Introducing Variable Rate Liquidity Pricing for Targeted Affordable Multifamily Properties
October 26, 2011
Freddie Mac currently provides an 18-to-40-year long-term credit enhancement for our Targeted Affordable Housing (TAH) transactions. Liquidity fees are currently assessed at origination and remain fixed during the duration of the credit enhancement period.
For TAH sponsors that need a shorter-term liquidity facility, but longer than banks are currently offering of one to three years, we now have a flexible alternative. We’re adding Variable Rate Liquidity Pricing for affordable multifamily properties with Tax-Exempt Bond Securitizations (TEBS) and Targeted Affordable Retail Transactions. This new flexibility means that you now have the option of liquidity pricing on an ongoing basis, which may reduce your transaction costs.
Variable Liquidity Pricing Benefits
The new alternative, Variable Liquidity Pricing, adjusts every 90 days based on both a fixed and a variable component. Variable Liquidity Pricing also offers a lower up-front fee of 50 basis points (bps) over our existing up-front Fixed Liquidity Pricing of 100 bps.
This shorter-term liquidity contract is for five years and can be extended up to the expiration of the credit facility with more frequent liquidity pricing. Extensions are available in five-year increments.
Large institutions participating in structured deals should find Variable Liquidity Pricing advantageous. Retail borrowers, especially with tax credit sponsors, may desire to be locked in for the entire deal term with our existing Fixed Liquidity Pricing, even if priced higher than the variable contract’s then current price. We will continue providing long-term credit enhancements in conjunction with Variable Liquidity Pricing. Below are some more of the features and differences between Variable Liquidity Pricing and Fixed Liquidity Pricing.
Variable Liquidity Pricing Structure
- Up-front liquidity fee: The fee is based on market factors and is currently 50 bps.
- Fixed and variable component: The contract is based on both a fixed and a variable component with pricing that adjusts every 90 days.
- Variable component pricing: Critical to understanding the structure is that the variable component is based on the difference between the 90-day LIBOR and the 90-day Treasury. Please note that this is a variable component, not the absolute rate of either index.
- Fixed component pricing: This is fixed by Freddie Mac for the five-year term of the facility at rate lock, based generally on Freddie Mac's debt costs for five-year notes.
- Contract price: There is no ceiling, and borrowers can hedge at their own expense.
Variable Liquidity Pricing Contract and Credit Enhancement Duration
- Liquidity contract duration: The liquidity contract is for five years only. Extension options are available for the liquidity facility in additional five-year increments. The last extension will be five years or less to match the maturity of the credit enhancement agreement.
- Credit enhancement duration: The duration of the liquidity contract will not exceed the duration of the credit enhancement.
- Fixed component repricing: A new fixed component will be proffered based on current economic conditions for each successive five-year extension six months prior the end of each contract period.
Availability of Variable Liquidity Pricing
- Annual programmatic limit: $750 million in new Variable Liquidity Fee contracts.
- Optional contract: Some sponsors may prefer the current fixed liquidity pricing with a locked price for the entire deal term.
- Structured affordable transactions: Variable Liquidity Pricing is available for all structured affordable transactions, including Tax-Exempt Bond Securitizations (TEBS).
- Retail targeted affordable housing: Variable Liquidity Pricing is available for TAH 80/20 transactions.
- New Issue Bond Program: Variable Liquidity Pricing is not available for this Housing Finance Agency program.
Variable Liquidity Pricing Resources
We have created several resources to assist TAH Seller/Servicers with Variable Liquidity Pricing. There is a Fixed and Variable Liquidity Pricing Term Sheet available for download on our website. In addition, you will find updated TAH Term Sheets for all Structured and Retail Transactions.
Freddie Mac recognizes that providing financing for affordable housing is critical to the nation’s housing market. For this reason, we have a dedicated home office TAH sales and underwriting staff for new loans and bond credit enhancements.
Please contact your TAH relationship manager if you have questions about Fixed and Variable Liquidity Pricing.