The Obama administration has launched a program intended to help state and local housing finance agencies finance several hundred thousand mortgages for first-time homebuyers, and provide opportunities for borrowers at risk of foreclosure into more sustainable loans.

State and local housing finance agencies (HFAs) — which before the financial crisis financed more than 3 million home purchases through the issuance of tax exempt bonds — have been frozen out of the bond market, forcing many to suspend lending or scale back their programs and raise rates.

The Obama administration has launched a program intended to help state and local housing finance agencies finance several hundred thousand mortgages for first-time homebuyers, and provide opportunities for borrowers at risk of foreclosure into more sustainable loans.

State and local housing finance agencies (HFAs) — which before the financial crisis financed more than 3 million home purchases through the issuance of tax-exempt bonds — have been frozen out of the bond market, forcing many to suspend lending or scale back their programs and raise rates.

Under a temporary financing program announced by the Treasury Department today, the government will purchase securities issued by Fannie Mae and Freddie Mac backed by new mortgage revenue bonds issued by the HFAs.

The New Issue Bond Program (NIBP) is intended to make it possible for HFAs to issue tax-exempt bonds at the levels previously authorized by Congress, but which they have been unable to do because of the lack of demand from private investors.

Last year’s Housing and Economic Recovery Act (HERA) gave states $11 billion in new tax-exempt bond authority, which would have increased the number of homes financed by state HFAs from 170,000 to 270,000, the National Council of State Housing Agencies said in announcing its support for the initiative.

State HFAs could issue more than $30 billion in housing bonds over the next two years in response to growing demand by first-time homebuyers seeking to take advantage of lower house prices and plentiful housing stock, the group said.

In addition to loans, some state HFAs offer downpayment assistance programs that can be used in conjunction with loans insured by the Federal Housing Administration. Some of those programs allow buyers to "monetize" the $8,000 first-time homebuyer tax credit and apply it toward FHA downpayment requirements (see story).

The NIBP program will also support development of "tens of thousands" of new rental housing units, the Treasury Department said.

The Treasury’s HFA initiative — which is being undertaken under the authority of HERA — includes a second component, the Temporary Credit and Liquidity Program (TCLP), in which Fannie Mae and Freddie Mac will assist state and local HFAs refinance existing bonds to lower their costs.

In the last 19 months, the lack of liquidity in bond markets has cost the Florida Housing Finance Corp.’s guarantee fund $16 million in increased interest expense, the Treasury Department said. …CONTINUED

To cover the government’s costs and protect taxpayers from risk, HFAs will pay a fee to access both the NIBP and TCLP programs. The fee for the TCLP program will increase over time to "encourage HFAs to find private alternatives as quickly as possible," the Treasury said.

Before the HFAs can use the proceeds from the NIBP program, they will be required to sell shorter-term bonds in the private market at a ratio equal to 40 percent of aggregate bond proceeds, allowing the program to exceed the Treasury’s investment and mitigating risk to taxpayers.

State HFAs say they did not engage in subprime lending, offering mostly fixed-rate, 30-year loans to first-time homebuyers, and that their loans have performed better than both conventional and subprime loans.

But the secondary market for mortgage-backed securities and mortgage revenue bonds that don’t carry the backing of Fannie and Freddie has largely evaporated, and some states have experienced financial problems that hampered the ability of HFAs to issue bonds.

California’s budget crisis forced the state’s HFA to suspend its 30-year fixed-rate mortgage loan and downpayment assistance programs in December (see story).

The downpayment assistance program, which provides loans of up to 3 percent of a home’s value to assist with downpayment and closing costs, was restored in May, and CalHFA rolled out a new 30-year loan program in June that did not rely on bond financing and was therefore limited in scope.

The Treasury Department’s news release included comments from directors of HFAs around the country welcoming the initiative.

Steve Spears, CalHFA’s acting executive director, said the initiative will "help revive CalHFA lending programs and give California first-time homebuyers a chance to take advantage of the highest affordability levels that have been seen in almost two decades."

Michael Gerber, executive director of the Texas Department of Housing and Community Affairs, said that while he is still waiting to see many details of the program, it has "the potential to get Fannie Mae, Freddie Mac, and the Federal Home Loan Banks back in the game" and help state and local housing finance agencies continue to fund loans.

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