The Origin Multifamily Credit Fund for qualified purchasers* offers a passive income stream that comes from conservatively leveraged mortgaged-backed securities—specifically, Freddie Mac K-Deal and SBL B-Piece certificates secured by cash-flowing, geographically diversified multifamily mortgage loans.
Origin Credit Advisers has met Freddie Mac’s stringent requirements to become an approved B-Piece certificate purchaser because we are affiliated with Origin Investments, a multifamily owner, lender and asset manager with extensive experience and a proven track record. Freddie Mac requires bond purchasers to be active borrowers who are familiar with the inner workings of its products. Plus, it requires equity of $25 million to $65 million to bid on B-Piece certificates, an intensive capital requirement that eliminates 90% of potential buyers.
Benefits of the Multifamily Credit Fund
The Multifamily Credit Fund strives for the following benefits:
Steady yields. The Fund’s investments include a combination of fixed-rate certificates and floating-rate investments. The latter targets a premium over the Secured Overnight Financing Rate (SOFR) or its predecessor, the soon-to-be-retired London Interbank Offered Rate (LIBOR). The more transparent SOFR is an index of overnight Treasury yields.
Priority Position. Freddie Mac has a low historical loss rate (0.076%) and the Fund’s bond certificate position is senior to common equity owners, providing a 30% cushion to loss. Plus, the B-Piece certificates we look for are free of home loan or credit card debt, benefiting from the safety and resilience of multifamily housing.
Built-in inflation hedge. The Fund seeks to allocate equity to floating rate bonds, which means that when interest rates rise, so do the borrowers’ interest payments.
Tax efficiency. The Multifamily Credit Fund is structured with a REIT subsidiary, which under the provisions of the Tax Cuts and Jobs Act of 2017, provides a 20% tax deduction on all taxable dividends regardless of an investor’s income. The REIT structure also blocks unrelated business taxable income (UBTI) for tax-exempt investors, including IRAs.
About the Fund’s Target Investments
Freddie Mac is the largest multifamily lender in the U.S. It helps to ensure an ample supply of rental apartments by purchasing high-credit quality multifamily mortgages, which it securitizes through K-Deal and SB-Deal bond certificates and sells to third-party investors. Freddie Mac’s volume of new business is huge, totaling $83 billion in 2020. And its robust loan traffic allows it to bundle $800 million to $1.5 billion in loans on properties across the country and convert them into a single offering of securities with different investment tiers.
The Freddie Mac apartment portfolio has a lower risk profile than high-yield corporate bonds, investment grade bonds or other commercial mortgage-backed securities. Underlying properties are conservatively leveraged, with loan-to-value ratios at typically 70% and no more than 80%. Freddie Mac’s delinquency rate is lower than comparable Fannie Mae certificates or commercial mortgage-backed securities. Its loss rate over the past 26 years is an extraordinarily low 0.076%.
The Multifamily Credit Fund derives its yields from taking a position subordinate to Freddie Mac’s senior debt, which is known as a B-Piece. This slice of the loan pool is not guaranteed by Freddie Mac but is lower in the capital stack than property owner common equity. Owners provide 30% of funding and risk losing their entire investment in the event of a default. Multifamily Credit Fund investors are at risk only if this 30% cushion is exhausted.
About two-thirds of the Multifamily Credit Fund portfolio will consist of floating and fixed-rate K-Deal certificates. Loans in the Freddie Mac K-Deal portfolio originate from a diverse set of properties, primarily located in Texas, California, Florida and Georgia. The target allocation also includes small balance loan (SBL) certificates on loans originated for smaller apartment buildings and interest-only K-Deal certificates backed by future cash flows.
How We Vet Freddie Mac Certificates
Although Freddie Mac has its own rigorous vetting process prior to lending to multifamily owners and operators, we thoroughly vet each B-Piece certificate. We do that using our own proprietary underwriting and due diligence processes. When participating in a January 2021 K-Deal, we looked at the property locations, property operators and the investment’s risks and position in the capital stack. As well, we reviewed every investment’s strengths and weaknesses in depth to make bidding decisions.
We are excited to offer this product to help high-net-worth investors, family offices and registered investment advisors grow and preserve their wealth.
*Generally, a qualified purchaser is an individual or a family-owned business that owns $5 million or more in investments, not including a primary residence or any property used for business.