Freddie Mac Multifamily has added another tool to property owners’ toolboxes for preserving long-term affordability for working households without any subsidies.

The company’s new Mezzanine Loan pilot program, announced Aug. 7, offers favorable pricing and additional debt capital in exchange for owners voluntarily keeping rents affordable to low- and moderate-income households on 80% of a property’s units for at least the 10-year loan term. Eligible properties must start with at least half of the rents being affordable to households earning at or less than 100% of the area median income (AMI).

“We’re very excited to put an innovative product out there that makes a difference, and there's nothing quite like it in the marketplace,” says Kelli Carhart, vice president of production at Freddie Mac Multifamily. “As we continue to think about ways to preserve affordable rental housing, this product is truly innovative.”

Kelli Carhart, vice president of production, Freddie Mac Multifamily
Kelli Carhart, vice president of production, Freddie Mac Multifamily

The mezzanine financing effectively operates as a subordinate loan, according to Freddie Mac Multifamily, providing additional debt capital to fill the gap between borrower equity and the first lien mortgage loan amount. Rents will be checked annually to ensure that owners are compliant in keeping the majority of units at affordable levels. If owners are found to be out of compliance, they’ll be assessed a penalty fee until they return the units to the affordable rents.

“We’re giving borrowers a more affordable capital stack and more favorable financial terms. In exchange, they agree to limit rent growth for the term of the loan,” adds Carhart.

According to Freddie Mac Multifamily, it’s aiming to finance and keep affordable over 50,000 units each year through this new offering.

The loan product is available for workforce housing as the Workforce Housing Mezzanine Loan through Freddie Mac Multifamily’s conventional platform. The offering is also offered for affordable housing as the Targeted Affordable Mezzanine Loan, through Freddie’s Targeted Affordable Housing (TAH) platform.

For the Workforce Housing Mezzanine Loan, Freddie offers streamlined, simultaneous origination with a 10-year conventional Freddie Mac loan, a combined debt-coverage ratio (DCR) as low as 1.05x, and up to 90% leverage for eligible properties.

“We see an opportunity to make more of an impact—particularly in areas that have been overlooked in the past,” says Carhart. “We’re seeing a lot of properties being renovated, which is pushing rents to a level people can’t afford. Through this program, we can provide affordable rent levels for those who are being priced out.”

The Targeted Affordable Mezzanine Loan can be used for refinancing or acquiring Sec. 8 properties and low-income housing tax credit developments that are at year 11 or later in the compliance period, as well as for repositioning affordable housing developments for resyndication. Like the Workforce Housing Mezzanine Loan, the product is a streamlined, simultaneous origination—with a 10-year Freddie Mac TAH loan, with a DCR as low as 1.05x and up to 90% leverage for eligible properties.

Philip Melton, executive vice president and national director of affordable and FHA lending at Bellwether Enterprise Capital, says the Mezzanine Loan pilot will not only assist borrowers who are committed to the preservation of affordable housing but also the working families who reside at the properties.

“The cap on rental increases can lessen the ongoing loss of affordable/workforce housing communities in municipalities across the country and can enable residents to create a more stable, long-term living situation for their families knowing that their rent will grow at a manageable pace,” says Melton.

“Many residents in the affordable/workforce housing market have faced displacement due to market-driven value-add investments that often come with substantial increases in the resident rent burden, thus necessitating uprooting families to other apartment communities,” Melton adds. “This can impact their daily commutes, their children’s education options, and access to cultural offerings in their communities. This new program has the ability to have a dynamic impact on the lives of residents and their communities.”

Carhart says the mezzanine product has already caught the attention of borrowers. “The amount of interest has been robust,” she adds. “We’ve screened numerous deals and are close to putting several transactions under application.”

Historically, nearly 90% of the eligible rental homes Freddie Mac finances are affordable to low- and moderate-income households, according to the government-sponsored enterprise. However, this mezzanine pilot program is the latest in a series of concerted efforts by Freddie Mac Multifamily to increase the creation and preservation of affordable housing without relying on local, state, or federal subsidies to address the nation’s affordability crisis. As part of its Duty to Serve plan, Freddie Mac has ramped up its efforts to expand affordability and address some of the most persistent housing challenges across the country.

In May, Freddie unveiled a social-impact pilot to preserve affordable housing and protect working households from rising rents. In return for low-cost loans under the program, borrowers must voluntarily reduce or maintain the majority of a property’s rents as affordable to households earning 80% or less of the area median income for the life of the loans.

These new programs come at a time when the affordability crisis continues to make headlines. According to the Harvard University Joint Center for Housing Studies’ State of the Nation’s Housing 2018 report, released in June, almost one-third of all U.S. households have housing cost burdens, having spent more than 30% of their incomes on housing in 2016. This includes about 20.8 million renter households, of which more than half are severely cost-burdened, paying over 50% of their incomes for housing.

In addition, the National Low Income Housing Coalition’s latest Out of Reach report puts the 2018 national housing wage at $22.10 per hour for a modest two-bedroom rental, with the average renter earning enough to afford this unit in just 11% of U.S. counties.