Via FlexCAP, Habitat for Humanity International’s (HFHI) goal was to build more homes for low-income families by attracting commercial sources of capital.
Provider
Habitat for Humanity International (HFHI) and Habitat for Humanity affiliates in the U.S. HFHI is the parent organization to the affiliates.
Recipients
Various investors, including banks, insurance companies, foundations, and state housing agencies.
Amount and Instrument
The amount varies by transaction and declines over time. The first-loss amount incorporates two elements: the equivalent of one-quarter of principal and interest on the investor notes held in cash reserve (provided by Habitat for Humanity affiliate borrowers) and a guarantee equal to 5 percent of the outstanding balance on investor notes (provided by HFHI).
Structure and Terms
Affiliates make housing loans to eligible individuals, typically 20-30 year loans at zero percent interest. The FlexCAP program creates a secondary market for these mortgages, enabling affiliates to borrow against mortgages in their portfolios. Through FlexCAP, HFHI issues 7 or 10 year notes to investors, which are secured by a pledge of affiliate mortgages. The interest on FlexCAP notes is typically 3-4 percent. Affiliates select the 7 or 10 year loan term, and loans are sized based upon the discounted value of a 7 or 10 year payment stream from the pledged mortgages. Actual monthly payments from the pledged mortgages are used to make principal and interest payments on the investor notes.
Motivations
HFHI’s long-term goal is to provide low-cost capital to affiliates while maintaining a conservative structure that protects the interests of investors. The FlexCAP program enables affiliates to recover a portion of the mortgage cash-flow stream sooner and to then recycle these into more loans, thus accelerating home-building for low-income populations. For investors, FlexCAP provides access to steady, reliable cash flows, secured by many layers of protection. In addition to the guarantee and cash reserve (described above), investors are further protected by the fact that:
- If a pledged mortgage becomes delinquent, the affiliate is required to substitute a performing mortgage of equal or greater value.
- Affiliates may not pledge more than 60 percent of their performing mortgage portfolios, ensuring that it is not overleveraged and mortgages are available for substitution.
- The loans are full recourse obligations of the affiliates, providing investors eventual access to the participating affiliates’ unencumbered assets in the event of a default.
Moreover, since the underlying mortgages are 20-30 years in length, while the notes have a 7-10 year horizon, the present value of the pledged mortgages is typically 200 percent or more of the FlexCAP loan principal at closing, and this ratio increases throughout the term of the investment. Last, but not least, investing banks are able to benefit from Community Reinvestment Act credits. Negotiations HFHI markets FlexCAP offerings to its 1,500 U.S. affiliates that then apply for a loan. HFHI conducts financial due diligence on the affiliate applicants and performs a legal review of every mortgage pledged as collateral. The affiliate notes, together with the underlying mortgage collateral, are pledged by HFHI to investors through an indenture structure. Wells Fargo acts as indenture trustee for the transactions and holds all collateral and administers all loan payments at both the affiliate-HFHI and HFHI-investor levels. The use of standard legal documents minimizes investor transaction costs for note closings.
Negotiations
HFHI markets FlexCAP offerings to its 1,500 U.S. affiliates that then apply for a loan. HFHI conducts financial due diligence on the affiliate applicants and performs a legal review of every mortgage pledged as collateral. The affiliate notes, together with the underlying mortgage collateral, are pledged by HFHI to investors through an indenture structure. Wells Fargo acts as indenture trustee for the transactions and holds all collateral and administers all loan payments at both the affiliate-HFHI and HFHI-investor levels. The use of standard legal documents minimizes investor transaction costs for note closings.