GSE-Backed Muni Housing

Research evidence excerpt

GSE-Backed Muni Housing

r view, as they

are relatively illiquid and their total outstanding is relatively small.

GSEs and Tax-Exempt Financing

The GSEs support multifamily housing by reducing funding costs through capital market

execution. They provide a credit guarantee on either the loans or the resulting securities, which

increases investor demand, thereby resulting in lower borrowing costs. Both Freddie Mac and

Fannie Mae have programs in place that works in conjunction with the 4% LIHTC credit, while

Ginnie Mae guarantees bonds securitizing LIHTC loans that are insured by the FHA/VA as part of

its standard operations.

Freddie Mac ML program

Freddie Mac issues tax exempt bonds under its ML program. It purchases government notes

from its Optigo TAH (Targeted Affordable Housing) lenders and securitizes them. These notes

(aka TELs or Tax Exempt Loans) finance acquisition, rehabilitation, or construction of affordable

multifamily housing that utilize the 4% LIHTC program.

Since the program's inauguration in 2017, Freddie Mac has issued close to $10bn in ML

bonds. Deals are typically structured with a senior tranche that is sold through syndication and

a junior tranche that is either retained by the sponsor or sold separately. The junior tranche

provides a 5% to 10% credit enhancement to class-A investors. Freddie Mac guarantees timely

principal and interest on the senior tranche, while the junior tranche is not guaranteed. (Figure

3)

Compared to the more common 5- and 10-year Freddie K deals, these deals tend to offer longer

WALs, reaching 10 to 15 years. Similar to Freddie K deals, they too pass the loan amortization to

investors sequentially. For context, the first ever ML bond from 2017 is still over 80%

outstanding.

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