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Perspectives
October 08, 2018

Persistent Problems Require an Innovative Approach

David Leopold and Kelli Carhart
By
David Leopold and Kelli Carhart

Innovation is often born out of challenge. In fact, many of the most famous innovations in our history were in response to a challenge. The wheel, the compass, and the printing press were invented to overcome persistent challenges of transportation, navigation and information sharing.

We're not trying to reinvent the wheel at Freddie Mac. That's not our mission. But the challenges we are working to solve are also significant. We're working every day to help solve the challenge of providing working families with access to safe, decent and affordable housing. Whether you're a buyer or a renter, a quality place to call home is the cornerstone of a healthy, stable and productive life. But, with the rapid rise in rents over the past several years and the demand for affordable housing far outstripping supply, the affordability crisis has hit low and moderate-income renters particularly hard.

With a challenge this great, it's important to remember that there's no silver bullet. Instead we employ a multi-faceted approach, which includes innovative financings that restrict rents for low- and very-low income families, offerings that bring impact investors to the table to finance workforce housing, a significant effort to finance smaller loans more expeditiously, and our commitment to focus on underserved markets.

This summer, Freddie Mac's Multifamily business announced a new innovative pilot designed to test a solution to this continuing problem. We unveiled our Mezzanine Loan pilot – a groundbreaking new financing option that will incentivize rental property owners to limit rent growth at properties outside of programs or requirements mandated by federal, state or municipalities. A mezzanine loan is a second loan, filling in the gap between borrower equity and the first lien mortgage loan amount. Under the mezzanine pilot, Freddie Mac provides favorable pricing on the Mezzanine Loan in exchange for owners voluntarily limiting annual rent growth on 80 percent of the units in the property – preserving rents at more affordable levels for the life of the loan. 

It's an inventive pilot and a first-of-its kind solution – one that we believe can  preserve housing by limiting rent growth while delivering the same speed, efficiency and execution that our customers expect from Freddie Mac.

The Mezzanine Loan is available in two types. Our Conventional product supports workforce and affordable housing in traditional financings. Our Targeted Affordable Housing product is for refinancing or acquiring Section 8 properties and year 11 or later Low-Income Housing Tax Credit (LIHTC) properties, or repositioning any affordable property for resyndication with a new allocation of LIHTCs. In both instances, the Mezzanine Loan is originated at the same time as a Freddie Mac first lien mortgage loan in a streamlined, single process.

Last month we closed our first loan under the Mezzanine program, alongside our lender partner Holliday Fenoglio Fowler, L.P.  An approximately $15.7 million first lien mortgage loan together with Mezzanine Loan of about $2 million financed the acquisition of a 256-unit, garden-style apartment complex located in Tyler, Texas. As a result of the Mezzanine Loan, 205 of the units at the property are subject to limits on rental increases, helping to keep them affordable for working families in the area for the next 10 years.

As the nation's multifamily housing finance leader, we've always innovated to serve the needs of the rental market. This innovative pilot makes it makes it more economical for multifamily owners to keep rents affordable at workforce levels, thereby supporting our borrowers and improving affordability for working families. It may not be the wheel or printing press, but if we can help more families find quality, affordable housing, that's good enough for us.

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