Barclays’ analysts are urging investors to not miss out on the benefits of risk-sharing agency financing rules that in their view are revolutionizing municipal housing finance.
Multifamily real estate investors may have to catch up with a still-evolving trend of replacing traditional mortgage revenue bonds with more cost-effective pass-through structured financings backed by Housing Finance Agency guaranteed mortgage loans.
According to Barclays’ Multifamily Federal Housing Administration 542(c) Risk-Sharing addendum, pass-through structured financing typically helps lower cost of capital allowing issuers “to better leverage the credit quality” of FHA loans.
Under the 542(c) risk-sharing umbrella, HFAs are responsible for a portion of the credit risk.
Therefore, analysts are urging investors toconsider “adding debt issued under Section 542(c) to their portfolios, particularly as this type of issuance becomes more established in the market over time.”
Barclays’ municipal research analyst, Thomas Weyl, and mortgage securitization expert, Keerthi Raghavan, narrow down the factors that support a pass-through structured financing oriented approach to
Upon default, they note, under 542(c) the bondholder is exposed to the FHA credit risk, “which is backed by the full faith and credit of the U.S. government,” not the individual HFA.
If under the multifamily 542(c) risk-sharing program the recovery upon default and from the
“With conventional FHA-insured bonds wrapped by GNMA, investors would receive full and timely principal and interest payments upon default,” they wrote, with debt issued via the 542(c) multifamily FHA risk-sharing arrangement, “investors would receive ultimate payment of 100% of principal and interest, less one month of interest.”
In the absence of a one-month cash funded debt service reserve fund, they add, there is a risk the interest shortfall would not be paid.
