The liberal think tank the Center for American Progress has proposed a plan to promote a new source of financing for troubled state housing finance agencies — the House America Bond.
A HAB would be a taxable, direct-pay bond, modeled after the Build America Bond program, which was created as part of the American Recovery and Reinvestment Act of 2009. BAB issuers receive a subsidy payment from the Treasury Department equal to 35% of their interest cost. BABs could only be issued by state and local governments, not state housing agencies, which typically issue private-activity bonds.
Jordan Eizenga, a member of the economic policy team at CAP and the author of the proposal, said issuers would not need a 35% subsidy rate, as that rate may have been too generous. Somewhere between a 28% and 32% subsidy rate would be sufficient and in line with the implied tax rate in the tax-exempt market, he said.
“Build America Bonds is a simple and tested program that worked at lowering borrowing costs during the worst time in our recent financial history,” Eizenga said. “It stands to reason that a similar program would be just as effective going forward for state housing finance agencies.”
The HAB program would provide another tool for HFAs to provide “affordable and sustainable mortgage programs and rental opportunities for many people currently not served by mainstream financial institutions,” he said.
State and local HFAs sell tax-exempt housing bonds, commonly referred to as mortgage revenue or single-family housing bonds and multifamily housing bonds. They use the proceeds to finance low-cost mortgages for low-income, first-time home buyers or the development of apartments at rents affordable to lower income families.
HFAs’ annual issuance of housing bonds must fall within their state’s private-activity bond volume cap. The 2012 limit for each state is $95 per capita or $284.56 million, whichever is greater, according to the Internal Revenue Service.
Housing experts say the HAB proposal is a good one that would help broaden investor appeal and access untapped demand in the municipal bond market. The financial crisis significantly diminished investor interest in housing bonds, which limited the amount of funds available to finance affordable home mortgages and multifamily loans.
The spread between mortgage rates and tax-exempt revenue bonds historically has been positive, with mortgage rates tending to be higher than tax-exempt bond rates, according to Eizenga. Beginning in October 2008 the spread became negative, with tax-exempt rates exceeding mortgage rates. HFAs were unable to borrow at rates to make their programs work.
In response, the Treasury Department launched the New Issue Bond Program in October 2009 to boost state and local HFA issuance of affordable-housing bonds. Since its creation, the NIBP has helped HFAs finance more than 100,000 single-family units and more than 24,000 rental homes, according to the Treasury. The program will sunset Dec. 31.
Barbara Thompson, executive director of the National Council of State Housing Agencies, said she has not endorsed the plan but is delighted to see the Center for American Progress’ work and is very interested in the proposal.
“We have pursued a number of avenues to use the PAB cap in this difficult environment,” Thompson said. “Our agencies just aren’t able to find buyers for long-term bonds.” She added that she would not want HABs to replace traditional tax-exempt housing bonds.
However, because the proposed HAB program mirrors BABs, it may be unlikely to gain traction among Republicans in Congress who have consistently opposed the revival of the BAB program. President Obama’s $3.8 trillion fiscal 2013 budget included a proposal to make BABs permanent at lower rates.
“I don’t think it should be dead on arrival with Republicans,” said Ethan Handelman, vice president for policy and advocacy at the National Housing Conference. “The housing need is something both parties have recognized. It is a helpful proposal that should be done. This program is a good way to leverage private activity with private market discipline.”
John Murphy, executive director of the National Association of Local Housing Finance Agencies, said the proposal is not viable in such a partisan congressional environment. “We want every tool we can get, but we have our doubts about how gettable it is,” he said.
Eizenga has met with members of Congress and staffers about the proposal. It’s unclear if it will become legislation, but he said there is a concern about the housing market and members are looking to shore up support for expanding affordable housing.
Rolf Pendall, director of the Metropolitan Housing and Communities Policy Center at the Urban Institute, said the proposal shouldn’t be considered a “forever solution,” but rather one of several ideas to explore in the short term to boost the weak housing market.
“Not every state housing finance agency is perfect, so it is important to make sure safeguards are put in place and use this new power appropriately with national and local goals in mind,” he said.