Lenders have started bundling multifamily mortgages into securities, which are investments that pool loans together and pay out income. This lets them sell those securities and recycle the cash into new affordable-housing loans.
The approach took off in a big way this year.
Citigroup Inc. helped popularize the model. Tax-exempt issuers can now pool mortgages from multiple properties instead of funding one single development. They sell securities backed by those loans, then take the money and lend it out again.
Gabe Diederich, who manages portfolios at Robert W. Baird & Co., anticipates continued growth. "Now that Citigroup has proven there's market access, we're going to continue to see more of these," he said.
The appeal is fairly simple. These bonds offer investment-grade debt with relatively wide spreads, which means the extra yield over safer bonds is generous. Many deals carry mid-investment grade ratings but pay yields similar to junk-rated or unrated debt.
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That gap exists partly because of how the bonds are structured, not because the loans are risky. Jeremy Holtz of Income Research + Management points out that many housing deals use 3% or 4% coupons, which is the interest rate the bond pays. The 5% coupons common in the muni market attract more natural buyers. The lower coupons limit the pool of buyers and push spreads wider.
In July, the National Finance Authority completed a $162.3 million sale of affordable-housing certificates, with the underlying loans coming from Impact Community Capital. The securities were supported by stakes in 21 multifamily mortgages spanning 10 states. This marked Impact's debut in private tax-exempt securitization, and the offering drew more demand than available supply, said President and CEO Michael Lohmeier.
Investors are also getting more comfortable with the underlying assets. Jason Appleson of PGIM noted that these certificates' underlying projects typically enjoy high occupancy, driven by robust demand for affordable housing. "Even when the economy is slowing, these facilities still have a line out the door," he said.
The demand is real. Impact's data show only 35 affordable and available rentals exist per 100 households with extremely low incomes.
This is a market that barely existed six years ago, and it is now doing billions of dollars in deals. It gives everyday investors a way to earn solid yields while backing a pressing social need.
But there are reasons to stay alert. Holtz cautions that shifting spreads and market conditions could make valuations less appealing. "There's always a risk of becoming too comfortable," he said. He suggests investors examine the underlying mortgages and deal structure before jumping in.
These bonds' spreads are partly due to the limited involvement of retail investors and separately managed accounts. As more players show up, that could change. Lohmeier calls it a "positive feedback loop" - more issuance could widen the investor base, which gives lenders a bigger outlet to recycle capital into new loans.
Diederich sees the broader trend clearly. "Some of the backdrop that the securitized and mortgage market has had for years, we're seeing more of that develop inside of the muni housing sector as well," he said.
For investors, the takeaway is straightforward. A niche corner of the bond market is becoming mainstream, and it is bringing attractive yields along with it. Just remember that when a market grows this fast, the easy money often comes with extra homework.
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