Triple-A-rated Fannie Mae - the largest provider of credit enhancement in themultifamily housing sector - is breaking into the burgeoning auction-rate securitiesmarket.
The New York City Housing Development Corp. next week is selling $130 million in 30-year, multifamily housing revenue bonds with a $112 million tax-exempt, auction-rateseries that will carry the long-term, triple-A credit enhancement from Fannie Mae. Thebalance of the $130 million deal is federally taxable.
The deal diversifies the type of credit enhancement Fannie Mae has provided in themultifamily housing market. The company, which is congressionally chartered, hastraditionally enhanced fixed-rate housing bonds with its triple-A rating and as the useof floating rate debt has grown in popularity it has offered enhancement and liquidity -letters of credit or standby purchase bond agreements - for conventional variable-ratedemand obligations.
Now, as auction-rate securities have grown in popularity, the company is offering toenhance the product, which unlike VRDOs, does not require liquidity - one of the mainreasons for its increased popularity.
To date, none of the traditional credit enhancers in the housing sector have offered toback auction-rate products. Instead, such deals have come without enhancement or carriedbond insurance. Fannie Mae said it believes it is time for the agency to diversify intoenhancing auction-rate securities and it expects other agencies, for instance FreddieMac, to follow suit.
"Moving into auction-rate securities allows us a more natural diversification of ourbook of business," said Daniel Cunningham, national director of the agency's nationalaffordable housing team. "From our conversations we've received affirmation thatauction-rate securities is where variable-rate, tax-exempt investing is going."Cunningham said Fannie Mae is "looking at several deals. This one materialized fairlyquickly. Once this one goes through, more people will see it as acceptable."
According to Thomson Financial, the volume of multifamily housing bonds sold in theauction-rate mode grew to $1.3 billion last year from a mere $135 million in 2002, whileacross the municipal market, auction-rate volume was up 75% to $45.2 billion last yearover the year prior.
HDC president Emily Youssouf said the arrival of Fannie Mae as an enhancer in the marketis significant because "it broadens the market of who can buy our bonds. Fannie Maetrades really well. Having them accesses another group of investors."
She said the HDC did one other auction-rate deal, which it sold through its double-A,open resolution credit and so did not require credit enhancement.
The HDC also noted that next week's sale is notable because the $112 million in Series Abonds are expected to have an initial auction period of 30 days, which differs from thetypical 7, 28 or 35 day auction rate periods.
Fannie Mae is requesting a monthly auction period in order to have an amortization thatcoincides with the mortgage loan, HDC said.
Goldman, Sachs & Co. is sole senior manager on the $130 million deal, with Hawkins,Delafield & Wood as bond counsel. The project developer is Related Co., a major New YorkCity real estate developer that is building a so-called 80-20 multifamily rental housingproject in Manhattan on 10th Ave. between 55th and 56th streets.
American Property Financing was the original lender for the project.
