Whether you want to refund your current multifamily bonds or replace an existing credit enhancement, Freddie Mac delivers a full array of advantages, including:
- Replacement of direct-pay letters of credit, usually without overhauling
original bond documents
- Easy, convenient approval process for fixed-rate or floating-rate
bonds
- AAA/Aaa ratings
- Legal fees set at application
Eligible Transactions
Replacement of existing credit enhancement facility or new credit enhancement facility for tax-exempt bonds for refundings, acquisition and acquisition/rehabilitation
- Fixed-rate: Including put bonds (balloon transactions) and remarketing/redemption bonds
- Floating-Rate: Acquisition and acquisition/rehabilitation
or refunding of floating-rate tax-exempt bonds
- Credit Substitution: Fixed- and floating-rate direct-pay
letter of credit substitution available
- These parameters do not apply to Forward Commitments for properties financed by bond credit enhancements. See our Affordable Forward Commitment 4% Tax Credit Tax-Exempt Bond execution.
Eligible
Properties
Garden,
mid-rise and high-rise apartments with minimum occupancies of 90%
for 90 consecutive days
Eligible
Borrowers
Partnerships
(general or limited), corporation, trusts, joint ventures or limited
liability companies. For-profit and certain qualified nonprofit entities
are eligible
Eligible
Seller/Servicers
Freddie
Mac-approved Multifamily seller/servicers
Loan
Size
- Minimum loan size is $3 million
- Maximum loan size is $50 million, with larger transactions considered
on a case-by-case basis.
- Pools of properties can also be financed.
Credit
Enhancement
The credit
enhancement will be in the form of a Credit Enhancement Agreement
entered into by Freddie Mac and the bond trustee. Freddie Mac guarantees
payment of mortgage principal and interest that is used to pay the
bond investors
Liquidity
Provider
Freddie
Mac will provide a liquidity facility for floating-rate bond credit
enhancements that is co-terminus with the credit enhancement.
Interest
Rate Hedge Agreement
An interest rate
cap or swap is required from an acceptable provider for floating-rate
transactions. Freddie Mac can serve as credit enhancer on swap agreements
Principal
Reserve Fund
Absent
actual amortization of the bonds, for floating-rate bond credit enhancement,
a principal reserve fund is required, and typically it is based on
a 30-year amortization schedule
Taxable
Tail
Allowed at Freddie
Mac’s discretion
Financing
of Issuance Costs
Freddie
Mac may allow reasonable bond issuance costs to be included in the
principal amount of the mortgage in some circumstances
Loan
Terms
10 to 30
years
Maximum
Amortization Period
30 years
Maximum
LTV
- For variable-rate bonds, the maximum LTV is the greater of 85%
of market value or 80% of adjusted value
- For fixed-rate bonds, the maximum LTV is the lesser of 90% of
market value or 85% of adjusted value
- For fixed-rate bonds only, the maximum LTV is 90% of adjusted
value with HUD risk sharing
Minimum
DCR
- 1.25x
- 1.20x if low-income tax credits are in place for 40% or more
of the units. Tax credit benefits must extend 7 or more years
beyond closing. Cash out is limited to normal and customary transactional
costs
- 1.15x with HUD risk-sharing (fixed-rate bonds only)
Prepayment
Provisions
Prepayment
provisions are deal-specific and reflect the prepayment provisions
of the bonds. Yield maintenance is required on the fees payable to
Freddie Mac and the seller/servicer during the applicable yield maintenance
period-typically 15 years.
Subordinate
Financing
- Soft subordinate debt:
- Debt service cannot exceed 75% of cash flow after payment
of operating expenses, reserves, escrows and senior debt
- Combined LTV may exceed 100%
- Hard subordinate debt:
- Combined debt service ratio may not be less than 1.10x
- Combined LTV may not exceed 90%
Recourse
Requirements
Nonrecourse
except for standard carve-out provisions
Appraisal,
Environmental Report and Engineering Report
Required
Replacement
Reserves
Generally
required
Real
Estate Tax Escrow
Generally
required
Property
Insurance Escrow
Generally
required
Application
Fee
Greater
of $3,000 or 0.1% of loan amount
Servicing
Fee
- Servicing fee based on a sliding scale. Freddie Mac may adjust
the servicing fee for floating-rate transactions to accommodate
the additional servicing requirements
- Freddie Mac yield and servicing fees are guaranteed for term
of lock-out period under the bond documents
Financing
Process
Freddie Mac uses a two-stage application process
- Lender submits a preliminary package to the appropriate Freddie Mac regional office. This package contains introductory information on the property, borrower, a certification regarding the fees of Freddie Mac’s outside counsel, management and market; a description of the bond transaction; identification of the parties; and a description of the interest rate hedge proposed. If the financing request described in the preliminary package appears to meet our program requirements, we will issue a quote.
- Lender submits a full underwriting package and the application fee. If the proposed transaction meets our investment criteria, we will issue a Letter of Commitment. The Letter of Commitment sets forth all of the important terms and conditions of the mortgage and the Credit Enhancement Agreement including mortgage interest rate, credit facility fee, liquidity facility fee, servicing fee, trustee fee and any other fees associated with the bond transaction.
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