Desert oasis: State housing agencies turn to secondary mortgage market
State housing finance agencies are looking to the secondary market to fund mortgages for borrowers seeking help with down payments and closing costs.
HFAs use fixed-rate, long-term housing bonds known as MRBs to finance home loans. Because these bonds were tax exempt, they allowed borrowers to take out mortgages at a cheaper rate because of the tax benefit to the investors.
But since 2008, investor demand for the bonds dried up. Those remaining demanded higher premiums in order to bet on a shaky housing market. The lack of demand and struggling state and municipal budgets forced the interest rates HFAs could charge upward. As a result, the agencies could no longer compete in a market where interest rates for the rest fell to historic lows, Moody's Investors Service detailed in a report Monday.
Many HFAs participated in the New Issue Bond Program, offered by the federal government in 2009. It allowed the agencies to sell part of their bonds to the Treasury Department below market rates in order to fund the loans. But the program ends Dec. 31, pushing many agencies toward the secondary market for a new solution.
"In order to continue meeting their mission of offering single family loans to first-time home buyers, many state HFAs are now turning to the secondary mortgage market as a funding source – a strategy which brings with it certain benefits and challenges," Moody's said in the report.
The Arizona Housing Finance Authority participated in NIBP and was able to sell some of the mortgage-backed securities originated under the program into the market. Ariz. HFA managers recycled the proceeds back into the program to finance more loans, but they expect it to run out before the end of the year.
"Ariz. HFA staff is currently researching new programs that may be offered following completion of the current program," said Arizona HFA Program Administrator Carl Kinney in a statement to HousingWire. "Staff is currently talking to consultants and companies that might provide a 'turn-key' TBA program."
HFAs can use the "To Be Announced" market to issue MBS on a specific date and hedge the risk of rising interest rates between the time a loan is reserved for the pool and the time it is delivered to the investor – usually two to three months out.
"The AzHFA would be looking to offer a program where the hedging risks would be taken by the TBA provider," Kinney said.
Many options remain for other states, Moody's said, including selling wholesale loans to Fannie Mae and Freddie Mac or securitizing and issuing MBS themselves. But not every HFA is looking to the secondary market, yet.
"Currently we don't have plans on using the secondary market. However should things change we would take another look at the possibility," said Ken Giebel, director of Marketing for the California Housing Finance Agency.
Moody's said if a particular program succeeds, some agencies may even replace the old model of issuing tax-exempt housing bonds with a permanent secondary market structure, should it work.
"If and when the disparity between bond rates and mortgage rates reverses, we anticipate that many HFAs will resume financing through MRB issuance," Moody's said. "A number of factors may influence their ability to do so, including whether they have maintained sound working relationships with their lending community or if they have determined that the secondary market approach is more effective."
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