A securitisation of affordable housing loans with a novel structure offers a model US banks could copy.
The deal saw the issuance of two cash securitisations of Low-Income Housing Tax Credit (LIHTC)-eligible loans made by Citi Community Capital, an arm of Citibank that finances for-profit and not-for-profit affordable housing developers in the US.
The securitisations were called CITAH 2019-2020 – the name is a contraction of Citi Affordable Housing – and each has two tranches. One of the securitisations covered 45 properties in California, and the other covered 39 properties in 13 other US states.
CITAH 2019-2020's California and National portfolios closed in December 2019 and January 2020, respectively, amounting to $946 million total notional exposure and referencing over 11,500 LIHTC units across 14 states.
The Class A certificates of both securitisations earn a fixed monthly interest payment with senior right to amortisation proceeds and were marketed to the public.
The Class B certificates earn monthly residual interest payment, with junior rights to amortisation proceeds. These subordinate certificates were bought by International Infrastructure Finance Company II, previously managed by Mariner Investment Group, LLC. The management of the strategy has since been taken over by Newmarket, which has been spun out of Mariner.
It is believed that this is the first LIHTC issue to have such a dual-tranche structure.
For Citi, the transaction allowed it to achieve funding, as well as capital relief benefit, freeing up capacity to help it make further loans.
The dual-tranche structure allowed for a more varied risk-return profile across the tranches.
Citi believes this is an innovative model for other banks to use to increase lending headroom in the affordable housing space.
"We were especially excited to expand our investment in affordable housing because it's proven to have a strong positive impact on economic mobility and yet the shortfall in affordable units remains vast," said Molly Whitehouse, director and portfolio manager at Newmarket.
"There remains a lot of work to be done as a nation – CohnReznick estimates that there's currently a shortage of 7.4 million affordable rental homes for extremely low-income households in the United States alone," said Newmarket associate Adelaide Morphett. "But we're honoured to get to play our part, helping to finance through the CITAH transactions over 11,000 low-income units"
The LIHTC scheme provides a tax incentive to construct or rehabilitate affordable rental housing for low-income households. It allows investors to offset loans or investments in affordable housing against their income tax liabilities.