WASHINGTON —The Obama administration yesterday unveiled a long-awaited temporary bond purchase and liquidity program designed to help state and local housing finance agencies that have been forced to curtail or shut down their programs during the financial crisis.
Officials from the Treasury Department, the Department of Housing and Urban Development, and the Federal Housing Finance Agency made the announcement in a conference call with reporters, but refused to quantify the programs, saying only that they will be sized to “meet demand.”
“We felt it is important to build estimates for the program from the ground up,” Treasury assistant secretary for financial institutions Michael Barr told reporters. Barr said that there will be some form of ceiling on the size of the programs, but refused to give any estimates of them.
But housing officials said that to be effective, the programs will likely need to result in as much as $20 billion in purchases and $15 billion in Treasury-financed liquidity.
Barr stressed that the two programs will be paid for by state and local HFAs, through fees, and not taxpayers. Asked who would be on the hook for losses, Barr said, “The HFAs are in the first loss position,” followed by the Treasury and then the Fannie Mae or Freddie Mac.
The programs, which stem from a speech President Obama gave in February in which he promised to help state HFAs with their liquidity problems, comes as state HFA bond issuance has fallen to only about $4 billion, one-quarter of what it has been in the past, according to Susan Dewey, president of the National Council of State Housing Agencies and executive director of the Virginia Housing Development Authority. The housing market collapsed amid the financial crisis and has struggled to revive as banks, mutual funds, insurance companies, and other traditional investors have held off or limited purchases of tax-exempt housing bonds.
Some housing sources said that HFAs also have been unable to borrow at rates to make their programs work because the Federal Reserve and Treasury are buying GSE securities in a manner that has driven down overall rates. They are so low that HFAs no longer offer an attractive product, though they previously were able to offer mortgages up to 100 basis points below prevailing commercial rates.
HFAs that issued variable-rate demand obligations have been especially hurt because the financial institutions they relied upon to remarket the debt 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 on issuers, housing experts said.
Some VRDOs unable to be remarketed by the HFAs have become bank bonds, which HFAs must pay off under aggressive amortization schedules. A May 2009 survey by the National Council of State Housing Agencies found that 37 HFAs had $23 billion of VRDOs outstanding, with nine holding more than $2 billion of bank bonds.
Dewey told reporters that the temporary liquidity program would benefit more than 30 states, including California, Colorado, Florida, Pennsylvania, Wisconsin, and Vermont.
More broadly, she said, both programs would allow HFA to continue to offer below-market financing for first-time homebuyers “and we are ready and well-positioned to immediately begin implementing these critical programs.”
John Murphy, executive director of the National Association of Local Housing Finance Agencies, said that the programs reflect “a true partnership” between federal, state, and local officials “to respond to a pressing need.” NALHFA is delighted and anxious to see more details, he said.
The administration’s temporary new-issue bond program, or NIBP, will provide temporary financing for HFAs to issue new single and multifamily housing bonds to fund new mortgages. Treasury estimates the program will support up to several hundred thousand new mortgages and tens of thousands of new rental housing units for working families during the coming year.
Under the program, Treasury will purchase Fannie Mae and Freddie Mac securities backed by these new housing bonds. State and local housing HFAs must develop and submit requests and purchases will be made based on the allocation formulas established by the Housing Economic and Recovery Act of 2008.
HFAs will pay the GSEs and Treasury an amount intended to cover the cost of financing the new bonds as well as the risk posed by the individual HFA, based on its rating. Generally speaking, the interest rate on the new bonds will be equal to a short-term Treasury interest rate for the period during which the proceeds are held in reserve before being drawn down by the HFAs to originate mortgages, federal officials said.
Because of the short time frame of the program, Treasury will allow HFAs to issue short-term bonds that can be converted into long-term issues after the end of the year. The short-term proceeds can be placed in escrow until used by the HFAs to fund new mortgages in 2010. Before an HFA can use the proceeds, it will be required to sell to the private market shorter-term bonds in a ratio equal to 40% of aggregate bond proceeds, with the other 60% of bonds to be purchased through the NIBP.
Seth Wheeler, a senior adviser to Treasury Secretary Tim Geithner, said Treasury, HUD, and the GSEs are still working on the program with the HFAs and the administration probably will not be able to purchase HFA bonds under the program until at least next month.
The temporary credit and liquidity program, or TCLP, which will be administered by Fannie Mae and Freddie Mac, will provide replacement credit and liquidity facilities to HFAs for existing single-family and multifamily bonds. The Treasury will backstop the replacement facilities by purchasing a participating interest in the GSE temporary credit and liquidity facilities, using authority it was granted under the HERA. The program will only apply to bonds issued under previous authority allocated by Congress, federal officials said.