Popular Mortgage Program Spurs More VHDA Bonding

The Virginia Housing Development Authority expects to sell a great deal more debt this year than it did in 2004, in part because of the growing popularity of an unconventional new mortgage product that allows a homebuyer to pay interest only for the first seven years.

The Richmond-based VHDA expects to increase its borrowing to $1.07 billion from the $613.6 million of debt it sold last year. Roughly $750 million of the bonds sold this year will be tax-exempt, which compares to $431.7 million of tax-exempts the authority sold last year.

The VHDA’s bond-funded low-interest loan programs help consumers to buy or renovate homes. The authority also lends money to developers to develop and renovate affordable housing. The agency is completely self-supporting and relies on neither federal nor state funds for its operations.

VHDA finance director Patrick J. Carey said the expected increase in borrowing is partly due to the rising popularity of the authority’s new “1st Choice” mortgage product, which was started last fall. The program is funded through the sale of tax-exempt single-family mortgage revenue bonds and offers conventional, fixed-rate 30-year loans to residential buyers.

What’s most unique about the program is that qualified home buyers are allowed to pay interest alone for the first seven years, in addition to being able to skip the down payment and mortgage insurance, said Janice Burgess, the authority’s manager of loan programs.

These easier terms allow buyers to purchase their homes sooner and to start taking advantage of the property’s appreciation and the tax benefits associated with repaying a mortgage, Burgess said. After the eighth year, the loan is recast and amortized over the remaining term, which gives homebuyers greater flexibility, she said. The current lending rate under the program is 5 3/8%, she said.

The program is funded through VHDA’s regular tax-exempt single-family mortgage revenue bond offerings, not through special bond offerings, Burgess said.

“The benefit to the consumer is [that] it lowers their costs and significantly increases their buying power,” she said. Being able to stretch dollars farther is especially important in regions such as northern Virginia where some properties are appreciating at the rate of 25% annually, Burgess said.

Currently, 1st Choice loans represent 41% of all loan reservations in the VHDA’s tax-exempt bond program, according to the authority. A loan reservation refers to a loan that has been approved by the VHDA but has not yet closed.

Since the program started in October, originations have trended upward. In October, 1st Choice loans represented $8.4 million in principal, or 13.75% of VHDA’s total originations. In January, the figure had risen to $14.7 million, or 23.2% of originations.

Standard & Poor’s analysts Tabare Borbon and Ryan Fitzpatrick said the VHDA created the product to be more responsive to its constituencies in Virginia.

Virginia is a relatively high-cost state, especially northern Virginia near Washington, D.C., and “we see it as a real strength of the agency that they were able to create this product,” Fitzpatrick said.

Although many state housing finance agencies offer the zero-down payment option, the seven-year interest-only option built into the program is unique, according to Borbon.

The new VHDA program carries some risk because of so-called payment shock, which is when a borrower accustomed to paying a certain rate has to pay a higher rate, Borbon said.

The VHDA “told us they were going to do more of these loans, and we are very comfortable because of their strong, very prudent financial management,” Borbon said.

Burgess also noted that the 1st Choice program bears a resemblance to an interest-only mortgage product offered by the Rhode Island Housing and Mortgage Finance Corp.

While Thomas F. Hogg, chief financial for the Providence-based housing finance agency, did not return telephone calls, Standard & Poor’s Fitzpatrick confirmed that the corporation offers a “Buy More Mortgage Program.” The Rhode Island agency introduced the product in response to rapidly rising local housing costs, Fitzpatrick said.

Those loans bear interest only for five years and then amortize over 30 years, he said. A recent offering statement from the Rhode Island agency indicated that about a quarter of the loans it has issued since the beginning of 2003 are from the program, Fitzpatrick said.

The VHDA has an issuer credit rating of AA-plus with Standard & Poor’s and Aa1 with Moody’s Investors Service. Fitch Ratings does not rate the agency’s debt.

Both Standard & Poor’s and Moody’s rate VHDA’s single-family bond program triple-A, citing the program’s overall financial strength and over collateralization. The VHDA’s next single-family bond sale is tentatively scheduled for competitive bid on Feb. 15. The $35 million of alternative minimum tax bonds are expected to mature from 2006 through 2030.