WASHINGTON - Fannie Mae and Freddie Mac must resume their purchases of tax-exempt housing bonds to jump-start that virtually dead market so state and local housing agencies can utilize $11 billion of additional private-activity bond volume cap that Congress provided earlier this year, local government and housing groups warned federal regulators and lawmakers.

"Today ... there is virtually no market for tax-exempt housing bonds because of the current economic crisis," said a letter from the National Association of Counties, the National Association of Local Housing Finance Agencies, the National Community Development Association, and the U.S. Conference of Mayors. The letter was sent late Monday to Treasury Secretary Henry Paulson, Federal Housing Finance Agency director James Lockhart, who oversees Fannie and Freddie, as well as the chairmen of congressional committees with jurisdiction over housing.

The groups urged lawmakers and federal officials to direct Lockhart to bring Fannie and Freddie back as purchasers of tax-exempt single-family and multifamily housing bonds. They have not been active buyers of these bonds since 2005, but constituted 25% of the market in 2004, the letter said.

Congress earlier this year provided the additional volume cap for housing financing authorities to issue tax-exempt housing bonds to refinance subprime mortgages as well as provide assistance to first-time home-buyers as part of a comprehensive approach to solving the crisis in the mortgage market. But since the turmoil on Wall Street reverberated through the muni market, HFAs have been all but locked out of the market because of higher interest rates.

"Without Fannie and Freddie buying these bonds, it will be very difficult to utilize these critical resources that Congress has provided," the letter warned.

In addition, Fannie's and Freddie's absence from the market for low-income housing tax credits, which stimulate private investment in affordable rental housing, has caused the price of these credits to fall from a high of about $1.00 to less than 70 cents, the letter said. Developers typically sell these credits to increase equity in the development, which reduces the amount of bonds needed. This reduces debt service costs and rents.

The return of Fannie and Freddie to this market "would create competition in the marketplace allowing more affordable housing units to be built as a result of a higher market price for tax credits," the letter said.

State and local HFA officials said federal oversight of Fannie and Freddie provides an opportunity to have them back as players in the tax-exempt housing bond market.

"We're not seeing any velocity in the market at this point," said Jim Shaw, executive director of the Capital Area Housing Finance Corp. in Austin. "So it seems to make sense, as part of the bailout and all, to try to create some velocity in the market. We've been trying to put together a single-family deal now, and if we can find a buyer, I think our interest rates could end up higher than 6%," which are too high.

"Part of the recovery idea is getting us out there, looking at refinancing subprime mortgages," said Mark Ulfers, executive director of the Dakota County Community Development Agency in Minnesota. The lack of market access "is definitely handicapping not just local, but the state housing agencies as well. We have about $35 million total in 2008 bonding authority available to us [and] we'd like to do a transaction. But right now, there just aren't buyers that come in and purchase those bonds at an interest rate that makes the transaction work for us. We're unable to meet our mission to provide for first-time homebuyers because of the lack of demand on the investor side."

Ulfers said that even though the Dakota County CDA received an additional $10 million in volume cap after Congress passed the housing rescue bill, "that additional authority doesn't help us if we can't find investors to buy the bonds at an interest rate that makes any sense."

Ulfers also agreed that Fannie and Freddie's role in the market for low-income housing tax credits, which their investment in was about 25% of the total market, has depressed rates "substantially."

Phil Lentz, spokesman for the New York State Housing Finance Agency, said part of the problem with the shrinking market for the low-income housing tax credits is that "it's hard to attract people to use credits when they don't have profits. Banks are a major investor and if banks are in the red they don't have taxes they need to offset."

After viewing a copy of the letter, Lentz said his agency is very supportive of the groups' initiative, and that New York officials have also been in contact with Fannie and Freddie officials to explore ways that they can help state and local HFAs.

"They could buy our bank bonds that have had failed remarketings, that they could buy our long-bonds, they could buy our existing bonds, they could create a warehouse account that we can borrow from while we're waiting for the market to improve," Lentz said. "Bottom line is to get liquidity back for HFAs."

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