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Structured Credit Risk Notes

Multifamily Structured Credit Risk Notes (SCR Notes, pronounced “Score Notes”) are unsecured and unguaranteed Freddie Mac corporate debt. They are subject to the credit risk of an identified pool of multifamily mortgage loans for which Freddie Mac provides credit enhancement for the related multifamily bonds issued by state and local housing finance agencies (SCR Notes Reference Pool).

Freddie Mac Multifamily’s Role

Freddie Mac is a market leader in shifting credit risk away from taxpayers and to the private investor market. SCR Notes help bring this expertise to the affordable housing market. With SCR Notes, a portion of the credit risk is transferred from mortgages in the Reference Pool to credit investors who invest in the Notes, thereby reducing taxpayers’ exposure to mortgage default risk.

Freddie Mac makes monthly payments of principal and interest on the Notes. The principal payments are determined by the delinquency and principal payment experience on the SCR Note Reference Pool.

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Advantages

  • A large and diversified Reference Pool that helps to provide more stable and predictable performance
  • Freddie Mac Multifamily’s underwriting standards
  • Standardized servicing guidelines that are uniform across Freddie Mac Multifamily’s entire portfolio
  • Freddie Mac Multifamily’s internal underwriting strategy that does not distinguish between SCR Note Reference Pool loans and non-SCR Note Reference Pool loans
  • Access to investment in affordable multifamily assets as well as municipal public housing market

 

Characteristics

  • SCR Notes offer large and diversified Reference Pools.
  • Freddie Mac Multifamily holds the senior risk, which is unfunded and not issued.
  • B-Piece (or first-loss bond) which is not guaranteed by Freddie Mac, is sold to investors in the first transaction; additional mezzanine bonds may be issued in future transactions.
  • SCR Notes have a 15-year final maturity for the first fixed severity transactions.
  • The Notes pay principal linked to the principal collections on the “reference obligations,” subject to principal write-downs based generally on a fixed severity approach. .

Key Differences

  • SCR Notes are synthetic instruments whose cash flows are driven by performance of “reference obligations”, instead of actual collaterals tied to a trust in a typical securitization such as K-Deals.
  • SCR Notes are unsecured debt of Freddie Mac instead of agency MBS.
  • The reference obligations for SCR Notes are not expected to be be on Freddie Mac’s balance sheet, but are guaranteed by Freddie Mac.
  • SCR Notes’ economic concept of risk sharing is the same as K-Deals, which are REMICs backed by mortgage loans.

Structured Credit Risk Diagram

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