Shaun Smith - National Association of Local Housing Finance

Financing Affordable Housing with Tax-Exempt Bonds
and Housing Tax Credits Workshop
Thursday, October 23, 2014 | 10:00a.m. - 4 p.m. | Chase Manhattan Bank,
One Chase Manhattan Plaza | New York, NY | 60th Floor
New Freddie Mac Tax Exempt Loan
(“TEL”) Structure for Targeted Affordable
By: Shaun K. Smith
Senior Director
Targeted Affordable Production
703-714-2852 (o)
703-629-3327 (m)
8100 Jones Branch Drive, MS B4S
McLean, VA 22102
New Freddie Mac Tax Exempt Loan (“TEL”) Structure for
Targeted Affordable Housing
Since the financial crisis in 2008, many banks have developed tax exempt loan
versions of their tax exempt bond private placement structures to obtain “lending
credit” as compared to “investment credit” for CRA purposes and loan accounting
treatment under GAAP accounting guidelines. Within the past five years, this type
of tax exempt loan structure has been used by more than 35 Governmental
Freddie Mac has recently unveiled a new financing execution for multifamily
housing pursuant to which it purchases from its qualified seller/servicers tax
exempt notes (“Governmental Notes”) issued by state and local governmental
entities (“Governmental Entities”) evidencing loans made by the seller/servicers
(“Funding Loans”) to the Governmental Entities for the purpose of financing
affordable multifamily rental housing. The Governmental Entities loan the
proceeds of the Funding Loans to multifamily developers/owners (“Project Loans”)
to finance the acquisition and/or moderate rehabilitation of affordable multifamily
housing properties.
New Freddie Mac Tax Exempt Loan (“TEL”) Structure for
Targeted Affordable Housing
Governmental Note
Seller/Servicer as
“Initial Funding Lender”
Assignment of
Note evidencing
Funding Loan
and Continuing
Funding Loan to
Governmental Lender
pursuant to
Funding Loan Agreement
Freddie Mac as
“Funding Lender”
Governmental Lender
and Fiscal Agent
(same function as trustee)
Project Loan
to Borrower
pursuant to
Project Loan
*Contains project specific covenants consistent with Freddie Mac CME requirements.
New Freddie Mac Tax Exempt Loan (“TEL”) Structure for
Targeted Affordable Housing
The Project Loans meet the requirements for the issuance of tax exempt obligations
under Section 142(d) of the Internal Revenue Code of 1986, as amended (the Code”)
and for the syndication of 4% LIHTC under Section 42 of the Code. Once Freddie Mac
has acquired approximately $300MM in Governmental Notes evidencing the Funding
Loans, it will securitize the Governmental Notes using its M-Class execution.
Freddie Mac’s new “TEL” execution offers loan terms of up to 18 years, a 35-year loan
amortization, 1.15 debt service coverage and a 90% maximum LTV. It is priced at very
competitive spreads to the 10-year U.S. Treasury Bond.
Freddie Mac believes up front costs of issuance associated with private purchase of tax
exempt affordable housing loans may be as much as 40% less than that associated with
a public offering of rated, credit enhanced bonds. There are fewer documents (e.g. no
offering statement, reimbursement agreement, credit enhancement agreement, etc.)
and fewer parties involved (e.g. no underwriter, no rating agency).
Freddie Mac anticipates that for many transactions, a rate lock can be achieved within
three months of commencement of loan processing, and the closing can be achieved
within 30 to 45 days thereafter.
Sample Timeline: Quote to Purchase
Pre-Day 1:
Production and
Seller size loan
• Seller completes/
uploads LST and
requests quote
• Production determines
eligibility and sizes loan
• Production requests
quote from Pricing
• Pricing prices loan and
provides to Production
Day 1:
• Production
communicates quote to
• Seller/Borrower accepts
• Production creates file
in Document
Management System
Day 30:
Seller delivers
full underwriting
• 10bps application fee
• Third-party reports
Day 31-84:
Day 85:
• Underwriting performs
due diligence
• Production requests
loan spread from Pricing
and finalizes structure
• Underwriting performs
site inspection
• Underwriting prepares
final investment brief
• Underwriting approves
• Seller/Borrower accepts
final pricing and
Sample Timeline: Quote to Purchase (cont’d)
Day 90:
• Commitment
countersigned and
delivered to
• Seller, Underwriting and
Pricing perform
rate/spread lock
Day 120:
Seller makes
Day 125:
Seller delivers
loan to
Freddie Mac
Seller delivers final
delivery package to
Freddie Mac
Day 135:
Freddie Mac
purchases loan
Purchase and Legal
review closing documents
and authorize
disbursements to
purchase loan from Seller
New Freddie Mac Tax Exempt Loan (“TEL”) Structure for
Targeted Affordable Housing
Freddie Mac closed its first TEL transaction with the Ohio Housing Finance Agency
in August 2014, and anticipates moving forward on multiple transactions this fall,
with a number of Governmental Entities, many of whom are already familiar with
the Freddie Mac TEL execution. Freddie Mac expects to issue its first TEL M-Class
security in the next 6 to 12 months.
At this time, the TEL execution is available only for immediate fundings, primarily
for acquisition/moderate rehabilitation transactions. Within the next year Freddie
Mac expects to expand the TEL execution to include forward commitments for
new construction and substantial rehabilitation transactions.
With the Freddie Mac TEL execution, Freddie Mac benefits from structuring the
financings as loans, as opposed to bonds, because purchasing the Governmental
Notes evidencing the Funding Loans originated by its seller/servicers is more
consistent with Freddie Mac’s internal processing systems and it provides
economies of scale and a more efficient execution. Securitizing the TEL loans will
afford a more favorable secondary market execution and thus provide even more
competitive interest rates.

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