M and ML Certificates
(Multifamily Variable Rate Certificates)
Freddie Mac's Class A Multifamily M Certificates are fully guaranteed tax-exempt and taxable securities supported by pools of unenhanced tax-exempt and taxable multifamily housing collateral. Multifamily M Certificates offer Freddie Mac's guarantee of timely payment of principal and interest.
ML Certificates are uniquely positioned within the multifamily securitization market as a new, more efficient and cost-effective alternative to financing stabilized affordable multifamily properties with 4% Low-Income Housing Tax Credits (LIHTC). Freddie Mac is leveraging existing K-Series and M-Series securitization programs to efficiently securitize tax-exempt loans (TELs) and related supplemental taxable loans (Taxable Loans) via the ML-Series.
ML Certificates provide the opportunity to invest in predominantly tax-exempt securities supported by pools of TELs and Taxable Loans secured by completed, occupied, and stabilized affordable housing properties, including new construction and post-construction properties after moderate or major rehabilitation.
Since the financial crisis in 2008, many banks have developed TEL versions of their tax-exempt bond private placement structures to obtain “lending credit” as compared to “investing credit” for Community Reinvestment Act (CRA) purposes and loan accounting treatment under GAAP accounting guidelines.
Freddie Mac has implemented a TEL financing execution for multifamily housing pursuant to which it purchases from its approved Seller/Servicers for Targeted Affordable Housing tax-exempt notes (Governmental Notes also known as TELs) issued by Governmental Entities for the purpose of financing affordable multifamily rental housing. The Governmental Entities loan the proceeds of the Funding Loans to multifamily developers/owners (Project Loans) to finance the acquisition and/or moderate rehabilitation of affordable multifamily housing properties.
Freddie Mac TEL Structure
for Targeted Affordable Housing
In certain instances where the Governmental Entities cannot issue the entire amount of debt required with tax-exempt debt due to private activity volume cap constraints, Taxable Loans are made by the Seller/Servicers and sold to Freddie Mac. Such Taxable Loans are supplemental loans that were made at origination of and are usually subordinate to the TELs made on any given project.
Freddie Mac’s TEL product offers loan terms of up to 30 years, a 35-year loan amortization, 1.15x minimum debt service coverage ratio (DSCR) and a 90% maximum loan-to-value ratio (LTV). Currently, the TEL product is available for immediate fundings, primarily for acquisition/moderate rehabilitation transactions, as well as unfunded forward commitments for new construction and substantial rehabilitation transactions.
Freddie Mac securitizes TELs and Taxable Loans via the ML Certificate structure through the following steps:
- The fixed-rate TELs are transferred by Freddie Mac into a trust, treated as a partnership for federal income tax purposes1
- The fixed-rate Taxable Loans are transferred by Freddie Mac into a taxable loan trust, treated as a REMIC for federal income tax purposes1
- In exchange for the fixed-rate TELs, the Trustee, on behalf of the TEL trust, issues floating-rate Freddie Mac Guaranteed Certificates (Tax-Exempt ML Certificates) and principal-only Non-Guaranteed Certificates, privately placed with the B-piece buyer
- Interest payments on the floating-rate Tax-Exempt ML Certificates up to the weighted average coupon (WAC) of the fixed-rate TELs will not be subject to federal income tax. Any interest payments in excess of the WAC, including interest paid by the Freddie Mac Guarantee, will be subject to federal income tax
- All income received on real estate owned (REO) collateral will be subject to federal income tax
- In exchange for the fixed-rate Taxable Loans, the Trustee, on behalf of the taxable loan trust, issues floating-rate Freddie Mac Guaranteed Certificates (Taxable ML Certificates) and principal-only Non-Guaranteed Certificates, privately placed with the B-piece buyer
- Freddie Mac will sell the floating-rate Tax-Exempt and Taxable ML Certificates to the Placement Agents who will sell the floating-rate Tax-Exempt and Taxable ML Certificates to the market
- Multifamily ML Guaranteed Certificates offer the efficiencies of our securitization process to tax-exempt bond holders in the multifamily affordable housing market with Freddie Mac’s Guarantee of timely payment of interest and payment of principal at the stated maturity date
1 Subject to tax counsel opinion
- Strong credit provided by credit support of underlying mortgages underwritten to Freddie Mac’s portfolio standards, plus “Freddie Mac’s Guarantee” of the (1) timely payment of interest at the applicable floating rate and (2) the payment of principal in full by the applicable final payment date
- Strong Performance on all securitization platforms (K, M, SB) through security assets with some of the industry’s lowest delinquency and vacancy rates, along with other strong property fundamentals
- Diversification through pooled risk of many assets versus single asset risk
- Call protection associated with defeasance or yield maintenance
- NRSRO2-rated certificates based on anticipated rating of the Freddie Mac Guarantee
- Transparency and consistency on collateral and deal information via Trustee website
- Liquidity supported by expectations for repeatable and reliable issuance subject to market conditions
- Servicing Standard improves the Borrower experience post-securitization
2 Nationally Recognized Statistical Rating Organization