WASHINGTON — The South Carolina State Housing Finance and Development Authority next week expects to price $100 million of homeownership revenue bonds in its first issuance under the Treasury Department’s New Issue Bond Program.

The deal includes $60 million of tax-exempt bonds the HFA will convert from short-term, taxable debt bought by the Treasury at the end of 2009. Like other issuers participating in the NIBP, South Carolina needs to convert the debt by the end of this year if it wants to use proceeds to purchase mortgage-backed securities.

The deal also includes $40 million of new money tax-exempt bonds that the South Carolina HFA is required to issue to match the Treasury purchase.

The bonds will be offered to retail investors Monday and to institutional investors Tuesday. Goldman, Sachs & Co. is lead underwriter, with Barclays Capital and Citi. The McNair Law Firm PA is bond counsel. The federally backed bonds are rated triple-A.

The $15.3 billion program for state and local HFAs breathed new life into the housing bond market, which was disrupted by the credit crisis and the bursting of the housing bubble. This will be the South Carolina HFA’s first new-money deal since the summer of 2008.

Still, HFAs face some difficult timing issues with converting the debt held by the Treasury. Issuers might not be able to originate enough mortgages to fulfill their NIBP allocations by the end of the year.

The program allows HFAs three issuances in the calendar year to convert the taxable debt held by the Treasury into tax-exempt bonds. Some of the issuers have proposed that the department push back the deadline to avoid a rush to the market this December.

“Many issuers are concerned about a potential year-end market deluge” ahead of the Dec. 31 deadline, said South Carolina HFA finance director Richard Hutto.

HFAs may need all the time they can get to convert that debt because of an unusual negative arbitrage situation facing them. Traditionally, HFAs issue bonds and then originate mortgages with the proceeds. Most agencies now are originating loans prior to bond issuance to limit negative arbitrage from bond proceeds held in short-term investments at interest rates several points below the bond yield, Hutto said.

Issuers want “to eliminate as much negative carry as possible,” Hutto said. HFAs will attempt to purchase and “warehouse” as many loans as possible prior to a bond issuance. But this means issuers end up holding mortgages before they have established their bonds’ interest rate cost.

But a separate federal program to encourage home buying has spurred mortgage origination. Thanks to an $8,000 federal tax credit for some homebuyers, originations at the South Carolina HFA is at a record pace, Hutto said.

To further complicate issuance timing, mortgage rates have declined in months after the Federal Reserve ended its MBS purchases. The current 30-year fixed mortgage rate is 4.91%, and three months ago it was 5.06%, according to Bankrate.com.

“Nobody anticipated that,” Hutto said, adding that “we were concerned that there would be a jump” in mortgage rates after the first quarter.

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