The New York State Housing Finance Agency tomorrow plans to convert $176.8 million of bonds sold in 2005 to variable rate from auction-rate mode because of recent spikes in rates in the auction-rate market.

“We believe we can get lower rates with variable-rate bonds,” HFA spokesman Philip Lentz said in an e-mail. “Auction rates are higher now because of volatility in that market.”

Proceeds of the bonds were used to provide an HFA mortgage for 125 West 31st Street Associates LLC, a corporation created to own a multifamily housing development in Manhattan by Seagull Realty LLC. Seagull is controlled by two developers: the Durst Organization and Sidney Fetner Associates.

Fallout from the subprime mortgage meltdown, and subsequent turmoil among bond insurers, has in part shown up in spikes in interest rates on auction-rate bonds for many issuers and conduit issuers.

Interest rates on the HFA bonds nearly doubled from an average of about 3% in August to about 6% in December, Lentz said. The conversion is being made at the request of the borrower.

Moody’s Investors Service assigns its Aaa long-term and VMIG 1 short-term rating with stable outlook to the bonds.

The bonds were enhanced by Fannie Mae, which will also enhance the converted bonds.

Bear, Stearns & Co. is remarketing agent.

The development was built under the HFA’s 80/20 program requiring that 20% of the units built be set aside for a period of time for tenants who are eligible for affordable housing based on income. Construction is completed and the units are occupied, Lentz said.

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