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Making 4 Percent LIHTC Bonds Simpler Using Tax-Exempt Notes

April 25, 2014

Shaun Smith, Senior Director, Targeted Affordable Production

Shaun Smith
Senior Director, Targeted Affordable Production

With the trend of rents rising faster than incomes, we are focused on ways to expand credit to borrowers to create more affordable housing units. Our latest initiative, Direct Purchase of Tax-Exempt Loans, increases the liquidity needed for more affordable housing while creating Agency investment opportunities for investors.

Direct Purchase of Tax-Exempt Loans can lower a borrower’s issuance costs and ongoing cost of capital significantly, as well as simplify the closing process. It’s an alternative financing solution to our bond credit enhancement execution and is particularly attractive for projects developed with the 4 percent Low-Income Housing Tax Credit (LIHTC).

There is more good news because this initiative combines elements of our affordable business with securitization of tax-exempt bonds, which are proven capabilities already familiar to affordable borrowers. Some of you have had your loans securitized through K-Deals. If you have been involved with one our 26 Tax-Exempt Bond Securitization (TEBS) transactions, you already know how we securitize a portfolio of bonds from a single source. 

How Direct Purchase of Tax-Exempt Loans Works

I’d like to take this opportunity and explain, at a high level, how the Direct Purchase of Tax-Exempt Loans works.

An approved Freddie Mac Targeted Affordable Housing (TAH) Seller/Servicer originates a direct tax-exempt loan, also called the Funding Loan, to a government entity such as a state, city or county housing authority that has the capacity to issue tax-exempt multifamily housing bonds. Simultaneously, using the proceeds of the Funding Loan, the issuer makes another loan, known as the Project Loan, to the borrower to finance a specific multifamily residential housing project. Freddie Mac Multifamily purchases the Funding Loan from the TAH Seller/Servicer based on a commitment signed prior to origination of the Project Loan. Freddie Mac holds the Funding Loan on our balance sheet for a period of time before aggregating it with other tax-exempt loans. The pool of tax-exempt loans is securitized through Freddie Mac Multifamily M-Deals, which are sold to third-party investors.

Benefits of Tax-Exempt Loans

Historically, our credit enhanced tax-exempt bonds have been rated and placed by underwriters with institutional investors. A parallel market exists for investing in unrated bonds. The Direct Purchase of Tax-Exempt Loans eliminates certain fees typically found in other Freddie Mac offerings or other competitive direct bond purchase programs. We pass these savings and benefits to you and your borrowers in the following ways:

  • Approximately 40 percent lower closing costs compared to a bond credit enhancement
  • Elimination of fees for individual property ratings
  • Less paperwork and legal fees without the need for securities offerings documents
  • No need to prepare Credit Enhancement Agreement, Reimbursement Agreement, Intercreditor Agreement or secondary mortgage documentation
  • Improved customer service to you and your borrower due to the reduction of documentation and number of parties

Considerations for Direct Purchase of Tax-Exempt Loans

There are two very important items that you should discuss with the borrower upfront. First, ensure the issuer will permit a privately placed tax-exempt loan execution and the subsequent M-Deal securitization. My team is happy to help you work through this process with the issuer. Otherwise, we can still work with you using our other executions, including tax-exempt bond credit enhancements and short-term bonds.

Second, please confirm your willingness to have Freddie Mac’s counsel draft all transaction documents and to deal with all real estate issues. As always, the borrower may choose to use their own legal counsel.

Beginning today, we are quoting the Direct Purchase of Tax-Exempt Loans. Even though you will be required to pick your 4 percent LIHTC execution path at the time of prescreen, we encourage you to ask for quotes for our other executions to compare and contrast. Here’s what you need to know before you request your quotes:

  • The credit parameters are the same as those for our Tax-Exempt Bond Credit Enhancement for 4% LIHTC Mortgage, but the new execution is documented as a loan.
  • The Bond Quote Form will be used for all 4 percent LIHTC executions offerings.
  • The rate-lock process for the Direct Purchase of Tax-Exempt Loans is similar to the process for a 9 % Cash LIHTC Mortgage.
  • The terms of the Direct Purchase of Tax-Exempt Loans are up to 18 years with amortization up to 35 years.
  • The Freddie Mac purchase process is the same process as a cash loan. Please note that we are not able to table fund.
  • Issuers must permit a privately placed loan execution and the subsequent M Deal securitization. Freddie Mac is happy to work with the issuer to be sure that it will allow both private placements and subsequent securitization.

We plan to have draft loan documents available for review in May.

Training and Resources

I hope you’ll join me for training. For convenience, we’ve scheduled the following two sessions:

In the meantime, please download the new Direct Purchase of Tax-Exempt Loans Term Sheet on our Products page. Your Freddie Mac TAH representative is available to answer all your questions.

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