Impact Community Capital is marketing a small balance commercial loan securitization that will offer investors $189 million in AAA’ rated securities that are guaranteed by Freddie Mac, according to DBRS.
Funding Affordable Multifamily Housing Mortgage Loan Trust 2014-1 will also issue $25 million of lower-rated certificates that will be retained by Impact or an affiliate. These notes are not guaranteed by Freddie Mac.
The pool consists of 124 small balance loans that are secured by 118 multifamily properties which are primarily affordable housing associated with a Low Income Housing Tax Credit (LIHTC) program. Loans in the pool have an average balance of only $1.7 million. Historically, loans with smaller balances have experienced significantly higher loss severities in the event of default than larger loans because of fixed costs associated with foreclosure.
The loans were originated by Wells Fargo Bank, National Association, Bank of America and JPMorgan Chase and are being sold by Impact. The loans are backed by properties with rents that are affordable to those with low and very low incomes.
Impact has sponsored three rated REMIC affordable multifamily housing securitizations, including a 2000 securitization sized at $40.5 million (comprising 12 multifamily loans), a 2001 securitization sized at $164 million (which included the 2000 securitization) (comprising 107 multifamily loans) and a 2010 securitization sized at $302.0 million (comprising 176 multifamily loans). However this is the first transaction that offers the so-called “Q-certificates” which are the Freddie Mac guaranteed loans.
Although the loans have not been underwritten by Freddie they meet the company’s current underwriting standards.
"We are pleased to expand our securitization offerings and expect to execute a few Q-Deals a year," Mitchell Resnick, vice president of Freddie Mac Multifamily Capital Markets, said in a press release "In the Q-001 transaction, we are purchasing and guaranteeing the senior bonds, but may purchase certain other bonds in future Q-Deal transactions”
Freddie Mac has another small balance commercial mortage loan initiative in the works. At the beginning of October the government sponsored agency announced that it launched a new small balance loan platform to fund loans on multifamily properties with five units or more ranging from $1 to $5 million.
Arbor Commercial Mortgage, Greystone Servicing and Hunt Corp and Hunt Mortgage Group have already been approved by the agency as small business loan sellers/servicers and Freddie Mac said they have another four companies in various stages of approval.
Freddie plans to eventually package the loans in a securitization, similar to the agency's well established multifamily securitization program, the so called “K-deals”. Under the small balance securitization program the agency will transfer the first loss risk to private capital. However the subordinate tranche will be purchased by the originating sellers, which they in turn can sell to other investors. K-deal’s, on the other hand, sell the subordinate B-piece to third-party investors.
Freddie Mac said in a press release earlier this month that the platform is “specifically designed to meet the long-term debt capital needs of small rental property borrowers nationwide” and “will increase liquidity in the small balance space and provide stability in this somewhat underserved market”.
Recent research indicates that the small loan market comprises about 29% of the multifamily market, and is currently served primarily by many local and regional financial institutions.
The “Q-certifcicates” guaranteed by the agency in the Impact deal are a separate initiative. Patti Boerger, public relations director at Freddie Mac, said of the upcoming small balance securitization program: “It will take [the agency]several months to get enough small business loans through the new program to have enough to securitize,”.