New Issue Bond Program Results Are Underwhelming, S&P Says

As a U.S. Treasury Department bond program intended to help housing finance agencies nears its halfway point, results are lagging behind expectations, Standard & Poor’s warned in a report issued Tuesday.

The New Issue Bond Program is set to expire Dec. 31, but local housing agencies recently asked the Treasury to extend the deadline for converting short-term taxable bonds to long-term, tax-exempt, fixed-rate bonds. The agencies argue they could have trouble making the cutoff date.

The program was created late last year by the Treasury, in partnership with the government-sponsored enterprises Fannie Mae and Freddie Mac to revitalize HFA issuance of affordable-housing bonds that support low- and moderate-income families. The program allows the Treasury, under authority provided by the Housing and Economic Recovery Act of 2008, to buy Fannie and Freddie securities backed by the new mortgage revenue bonds. Treasury agreed under the program to buy $15.3 billion of state and local HFA bonds.

The housing bond market had been rising at about $4 billion per year until 2003, then peaked in 2006 at about $30 billion, Standard & Poor’s said. As the subprime mortgage crisis hit and HFAs ventured into less-traditional bonds such as variable-rate debt, issuance fell in 2008 to under $20 billion. It fell again last year to $10 billion, the lowest point in 10 years.

More than 90 issuers have participated in the NIBP program, according to the National Council of State Housing Agencies. The federal government allocated $17.7 billion for state and local housing agencies, and the agencies used $15.3 billion of that amount, Standard & Poor’s said.

The agency said about 120,320 borrowers were expected to seek help from state HFAs and about 7,680 borrowers were expected to seek help from local agencies between January and December. But by April, HFAs had originated bond-backed mortgages to only 7,700 borrowers, with another 5,800 loans in the wings. Only about 13,500 loans were financed under NIBP in the first quarter. That means NIBP has reached only about 10.5% of the intended borrowers and supported only $1.1 billion of loans, the report said.

“We believe that the federal purchase program of mortgage-backed securities, which the government initiated last year and continued through March 2010, placed an additional burden on HFAs’ ability to generate mortgages, as low rates in the open market have hurt the competitive advantage of many agencies to generate loans,” the report said. “Lack of demand for mortgage loans in areas with severe economic troubles also has affected issuance under the NIBP.”

The report said market competition for the bonds could increase in the fourth quarter due to an excessive supply of housing bonds, as agencies attempt to sell the remainder of their bond allocations.

“However, if the Treasury doesn’t extend the program, we expect to see in some cases redemption of unused NIBP proceeds based on the rate of mortgage origination some housing agencies have experienced year to date,” said Standard & Poor’s analyst Valerie White.

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