Tax-Exempt Commercial Mortgage-Backed Securities Are Having a Moment

As the need for affordable housing in the U.S. grows, the tax-exempt commercial mortgage-backed securities (CMBS) market is emerging as a potential financing tool to deliver more homes. New federal rules and greater attention from ratings agencies and top-tier banks are helping the growth of the burgeoning structure. 

Tax-exempt affordable housing securitizations have taken flight of late after years of largely flying under the radar, according to Ryan Paszczykowski, head of structured investing at Systima Capital Management. 

Tax-exempt CMBS deals occurred on an occasional basis back in the 2000s, but the structure began to develop consistently in the late 2010s when Citigroup and Freddie Mac rolled out programs offering credit risk transfer securities backed by tax-exempt loans issued by state or local housing agencies. The tax-exempt structures of these deals offer lower costs of capital than standard taxable CMBS or traditional affordable housing loans backed by Fannie Mae or Freddie Mac.

Freddie Mac then launched a multifamily loan program in 2017 securitized by tax-exempt loans tied to properties receiving new-issue 4 percent  Low-Income Housing Tax Credits (LIHTCs) and expanded its outreach of the offering in late 2024 through a new registration system. 

Now, the product is starting to take hold as a securitized offering in the municipal debt space at a time when there is increased support nationally to find financial solutions for America’s housing challenges. The deals have become more attractive to investors in a higher interest rate climate since the value of tax-exempt debt stays higher as rates remain elevated while also serving as an attractive option for high-yield investors who are drawn to collateral protections like the federally backed LIHTCs.

A recent deal that Systima itself was involved in underscores the increased demand. 

In July, the company closed a $153 million tax-exempt affordable housing bond deal through the Public Finance Authority, a conduit issuer based in Wisconsin, that was more than eight times oversubscribed with more than $1.2 billion in orders from 19 institutional investors. The transaction was securitized by a pool of loans on seven properties encompassing a 1,272-unit portfolio across Wisconsin, Illinois, Florida, Tennessee and Texas that participate in the LIHTC program, which provides tax incentives to affordable housing developers and investors. 

Paszczykowski said Systima has sought to become one of the first dedicated managers to bring private-label, tax-exempt affordable housing securitizations into the mainstream as a capital markets strategy to a broader investor base. He noted that the firm, which acts as buyer of subordinate B-piece certificates, is trying to educate investors about the durability of affordable housing credit and why the first-loss position can offer compelling risk-adjusted returns. 

“The market has definitely evolved as more participants have recognized the benefits of tax-exempt income and the strong historical credit performance of the affordable market,” Paszczykowski said. “Now you’re having rated tranches backed by affordable housing bonds and loans, and you’re getting a much broader institutional investor base looking at the asset class, driving that demand and liquidity and allowing the securitization market to scale.”

While the exact financial benefits for investors can vary based on variables like bond yields, recent data shows a 50 to 60 basis point spread savings between tax-exempt and taxable affordable housing securitizations, according to Paszczykowski. 

J.P. Morgan Chase was lead underwriter for the $153 million Systima deal, with Wells Fargo acting as co-manager. Systima retained the subordinate Class B certificates in the deal. 

Jason Kahn, executive director in public finance trading at J.P. Morgan, said the emerging tax-exempt CMBS business is benefiting from conservative lender underwriting and a strong track record of property performance. He added that there’s “predictable deal flow” now by leading issuers with new entrants also coming aboard. Secondary market trading liquidity from broker-
dealers has also increased. 

Kahn stressed that historically low delinquency and foreclosure rates of LIHTC-financed affordable housing enabled and widely utilized under tax-exempt CMBS has boosted credit ratings of these deals to give investors added confidence. While LIHTCs are permissible with traditional CMBS transactions, they are rarely used due to strict compliance requirements involving special servicers. 

“Low-Income Housing Tax Credit equity investors provide an external layer of institutionally held credit support that differentiates our growing tax-exempt sector from taxable CMBS,” Kahn said. “The rating agencies are a valuable participant in the industry and continue to invest their time and resources toward providing ratings that reflect credit characteristics in a format our fixed-income investors are used to reviewing as part of their due diligence process.” 

Momentum for new affordable housing funding sources such as tax-exempt CMBS got an added boost this year when a newly enacted federal housing bill permanently lowered the tax-
exempt private activity bond financing threshold for 4 percent LIHTCs — a key incentive for buying or rehabbing affordable rental housing — down to 25 percent from 50 percent. 

