Customized debt investments to finance affordable housing in the US

The US is struggling with a chronic housing shortage. Higher mortgage rates and rising rental payments mean housing is not only in short supply, but also becoming unaffordable for an increasingly large number of people. One of the focus areas for APG’s pension fund clients is investing in affordable rental housing. Customized debt investments through government-sponsored enterprise Freddie Mac (Federal Home Loan Mortgage Corporation) enable APG’s clients to maximize impact by targeting specific underserved populations. Members of the US Credits team tell us more.

“Our team is constantly evaluating fixed income investments that align with our clients’ responsible investing priorities,” explains Senior Portfolio Manager Jay Lee, who set up the relationship with Freddie Mac. “We are currently seeing many interesting opportunities in the securitized and structured finance space and identified affordable housing as one market segment with potential to offer both attractive risk-adjusted returns and positive real-world outcomes. Given Freddie Mac’s longstanding leadership in supporting affordable housing in the US, we reached out to their ESG team to see if we could partner on a customized debt investment. It has taken us about a year and multiple rounds of engagement to reach the point where we have developed our own exclusive basket of social loan securities.”

Intersectional impact

Part of Freddie Mac’s mission is to help expand access to housing and promote affordability. Freddie Mac developed a social bond framework specifically to attract capital to support these initiatives and has been one of the largest social bond issuers globally. Building off this strong foundation, the Credits team focused on customizing subsets of Freddie Mac’s existing social and sustainability categories, such as targeted population and furthering economic opportunity for underserved populations.

“Freddie Mac issues social bonds backed by a pool of multifamily loans that meet the affordable housing criteria described in their social bond framework. We view Freddie Mac’s social bond program as best-in-class and see these labeled bonds as great investments,” says Responsible Investment Credit Analyst, Lee Anne Hagel. “In addition to supporting Freddie’s labeled bond program, we also wanted to invest in a more targeted universe with our clients’ priorities in mind. For example, we may consider multifamily properties focused on certain underserved populations – aging population, veterans, farmworkers, people with disabilities – and then select loans that also fall within an economic opportunity zone, rural area, or a county where there is persistent poverty. In this way, Freddie’s framework allows us to focus on intersectional impact through customization.”

Investments selected for APG based on eligibility

On a monthly basis, Freddie Mac publicly auctions its loan securities in the market. “By setting up this relationship, Freddie Mac will show us social bonds that fulfill our eligibility criteria. We then screen these based on potential impact and other investment characteristics drafted internally and decide whether to invest,” explains Lee. “This process enables us to build a customized debt portfolio while also encouraging Freddie Mac to source these types of properties, as they know we are an interested potential buyer. From an additionality perspective, this partnership helps drive investment in specific affordable housing projects. Since May this year, we have made four investments at the monthly auctions, totaling USD 44 million in market value. The current target size is between USD 150-200 million, and we expect to reach that next year, at which point we will think about next steps.”

Housing affordability remains a chronic situation

Senior Responsible Investment Manager, Simone Andrews, notes that high mortgage rates and record-high house prices make it prohibitively expensive for a portion of the population to own a home. “Combined with a lack of supply, this has pushed up rents at a faster pace than incomes for many households.” According to data from the US Census Bureau, nearly half of all renter households in the US are cost-burdened, having to use more than 30% of their income for housing costs. “Our collaboration with Freddie Mac helps to address some of these challenges across the US – from California to Florida, from Maryland to Texas,” adds Andrews. “There is not only diversity in the types of underserved communities and the economic spectrum we target, but also in the regional representation of our investments.”

Agency guarantee and good liquidity

As a US government-sponsored enterprise (GSE), Freddie Mac’s debt securities carry an implicit government guarantee which helps support their mission to offer affordable housing. “This product enables us to gain exposure to the affordable housing theme via a securitized form of investment,” explains Lee. “As we invest through Freddie Mac, the debt investment has a GSE guarantee on the principal and interest payments, which reduces risk. At the same time, there is a very liquid secondary market for these securities, so if we ever need to sell, we can. There is also a broader portfolio rationale for this investment from a diversification perspective, since these loan securities offer a fixed rate of interest compared to the majority of structured credit investments that are floating rate.”

Granular data to show real impact

According to Senior Credit Analyst, Lead Sustainability Research, Joshua Linder, there is significant transparency about what APG is purchasing. “While there may be several dozens of properties collateralized in a typical labeled Freddie Mac deal, we are buying bonds backed by individual properties, so we're basically building our own pool. One of the reasons we sought to partner with Freddie Mac is because they are an industry leader when it comes to impact reporting. The data they make available enables us to report in a very granular way about the positive outcomes our investments support. For example, in one of our investments, 75% of all units are available for people who make less than 50% of the Area Median Income (AMI). With this level of information for each property, we can select from a group of loans that meet our customized criteria and choose the ones that best align with our client’s priorities while providing proper diversification in terms of target groups served.”

According to Luba Kim-Reynolds, Head of Investor Relations and ESG Initiatives at Freddie Mac Multifamily, Freddie Mac also sees benefits in the relationship with APG. “Freddie Mac is committed to advancing our mission of supporting both affordable housing and liquidity and stability in the multifamily market. By working directly with APG, we can do more of both, as reliable investor interest drives support for impact projects. We can provide more liquidity by recycling capital through the system, and in this way, everything comes full circle.”