WASHINGTON — Several small local housing finance agencies will not be participating in the new-issue bond purchase program recently rolled out by the Treasury Department. Instead, they have opted to return their allocations because high fees and the Treasury’s refusal to allow escrowed bonds to be sold at a premium make it economically infeasible for them to do the transactions.
Exact numbers are not yet known, but at least a dozen local HFAs out of the 100 that received allocations from the Treasury have dropped out of the program. John Murphy, the executive director of the National Association of Local Housing Finance Agencies, said yesterday he expects the exact number to eventually be higher.
Murphy also confirmed that Treasury officials have notified NALHFA that they will not change either the fee or premium requirements to accommodate the smaller HFAs.
However, neither issue is expected to deter state HFAs and large local housing agencies that have the ability to pay for down-payment assistance with separate funds and that can handle the fees, which would be at least $110,000.
The new-issue bond purchase, or NIBP, program is designed to provide a temporary market for new single- and multifamily housing bonds that the HFAs have had trouble issuing to finance new mortgages in the wake of the financial crisis and amid the current recession. Under the program, the Treasury will purchase Fannie Mae and Freddie Mac securities backed by new HFA bonds.
All 50 states requested allocations under the program, and the Treasury agreed to purchase up to $14 billion of bonds. Another $4.5 billion were allocated to local HFAs. Any allocations returned to the federal government are expected to be redistributed to remaining participants, Murphy said.
The biggest obstacle for local HFAs, especially those on the smaller side, is a program rule stipulating that any bonds tied to escrowed proceeds cannot be sold at a premium. Small local HFAs usually count on such premiums to finance grants that help first-time homebuyers make down payments.
The escrow rule could not be avoided by the HFAs given the rapidly approaching deadline for the program. Given that any bonds sold as part of the program must be issued by Dec. 31, most program participants plan to issue short-term taxable debt quickly, put the proceeds in escrow, and then convert the taxable notes to longer-term tax-exempt bonds next year. As a result, however, they would not be able to issue the bonds at premiums.
“Issuers normally sell [premium] bonds on their single-family bonds to raise funds for down-payment assistance grants for homebuyers,” said Mark O’Brien, a managing director with Morgan Keegan & Co. Under the program, “these issuers either can’t use down-payment assistance or must provide that out of their funds, and that can’t be economically viable.”
Murphy warned the Treasury’s Seth Wheeler — a senior adviser playing a key role in the NIBP as well as a new temporary credit and liquidity program for housing bonds — that blocking premium bonds is preventing interested HFAs from participating.
“I am hearing from many local issuers about their inability to accept their allocation of [NIBP] authority, and I’m deeply troubled by this state of affairs,” Murphy wrote in a letter sent to Wheeler last week.
However, the Treasury Department did not modify that requirement, citing concerns that it could lead to homebuyers not investing enough of their own money into a home — a dangerous proposition considering losses already incurred by the Federal Housing Administration from mortgage defaults. Treasury officials added that they simply could not change the program this close to the deadline.
Another issue that made the program less appealing to local HFAs was the steep fees they would have to pay to participate. All agencies have to pay a minimum $50,000 entrance fee to participate in the program and at least $60,000 more in legal fees to the government-sponsored enterprises’ attorneys to review the bond documents. Treasury officials have said they want the program to pay for itself, without any cost to taxpayers.
In addition to blocked premiums and high fees, Murphy pointed to “the timing of getting everything together” as another program hindrance. HFAs had just over a month to put together transactions after the Treasury announced allocations in late November.
“Local governments by law and custom are not fleet of foot,” he said.