HUD Set to Unveil Support for HFAs

WASHINGTON - The Obama administration is close to unveiling a three-pronged program to help state and local housing finance agencies, including a liquidity facility to support state HFA-issued variable rate demand obligations, a senior Department of Housing and Urban Development official will tell lawmakers this morning.

William Apgar - a senior adviser to HUD Secretary Shaun Donovan - who is to testify at a House Financial Services Committee hearing on four municipal bond bills, will say that "detailed guidance" on the HFA assistance "should be available in the near term," according to prepared testimony released yesterday.

The program is being developed by the White House, the Treasury Department and HUD, with Fannie Mae and Freddie Mac in charge of operating the liquidity facility for housing VRDOs. Though Apgar is not likely to say when details of the program would be announced, two market sources said that it could come as early as Friday.

Meanwhile, Martha Mahan Haines, the Securities and Exchange Commission's municipal securities chief who also will testify at the hearing, is expected to say that the SEC supports proposed legislation that would require all municipal financial advisers to register with the SEC, submit to its oversight, and adhere to a fiduciary standard of care because it has long been concerned about some advisers' conduct.

The SEC believes that the legislation would help address the potential problems concerning FAs who advise issuers and conduit borrowers on their securities offerings, transactions in swaps and other derivative products meant to hedge risk, and the investment of bond proceeds.

"We have been concerned about the observed and reported conduct of some municipal financial advisors, including 'pay to play' practices, undisclosed conflicts of interest, advice rendered by financial advisors without adequate training or qualifications, and failure to place the duty of loyalty to their clients ahead of their own interests," Haines is expected to say according to draft testimony released yesterday.

The legislation is needed, she added, because the SEC's current authority "limits our ability to address these concerns adequately."

David Wilcox, deputy director of the Federal Reserve system's division of research and statistics, is expected to question the extent to which federal intervention in the muni market is warranted over the long-term and will repeat concerns already expressed by Fed Chairman Ben Bernanke.

The testimony comes as the committee, headed by Massachusetts Democrat Barney Frank, is set to consider four bills. One would authorize the Treasury Department to provide $250 billion of reinsurance to new credit enhanced muni bonds over five years. Another would authorize the Federal Reserve to establish a special-purpose entity that would in turn provide a liquidity facility for VRDOs. The Fed-financed facility would be much broader than the liquidity program to be discussed by Apgar, which would be operated by Fannie and Freddie and apply only to housing VRDOs. Treasury, which effectively runs the two mortgage giants, does not believe separate legislation is needed for them to provide liquidity to housing-related debt.

A third bill would require SEC registration of FAs but would specifically exclude bond attorneys, rating agencies and registered broker-dealers acting as underwriters from the registration requirements. A fourth bill would require rating agencies to rate all municipal and other debt based on the likelihood that the investor may not receive payment in accordance with the terms set at issuance and would give the SEC 270 days after enactment to prescribe the necessary rules.

Some of the more provocative testimony may come from Keith Curry, managing director of Public Financial Management, who is expected to express support for the FA bill, with some caveats. "[I]t is appropriate to emphasize that there is no demonstrated need for registration and regulation to protect investors," he plans to say in written testimony. "As far as I know, every publicized instance of abuse of investors or municipal issuers in the last decade has involved broker firms which already were registered with the commission."

That take, however, is contradicted by Haines' testimony, which notes that the SEC has brought over 20 enforcement actions against muni FAs, several of whom were not broker-dealers.

Curry also plans to strongly oppose efforts by the Municipal Securities Rulemaking Board to regulate independent FAs. "We urge the committee to resist the brokerage community's predictable efforts to subject financial advisors" to MSRB rules, his written testimony states. "The MSRB is a captive of the brokerage firms who on one day compete with the independent financial advisors for the role of advisor to municipal governments, and on another day seek the highest rate of interest as the underwriter of municipal debt. It is the local governments, and their taxpayers, who are best served by preserving the strong voice of the independent advisor."

Testifying on behalf of the Regional Bond Dealers Association, Michael Marz, who is vice chairman of First Southwest Co., plans to support all four bills, while recommending two changes to the Treasury reinsurance program.

He plans to urge the program not be limited to muni-only insurance companies, warning this "may be overly restrictive" and could prevent Treasury reinsurance on any of the companies currently active in the market." He also said the committee may want to allow issuers to apply for reinsurance for two years instead of five, while extending the term of the federal credit enhancement for the life of the bonds.

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