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NFMA – Advanced Seminar – Real Estate Backed Bonds

Explore the unique nature, legal structures, and credit protections of state housing finance agency bonds. Learn about bond resolutions, credit requirements, and challenges facing these agencies in the real estate market.<br>

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NFMA – Advanced Seminar – Real Estate Backed Bonds

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  1. NFMA – Advanced Seminar – Real Estate Backed Bonds STATE HOUSING FINANCE AGENCY BONDS John WagnerPartner January 26, 2012

  2. Nature of State Housing Finance Agencies • Unique quasi-governmental financial organizations • Professional staff • Self supporting • History • Initially multi-family programs (HUD § 236, § 8) • National expansion with single family programs • LIHTC administration • Legal Organization • “Authority” – separate instrumentality; most autonomy • “Agency” – less autonomy; separate but substantial state control • “Department” – part of state administration; little autonomy • Preferred federal housing finance program delivery system • Benefit from special programs • Federal tax benefits • SEC exemptions • Revenue Sources • no tax support • program asset “spread” • investment income • program fees • Multiple overseers/stakeholders • HUD/IRS/SEC/States • bondholders/financial counterparties

  3. Bond Legal Structures • General obligation vs. limited/revenue obligation • G.O. bonds secured by pledge of unrestricted assets; also usually a pledge of specific assets • Limited/revenue bonds secured only by pledged assets • “Moral” obligation • Rarely used any more • Open vs. closed (stand alone/conduit) resolutions/indentures • Open – more in the nature of a secured borrowing • Closed (stand alone/conduit) – more of a classic ABS • Statutory Pledge • Affords greater protection and flexibility

  4. Typical Bond Resolution/Indenture Provisions • Requirements for credit of program loans/assets • E.g. – GNMA, FNMA, FHLMC MBSs; FHA insurance; PMI insurance • Investment quality requirements • Keyed to rating agency requirements as well as state law • Cash Flow and Parity tests • Cash Flows based on rating agency projections • Parity test usually well over 100% • Cash Withdrawal Limitations • Usually only excess cash flow plus parity test • Additional bond requirements • Adequate staffing requirement

  5. Program Loan/Assets Credit Protections • Whole loans (SF) • Tax and state law requirements (e.g. – income verifications, no “no doc” or signature loans) • Mortgage insurance (FHA, VA, RD, PMI) • Trend to SF GNMA/GSE MBSs • Multi-family loans • FHA, GNMA, GSE, LOCs • Section 8 • Tax Credits/Low LTV’s

  6. Dodd-Frank Effect • More disclosure • Both upon issuance and continuing • More timely disclosure • More conservative and regulated SF mortgage underwriting • Stronger mortgage credits • But also smaller market • Continued federally favored status • SEC exemptions • Various consumer regulation exceptions

  7. Issues Facing HFA’s • Lack of taxable/tax-exempt spread • Use of SF down payment assistance to offset • 4% LIHTCs and CRA for MF • Smaller national SF housing market • Low investment rates • Increased federal regulation (still favored, however) • Handling expanded federal programs (more fees?) • Still some counterparty risk to deal with

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