What got me interested in the state of state housing finance agencies (SHFAs) was a small news story at the start of the year about Fitch Ratings issuing a statistical report for the tax-exempt housing sector.

The one sentence that caught my eye read: "In comparing fiscal 2011 results with those from fiscal 2010 for the 34 SHFAs, Fitch found that total assets decreased by 5.4 percent, while total debt decreased by 7.5 percent, reflective of the overall decline in bond issuance."

While the sentence seems straightforward, I was confused because I wasn’t sure if the decline in total assets and debt was a good thing or a bad thing.

I decided to call Barbara Thompson, the executive director of the National Council of State Housing Agencies (NCSHA), to get her take on the Fitch Report.

"We don’t want to see assets decline," Thompson said, "but the reason is just as Fitch put it: The overall market (for housing bonds) is bad in terms of activity."

To which she added, "The Fitch numbers are almost a little reassuring that it’s not larger than that."

A little background is needed. SHFAs are state-chartered, independent organizations that were established to meet the affordable housing needs of the residents of their states. The housing agencies operate under the direction of a board of directors appointed by each state’s governor.

SHFAs run a number of different housing programs, but the two core ones are the low-income-housing tax credit, which produces low-income rental housing, and the tax-exempt, private-activity bond program that raises money for various state housing programs.

As I wrote in a column last year, the low-income housing credit program works this way: Each state is awarded a set amount of tax credits based on census information. Then in a competitive process, for-profits, not-for-profits, housing authorities, etc., apply for an award of credits for their projects, which, if won, flow to the developer entity for a period of 10 years or until the project is completed. The actual financing comes from the selling of credits to investors, generally for less than they are worth.

Big corporations buy the credits to offset profits

The SHFAs and partners have produced nearly 2 million rental homes with equity provided by the housing credit, according to the NCSHA.

During the recession when corporations were bleeding dollars they didn’t need credits, and this program floundered until it was rescued by a combined Obama administration and congressional effort.

"There were two programs that basically allowed housing agencies to convert credit to cash because there was no market for credit," Thompson said. "These programs did what they were designed to do — bridge the most difficult period, from 2008 into 2011. Then what we all hoped would happen, happened: the market returned. There is greater investor interest, pricing is up, and there is a lot of interest in production. The program has really returned."

Unfortunately, the housing bond market has not come back.

State and local governments sell tax-exempt housing bonds, also known as mortgage revenue bonds (MRBs) and multifamily housing bonds (MHBs), and use the proceeds to finance low-cost mortgages or the production of affordable rental housing. According to NCSHA data, MRBs have made first-time homeownership possible for more than 2.6 million lower-income families, approximately 100,000 every year, while MHBs provided financing to produce nearly 1 million "affordable housing" apartments.

Before the Great Recession, the average SHFA bond issuance was around $15 billion to $22 billion, according to Garth Rieman, director of housing advocacy and strategic initiatives for NCSHA. He breaks it down this way: In 2004, there was $9.6 billion in bonds issued for single-family and $5.58 billion for multifamily; in 2007, those numbers rose to $17.8 billion for single-family and $4.9 billion for multifamily.

In addition, bond issuance is the way most SHFAs generate revenues to keep operations going. Although some SHFAs are attached a little more directly to state governments, very few get operational support through state funding. For the most part, they are self-sufficient, maintaining operations through earnings off their bond programs.

The Obama administration again stepped in with a program to unfreeze this bond market, but that could end at the beginning of this year.

"Once that is over, the states probably still won’t see a lively bond market," Thompson said pessimistically. "The municipal bond market in general has been hit hard and there is little activity for the housing sector."

This isn’t to say that some SHFAs have not been successful. One of the most salubrious has been the Pennsylvania Housing Finance Agency (PHFA), run by Brian Hudson, its executive director and CEO.

"The bond market is not in the best of shape," Hudson said. "Investors want more yield. Anything that has the word housing attached to it means investors want to be paid handsomely. You can’t offer an attractive mortgage rate when you’re funding capital with higher yields."

To get around this impasse, PHFA became a direct Ginnie Mae seller/servicer.

"We use some of our own funds to warehouse mortgages until we can package them into a Ginnie Mae mortgage-backed security," Hudson said.

In the normally quiet winter months, Hudson said his agency was doing about $7 million a week in mortgages.

In the heart of the Great Recession, PHFA stayed active, doing about 4,000 loans with a value of $413 million in 2009, and 7,727 loans valued at $821 million in 2010.

How have those mortgages performed? In short, exceptional.

"Our foreclosure rate is around 1 percent," Hudson said.

The secret sauce in regard to PHFA’s success is a combination of factors, including full underwriting, documented income and counseling. Also, since most homeowners can afford a mortgage but don’t have the money for a down payment, PHFA provides $4,000 in what Hudson calls "closing cost assistance."

And Thompson noted, "SHFAs are spending a lot of time retooling and coming up with new lending executions that they, perhaps, have not used in the past."

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