McLEAN, VA–Freddie Mac began securitizing the paper from the tax-exempt loan (TEL) program that it launched in 2014 this year. It issued two securitizations and then this week a different variant of the same product came to market: two Multifamily Participation Certificate pass-through securities backed by tax-exempt loans (TEL Multi PCs). Like the TEL ML Certificates that were securitized, the underlying tax-exempt loans in these TEL Multi PCs are made by state or local housing agencies and secured by affordable rental housing.
Also, said David Leopold, Vice President for Affordable Housing Production and Investments at Freddie Mac Multifamily, both models are reflective of Freddie Mac's commitment to developing the best execution for sourcing the cheapest capital.
In that respect they both performed well, he tells GlobeSt.com.
For its inaugural Multi PCs, Freddie Mac priced two separate single-class securities each backed by one fixed-rate, multifamily tax-exempt loan. The first is backed by a loan totaling approximately $3.9 million. The second is backed by a loan totaling approximately $2.9 million.
For the ML Certificates securitization, which occurred in June of this year, the GSE issued $292 million backed by TELs on 25 properties in one transaction. In a second, it priced $18.5 million backed by taxable subordinate loans on three of the same properties as the first.
The transactions differ in many regards, of course, including to which type of investor they appeal. Investors interested in scale — typically institutional investors — tend to be more interested in the ML transactions, Leopold says. Participation certificates tend to appeal to investors looking for smaller, targeted opportunities — such as a particular geography, for example, he says.
Comparing the pricing of the transactions is an apple-to-oranges exercise: Freddie sells both a fully-guaranteed tranche and one that is not for the B piece in the ML deal. In the Multi PC transaction it takes 100% of the risk for the initial offering and distributes that risk in a different manner.
The GSE will continue with these transactions in 2018, Leopold says. “The plan is to move forward next year,” he says.
The Effect of Tax Reform
These transactions may not perform as they have this year in 2018 if tax reform passes, as it is looking increasingly likely that it will.
With a lower corporate tax rate of 20% (or 21% as some are speculating) the value of the deduction will be lower, which translates into lower pricing. Investors would almost certainly demand a higher coupon. On the other hand, tax reform will likely cull the total amount of tax advantaged assets in the market and constrained supply could lead to increased demand.
Leopold makes no guesses as to which scenario — or both — will play out but does point to the special features of this paper. “There is not a lot of this type of product in the market — we think it is a very unique market opportunity.”
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