With fewer municipal bond allocations now required to get LIHTC credits, developers will need to find new funding sources to replicate those missing dollars, according to Lisa Washburn, managing director and chief credit officer at Municipal Market Analytics.

As more affordable housing tax-exempt CMBS deals price, the institutional acceptance of the securitization structure should grow, Washburn said. She stressed that rating agencies could play a major role in advancing these transactions since the deals now receive at best credit ratings in the low single-A investment grade range if they don’t have a financial guarantee.  

“Affordable housing is not highly rated on a stand-alone basis. But, if you can create a significant portion of those as AA, that will really open up the interest in that type of security,” Washburn said. “There just needs to be more of them and more investment in understanding them, and then I would expect the investor base would grow.”

S&P Global Ratings assigned an A-minus rating to the most senior bonds and a BBB-plus rating to the subordinate tranche in the $153 million Systima deal. All seven assets in the transaction participate in the LIHTC program and provide rental housing to tenants at or below 60 percent of the area median income. 

Paszczykowski noted that private-label, tax-exempt affordable housing securitizations serve as a viable alternative for the traditional municipal bond market for affordable housing. That’s because the securitizations can yield a lower cost of capital through an expanded investor pool aided by strong ratings boosted by credit enhancements like LIHTC. 

When Freddie Mac funded affordable housing deals in the past, prior to Systima’s founding, the government-sponsored enterprise was largely limited in executing third-party executions that would enable banks to free up their balance sheets from securitizing affordable housing bond deals, according to Paszczykowski.

Since launching in 2013, Systima has been part of the overall growth of the tax-exempt CMBS affordable housing securitization space as one of the first non-bank entities to utilize the
private-label, tax-exempt affordable housing securitization market.

Paszczykowski joined Systima from Hillenbrand Partners’ commercial real estate group when the firm formed. Prior to that, he led the ratings process for CMBS loans at Fitch Ratings. 

“Our goal was to be an early mover in bringing a capital markets approach to affordable housing finance, with securitization as a core part of our strategy,” Paszczykowski said. “The market has evolved significantly, and having the ability to create a private securitization with an S&P rating allows us to recycle capital and finance additional affordable housing.”

Tax-exempt CMBS has emerged as another funding source for affordable housing at a time, too, when the municipal bond market at large has been playing an increasingly active role in the sector, according to Municipal Market Analytics’ Washburn. She has tracked borrowing trends from state and local governments at the firm since 2011. 

The amount of bonds issued annually by state and local housing agencies have risen steadily over the past eight years, going from $9.6 billion in 2017 to $22.9 billion in 2025, according to MMA data. Affordable housing bonds issued in the municipal bond market for 2026 totaled $17.3 billion as of Aug. 24. 

Washburn noted that amid the increase of municipal debt for affordable housing projects, there has also been an increase in other financing mechanisms. That includes the tax-exempt CMBS market along with tender option bonds that are placed into a special purpose trust.

While the market for private-label, tax-exempt affordable housing bond securitizations has expanded at a slower pace than Systima initially envisioned more than a decade ago, Paszczykowski is bullish on near-term growth of the space as more big banks like Wells Fargo, J.P. Morgan Chase and Jefferies look to underwrite deals. He stressed that the large-scale need for more affordable housing around the county only amplifies the need for the tax-exempt CMBS market to play an increased role. 

“Coast to coast, affordable housing is a major issue, and a lot of states and cities are trying to solve how to deliver more affordable housing for people that live there, and a way to do that is to drive down costs to develop affordable housing,” Paszczykowski said. “Part of that is this tax-exempt securitization market bringing more capital in and driving down loan spreads to lend more proceeds.”

Going forward, balance sheet lenders are expected to use private-label, tax-exempt affordable housing securitizations more in some form, according to J.P. Morgan’s Kahn. He noted that as demand for tax-exempt CMBS grows, capital costs for the underlying loans financing affordable housing will decrease over time, helping to produce more apartments in the U.S. 

“We’ve experienced this dynamic in other securitization markets where growing competition has driven capital costs lower and has translated to lower borrowing costs at the property level,” Kahn said. “This dynamic could benefit affordable multifamily housing finance in the U.S., and the municipal bond market is ready for it.” 

Andrew Coen can be reached at acoen@commercialobserver.com.