Freddie Mac will soon add affordable housing products to its Capital Markets Execution (CME), the company’s securitized mortgage program.
Market-rate borrowers have long enjoyed a significant discount on interest rates by choosing the CME program over a portfolio execution. And soon, affordable housing borrowers will be given that option as well.
Before it can offer the product, Freddie Mac has to make some big changes to its Targeted Affordable Housing (TAH) program. Previously, TAH lenders shared the risk and were delegated to make the loans without prior approval from Freddie, unlike Freddie’s conventional business.
But Freddie Mac is now moving the TAH program to prior-approval, transitioning one lender at a time. The decision was driven by “our desire to offer our securitization product to targeted affordable transactions, and that did not successfully work inside of a risk-share model,” says Christine Hobbs, director of affordable housing in McLean, Va.-based Freddie Mac’s multifamily division. “The securitization model manages risk in a different way, so it was redundant.”
While not every affordable housing debt product will be eligible for CME, immediate fundings on Sec. 8 properties will likely be the first to join CME.
Prudential Mortgage Capital Co., one of the largest TAH lenders, will transition to prior approval in September, and when it does, will be able to offer the CME program.
“It will allow us, on preservation deals, like a Sec. 8 taxable deal, to tap into their CME pricing,” says Paige Warren, a managing director who oversees affordable housing lending at Newark, N.J.-based Prudential. “We’re also hopeful that if we’ve got deals that show pretty deep targeted affordability, that there may also be some flexibility there as well.”
The official program is expected to be announced later this year.
It’s not just pricing that should improve in the near future; an underwriting change announced in July should increase the proceeds for some preservation deals.
Freddie Mac now allows properties with long-term Sec. 8 contracts, and loan terms of 10 years or more, to use above-market Sec. 8 rents when sizing a loan. In the past, underwriters had to use the lowest of low-income housing tax credit, Sec. 8, or market rents.
There are conditions, of course: The Sec. 8 contract should be longer than the loan term, and the property will have to meet certain exit tests as to whether it can refinance at conforming levels.
“This allows you to underwrite the above-market portion, as long as the property meets certain exit test requirements,” Warren says. “It’s recognizing the stability of that contractual income, and allowing you to recognize that income now for sizing purposes.”