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Treasury To Boost HFA Bonds

WASHINGTON - The Obama administration is preparing to announce that it will provide $35 billion to help state and local housing finance agencies, many of which were hit hard by the economic crisis and forced to curtail or suspend tax-exempt bond programs that allow them to provide affordable mortgages. But the window for $20 billion of the assistance may close by the end of the year.

Under the program, which could be announced as early as today, the Treasury Department would create a market for tax-exempt multifamily and single-family HFA bonds by purchasing up to $20 billion of them through government-sponsored enterprises Fannie Mae and Freddie Mac.

The administration also would provide up to $15 billion of liquidity to help HFAs remarket their variable-rate debt obligations.

However, the Treasury Department's lawyers have been insisting that any HFA bonds the Treasury purchases through the GSEs be issued by Dec. 31, 2009, the sunset date for the department's authority to buy securities from the GSEs under the Housing and Economic Recovery Act of 2008.

If they stick to their guns, the HFAs would have less than three months to issue the bonds.

Congress tried to provide relief for the HFAs under HERA by giving them the authority to issue an additional $11 billion of new housing bonds through 2010 to finance affordable single- and multifamily mortgages. It also provided alternative minimum tax relief for housing bonds and granted states a 10% increase in housing credit authority in 2008 and 2009 to produce affordable rental housing.

Armed with these new resources, HFAs were poised in 2008 to produce 100,000 affordable homes in addition to another 250,000 homes produced as a result of annual housing bond and credit allocations, according to the National Council of State Housing Finance Agencies.

But the act did not anticipate the full extent of the economic crisis. With the decline in investor income, financial institution deleveraging, and growing uncertainty about the economy - especially real estate - investor demand for housing bonds and credits diminished significantly. Fannie Mae and Freddie Mac, historically large purchasers of housing bonds and credits, have been out of both markets since 2006, sources said. Other traditional bond purchasers, such as banks, mutual funds and insurance companies, have limited their purchases or dropped out of the housing bond market altogether.

As a result, state and local HFAs have been unable to sell long-term housing bonds at interest rates low enough to allow them to lend the bond proceeds affordably, despite a growing demand for mortgages.

As of Sept. 25 of this year, authorities have sold only 91 single family housing bond issues with a total par amount of $4 billion, compared to 232 issues totaling roughly $10 billion last year and 355 issues at $16.1 billion in 2007, according to Thomson Reuters.

The HFAs sold only 42 issues totaling almost $1.7 billion of multifamily housing bonds as of Sept. 25 of this year, compared to 98 issues totaling almost $2.6 billion during the same period of 2008 and 106 issues totaling over $2.0 billion in 2007, the company said.

Housing groups such as the NCSHA and the National Association of Local Housing Finance Agencies have been pushing administration officials for help for months.

HFAs also have had trouble remarking their VRDOs. The financial institutions they have traditionally relied upon to remarket them and serve as buyers of last resort have either withdrawn from the market, been downgraded by credit rating agencies, or are charging excessive fees and imposing unfavorable terms for providing this liquidity, housing sources said.

A number of HFAs unable to find buyers for their VRDOs have been forced to convert them to "bank bonds," requiring them to pay them off under accelerated amortization schedules at high interest rates.

Housing groups argue that the VRDO payments, at a minimum, reduce HFAs' productive housing activity and, at worst, threaten their financial health.

According to Thomson Reuters, only 14 single-family housing VRDOs totaling $630.3 million were credit enhanced through Sept. 25, compared to 72 totaling $2.8 billion during the same period in 2008. Only 42 issues of multifamily VRDOs totaling $1.4 billion were credit enhanced through Sept. 25, compared to 125 issues totaling $3.2 billion during the same period the previous year.

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