Freddie Mac continues to guide investors with new risk products
In a continued effort to mitigate consumer credit risk via the introduction of new products, Freddie Mac has debuted a multifamily credit risk transfer capability for private investors. The new product is the first offering of Freddie Mac Multifamily Structured Credit Risk (SCR) Debt Notes and allows private investors to buy a portion of the credit risk on certain multifamily mortgages, backed by targeted affordable rental housing tax-exempt bonds guaranteed by Freddie.
"Freddie Mac has debuted a multifamily credit risk transfer capability for private investors."
Transferring risk
SCR Notes are unsecured and unguaranteed corporate bonds built on multifamily offerings, with the intention of sparing the taxpayers additional default risk and bolstering affordable housing development. The first SCR Note transaction involved $52 million in credit risk tied to the credit and principal payment risk of a reference pool of state and local housing agency tax-exempt bonds. This was only 5 percent of the $1 billion pool, with Wells Fargo acting as the sole structuring agent, lead manager and bookrunner and Systima Capital Management serving as the sole initial investor for the issued notes.
"By bringing in more private capital into the space, we are increasing the liquidity level," Victor Pa, vice president of multifamily investments for Freddie Mac, told Affordable Housing Finance. "By increasing liquidity, that should over time bring the cost of capital down. That should translate into lower financing costs for borrowers over time."
Even with the selling of the notes, Freddie only can offload first-loss credit risk – while remaining vulnerable to senior loss credit risk. Freddie Mac previously announced its intention to conduct "one or two SCR offerings each year," according to Affordable Housing Finance.
"Freddie Mac has unveiled an online tool called The New Freddie Mac Multifamily Apartment Investment Market Index."
Combining tools
By itself, the ability to transfer this risk is expected to strengthen the multifamily home market. To make investment even more favorable, Freddie has unveiled an online tool called The New Freddie Mac Multifamily Apartment Investment Market Index (AIMI). The tool allows potential investors to analyze market-specific trends and provide insight into investment conditions in certain cities.
"It is important that investors and other industry stakeholders stay on top of the shifting multifamily investment environment with the latest trend analysis and market insight that AIMI provides," Steven Guggenmos, vice president of Freddie Mac Multifamily Research and Modeling, told Marketwired. "Together with our internal analysis, AIMI offers investors a unique insight into understanding the multifamily investment landscape. AIMI gives investors an opportunity to combine a few of the market drivers and track trends."
The AIMI will be updated quarterly and tracks three primary factors, including:
Rental income.
Multifamily property price growth.
Multifamily mortgage rates.
The AIMI compares these factors against changes in net operating income (NOI) and property debt service, forming the basis of the index. The AIMI currently tracks 13 metros, as well as provides commentary on the national market.
"When necessary, the commentary provides macroeconomic factors that play a role in the market, such as employment growth and housing construction," reads the FAQ on the Index.
The cities currently being tracked are Atlanta, Austin, Chicago, Dallas, District of Columbia, Houston, Los Angeles, New York, Orlando, Philadelphia, Phoenix, San Francisco and Seattle. Making the tool particularly useful is the ability to compare specific quarters, tracking increases and decreases in the various drivers for different locations. Additionally, the Index provides a sensitivity analysis table shows how the Index value changes based on set mortgage rates and annualized NOI growth. Combined with the ability to selectively sell risk, Freddie Mac appears committed to shoring up the strength of the multifamily home market and chipping away at the pool of unpaid or underperforming loans taken out between 2007 and 2015.
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