McLEAN, VA—Freddie Mac is no stranger to the process of creating new structures in order to bring in new institutional investors to the housing market. But with its latest offering it may have outdone itself by reaching a class of investor type that can be difficult accommodate.
To recap, earlier this week Freddie Mac debuted a new credit risk transfer offering that packages affordable housing mortgage loans to sell to private investors. It has just settled its first offering of $52 million of these notes, which the GSE is calling Multifamily Structured Credit Risk Debt, or SCR notes (pronounced as score).
SCR notes are structured almost exactly like Freddie Mac’s popular K-Certificate offerings through which traditional multifamily loans are sold. SCR notes also offer similar yields, in the mid teens, Victor Pa, VP of multifamily investments for Freddie Mac, tells GlobeSt.com.
Another Kind of B Piece Buyer
Because of the way the SCR note is structured, it is fair to compare its investors with the B piece buyers in Freddie Mac’s K-Certificate deals, Pa says.
But the overlap ends there. In short, it is unlikely that investors in the K-Certificates will migrate over to the SCR deals even though they technically could and even though SCR deals could be perceived to have lower risk by those that are familiar with these transactions.
Why? Partially because the two offerings do not offer any kind of significant diversification but largely because these affordable housing loans are backed by state and local and federal tax credit programs, which are very complex and require special expertise to understand.
“Investors familiar with this space know because of that subsidy these loans will preform down the road,” Pa said.
A Private Equity Fund With A Social Mandate
These investors tend to be private equity funds with some kind of social responsibility investing mandate and are familiar with the tax credit ecosystem, Pa said. One example is Lake Forest, IL-based Systima Capital Management, which participated in the offering that Freddie Mac just brought to market. Systima describes itself as investment management firm focused on debt and equity investments in specialized housing, mortgage, and other real asset markets.
Pa estimates there are about a dozen or so institutional investors that fit this description.
Which is just as well, because the deal flow in this very specific space is also limited. All told, Freddie Mac expects it will do between $1 billion to $2 billion of SCR transactions a year. And already demand is very strong among these investors, Pa said. “We have had inquiries about offering something like this and since we announced the program we’ve been getting a lot of calls.”