Credit Enhancement

PSP Investment Protection

Throughout its history, the Positive Social Purpose (PSP) Lending Program has remained vigilant about providing attractive returns while mitigating potential investment risk. This careful governance is critically important to the program’s success, because it increases the appeal of this investment vehicle and makes long-term participation more viable.

We use various types of investment protection and credit enhancement:

• Guarantees – 100% coverage of principal and interest by government or quasi-government agencies such as Fannie Mae or Freddie Mac.
• Subordination and Pooling – Wespath purchases the senior class of subordinated pools, while our lending partners purchase the junior class. This protects us from losses on the underlying pool of loans until the losses applied against the junior class cause its value to be reduced to zero.

Reducing Risk of Default

Specific government programs are also used to support the underlying affordable housing or community facility development. This strategy does not provide protection against losses, but it reduces the chance that a loan will default. Government programs typically include additional third-party oversight by the agency administering the program.

A majority of the PSP Lending Program loans are made to affordable housing developments supported by the federal Low Income Housing Tax Credit Program. This program provides important motivations for borrowers that reduce the likelihood that a loan will default, and plays a role in nearly 90% of all affordable rental housing created in the U.S.

Reducing Risk Through Collaboration

The PSP Lending Program also works with industry leaders in real estate servicing, pricing and loan monitoring to provide a best-in-class management platform, excellent governance and exceptional diversification to the loan portfolio. These intermediaries perform initial project due diligence, conduct ongoing loan servicing and, most importantly, provide credit enhancement for loans. They are generally community development financial institutions that are mission-focused and have expertise in affordable housing and/or community facility lending.