ATLANTA - The Tennessee Housing Development Agency is wrapping up the sale of $50 million of homeownership bonds today as it works to raise funds to keep up with demand.

The agency yesterday completed a retail order period. Today, the deal will be opened up to institutional investors. Merrill Lynch & Co. and Morgan Keegan & Co. are the underwriters for the deal. Kutak Rock LLP is bond counsel.

The deal was almost postponed for at least a week because of market volatility, said Trent Ridley, the chief financial officer for the THDA. However, after much discussion, officials decided this was the best time to go to market. That decision was based not only on better market conditions, but also on the fact that the agency was quickly running out of funds to originate loans.

"The decision to enter the market at this time is primarily driven by the need for funds, as we are already $26.8 million into this deal," Ridley said.

He added that officials with his agency, like other housing agencies throughout the country, are closely monitoring federal legislation that would make bonds issued after the effective date of the legislation not be subject to the alternative minimum tax.

"We understand that non-AMT bonds would lower our cost of debt by 50 basis points, or 0.5% or more, which translates into a 5.49% mortgage rate rather than our current 5.99% rate," Ridley said. "So, you can see how a delayed pricing would benefit our borrowers, should the federal legislation pass. However, we are uncertain as to when the legislation will pass and become effective."

"Given we need funds to meet our demand, currently have a competitive mortgage rate, and are uncertain as to the timing of the federal legislation, we decided to proceed with the pricing as scheduled," he added.

THDA's deal consists of roughly $44 million of 2008-2A bonds that are subject to the AMT and about $5.7 million of 2008-2B bonds that are non-AMT bonds.

The 2008-2A bonds have about $22 million of serial bonds that mature from 2009 through 2018. There are also about $23 million of term bonds; one for about $12 million that matures in 2022 and another for about $10 million that matures in 2027.

Of the 2008-2B bonds, there are $160,000 of serials that will mature in 2013. There are also $5.5 million of term bonds.

Ridley pointed out that in structuring this deal, officials sought to take advantage of the shorter end of the yield curve by front-loading the deal, essentially pushing as much of the deal as they could into the shorter maturities.

"The longest maturity ... is 20 years when normally the longest maturity is 30 years," he said.

This was accomplished by the agency over-collateralizing the deal with $9 million of THDA funds.

Second, the rating agencies allowed the agency to run cash flows stress test at a minimum prepayment speed of 20%, which is normally 0%. This was only allowed after the agency provided 10 years of prepayment history to the rating agencies.

The deal received ratings of Aa2 by Moody's Investors Service and AA by Standard & Poor's. There is no rating from Fitch Ratings.

Market participants can expect the THDA to be back in the market before the end of the year.

Ridley said the agency tries to issue bonds in an amount equal to around three to four months of loan production.

"However, given the market has not be favorable for housing bonds, we have gone out with smaller issues to minimize our exposure to rate risk and get us through," Ridley said.

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