Freddie Mac's shift to fixed-rate snares muni interest

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The Federal Home Loan Mortgage Corp. expects to tap demand from municipal market investors for the first fixed-rate deal in a federal tax exempt loan program for affordable multifamily properties.

Lead manager Wells Fargo plans to price a $266 million offering of securitized loans this week by the government sponsored enterprise commonly known as Freddie Mac.

That deal will prime the pump for another $2.5 billion in loans Freddie Mac plans to securitize in the next two to three years, said Peter Cannava, a managing director in Wells Fargo’s public finance housing group.

“This is our flagship tax exempt program to finance affordable housing,” said David Leopold, a vice president for targeted affordable sales and investments at Freddie Mac. “We rolled it out a couple of years ago and it has been gaining traction ever since.”

The previous offerings were sold as floating rate bonds without a liquidity enhancement and drew more interest from structured finance investors, Cannava said. Municipal investors are interested in the deal, because it’s fixed rate and muni investors were not interested in purchasing floating rate debt without a liquidity enhancement, he said.

“There has been a lot more interest from muni investors than in the first four deals,” Leopold said.

Freddie Mac expects to do two to three of these deals a year totaling $1 billion over the next few years, Leopold said.

Freddie Mac has estimated it gets a 40% reduction in closing costs through using this structure instead of credit-enhanced bonds.

"The loans aren't rated, so you don't have to get a rating," Leopold said. "You also don't have to have an underwriter underwrite the bond and sell it to the market. There are fewer parties involved, so the legal costs are lower. The documentation also uses a standard set of template documents, which helps keep costs down."

Freddie Mac launched the program in 2014 as a cost-effective alternative to bond credit enhancement. The government-sponsored enterprise did not began securitizing the loans until 2017, Leopold said, because it only buys loans on affordable housing construction or rehabilitation projects once they have been stabilized.

Through the program, Freddie Mac is purchasing and securitizing revenue bonds issued by state and local government housing finance agencies as a conduit issuer for affordable housing developers and owners, Leopold said.

“Most of the loans are to renovate housing stock that was tired or obsolete,” Leopold said. “The improvements do two things, bring the product up to market standards to create better quality housing and it extends the affordability period on those units. The apartment owners usually have a 30- to 50-year covenant to keep the units affordable under agreements with local governments.”

The deal, called ML-05, is the fourth offering of tax exempt loans and the fifth offering of ML certificates in the program. This financing provides funding for housing in California, Washington, Texas, Utah and Florida.

Freddie Mac issued floating rate bonds, because there was a big market for them, but now the “market has shifted and we have shifted with it,” Leopold said.

Given the shape of the yield curve, it doesn't make sense to sell floating rate notes, Cannava said. It's better to lock in fixed rate debt.

The certificates back 21 tax exempt loans and will be split off in two tranches, a $97.6 million tranche including only the California paper and $168.4 million pool for all the other loans.

By splitting off California, investors in that state can benefit from a state as well as the federal tax exemption, Leopold said.

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Securitization Freddie Mac California Texas Washington Florida