Freddie Mac recently priced its second offering of a Multifamily Structured Credit Risk (SCR) Debt Note, which gives private investors a portion of the credit risk on certain multifamily mortgages targeted affordable rental housing tax-exempt bonds guaranteed by the government sponsored enterprise.

In a press release published Thursday, Freddie said that the approximately $43.1 million in SCR Notes are expected to settle on or around Dec. 29. Pricing was not disclosed.

Introduced in May 2016, SCR Notes are unsecured and unguaranteed corporate bonds whose performance is tied to a specific pool of multifamily mortgages insured by Freddie. They serve as a kind of reinsurance, protecting taxpayers, who might otherwise be on the hook for losses. Should the mortgages become delinquent or default, Freddie can retain interest payments or even principal of the SCR notes. The most subordinate SCR notes, which take the first losses, are sold to capital markets investors.  Freddie Mac retains the senior loss credit risk.

The first SCR Notes were issued in May 2016.

In this latest transaction, $43.1 million SCR Notes Series 20,16-MDN2, Class B are linked to the credit risk of approximately 68 multifamily mortgage loans originated between 1999 and 2016 with an approximate unpaid principal balance of $863 million. The mortgage loans were primarily funded by the issuance of targeted affordable rental housing tax-exempt bonds guaranteed by Freddie Mac. The loans adhere to Freddie Mac's underwriting, internal fraud prevention and quality control standards.

 Wells Fargo is the sole structuring agent, lead manager and sole bookrunner. Systima Capital Management is the sole investor for the issued notes.

Freddie still transfers the credit risk on the bulk of its multifamily business through another type of transaction called a K Deal. These look a lot like private-label commercial mortgage bonds. The GSE assembles diversified pools of loans backing apartment buildings and uses them as collateral for deals with two classes of bonds: guaranteed senior bonds and unguaranteed bonds known as subordinate and mezzanine bonds. Together, these two subordinate tranches offload the risk of the first 15% of losses on the mortgage pool.

Loans issued by state and local housing authorities aren’t eligible to be used as collateral for K-deals. These loans already serve as collateral for bonds issued by housing authorities and guaranteed by Freddie.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.