$35 Billion Slated for Local Housing
By Deborah Solomon
The Wall Street Journal
September 28, 2009
The Obama administration is close to committing as much as $35 billion to help beleaguered state and local housing agencies continue to provide mortgages to low- and moderate-income families, according to administration officials.
The move would further cement the government's role in propping up the housing market even as some lawmakers push to curb spending at a time of rising debt.
The effort, which could be announced as early as this week, is aimed at relieving pressure on government-operated housing finance agencies, which have been struggling to find funding amid the downturn. These agencies, or HFAs, are a small part of the housing market but are critical to many first-time and low-income home buyers, who can get lower-rate mortgages through an HFA than they could through a private-sector lender. Rates are typically 0.5 to one percentage point lower than commercial lenders.
Administration officials are concerned that HFAs have largely stopped making new loans, exacerbating the housing market's woes.
Details are still being finalized. The plan requires formal approval from Treasury Secretary Timothy Geithner and the White House.
The program could be in place for as long as three years, and would involve the administration essentially buying the debt that these housing agencies rely on for financing.
The Treasury Department, along with government-controlled mortgage giants Fannie Mae and Freddie Mac, is expected to buy as much as $20 billion of new housing bonds issued by the state agencies. It will also provide $15 billion in additional funding, as needed, to help the agencies continue to use a type of cheap, short-term financing.
If the housing agencies default on their debt obligations, taxpayers could lose out. The Treasury plans to charge fees to agencies that want to sell new long-term bonds to the government based on their individual risk factors, to help reduce the risk of default and protect taxpayers.
Money for the programs will come from Fannie Mae and Freddie Mac and from the Treasury, using its authority under the 2008 Housing and Economic Recovery Act.
While policymakers are beginning to unwind some of the other emergency programs extended to financial markets during the financial crisis, housing remains a weak spot that some view as too fragile to survive without significant government backing.
President Barack Obama said in February his administration would find a way to help support state housing finance agencies. Such a move has been pressed by state and local politicians and by housing advocates. House Financial Services Chairman Barney Frank, a vocal supporter of such housing initiatives, was the author of legislation earlier this year that closely mirrors the administration's plan.
The effort could trigger criticism, particularly from Republicans, for aiming federal funds at low- and moderate-income homeowners instead of other troubled areas, such as small businesses or commercial real estate.
The move also comes as some lawmakers are advocating less spending. Already, 40 senators are pushing to allow the Treasury's $700 billion bailout fund to expire and direct any remaining funds to pay down the nation's ballooning debt.
Rep. Scott Garrett (R., N.J.) said while he hadn't seen exact details of the plan, he questioned whether the government should be aiming more money at the housing market.
"I don't know that we can continue this pattern of having the federal government being the lender of last resort," he said. "Most people are calling on the government to lay out an exit strategy. This just gets us further into the quagmire."
More broadly, the move is an attempt to bolster the role of government in encouraging homeownership, especially among low-income Americans. Considered well-meaning by many, the principle has been blamed by others for fueling the housing boom that led to last year's financial meltdown.
Some state HFAs guarantee loans while others originate mortgages. The agencies also develop affordable multifamily housing or provide financing to developers of such housing.
To qualify for an HFA loan, borrowers must have certain income levels -- generally a percentage of a state's median income -- good credit scores and verifiable income. The criteria differ by state.
The agencies typically fund about 100,000 mortgages a year. In 2007, state HFAs issued $17 billion in bonds that funded 126,611 mortgages and some agencies were on track to exceed that level in 2008 before credit markets froze.
In total, HFAs have funded mortgages for about 2.6 million families, according to the National Council of State Housing Agencies. That's about 4.6% of the 56 million first-lien mortgages outstanding.
The agencies aren't in trouble because of subprime lending or bad loans. Rather, they have found it increasingly hard to find investors willing to buy the mix of tax-exempt and taxable bonds that HFAs sell to fund mortgages.
Interest rates have surged on municipal bonds, making it harder for the agencies to offer their less-expensive mortgage rates to borrowers. As a result, most HFA lending has come to a halt. California and Texas have suspended their lending activities altogether.
Ken Giebel, marketing director for California's state housing finance agency, CalHFA, said federal support is critical if agencies like his are to continue funding low-rate mortgages. "Our basic mission is to give moderate- to low-income people low interest rates, but that can't happen," when borrowing costs are so high, Mr. Giebel said.
To help these agencies continue lending, the administration will commit to purchasing up to $35 billion of new long-term bonds and shorter-term securities.
The Treasury will try to jump-start new mortgage originations by purchasing up to $20 billion of new, fixed-rate bonds issued by housing agencies. Under the program being discussed, Fannie Mae and Freddie Mac would purchase the bonds and securitize them, then sell them to the Treasury.
The effort is expected to help lower borrowing costs since the government would buy the bonds at interest rates more favorable than housing finance agencies can get in the private market.
A second effort will set aside $15 billion to target an inexpensive type of financing used by many housing agencies to lower borrowing costs. Variable-rate demand obligations, or VRDOs, are a type of debt used to fund long-term bonds and typically carry interest rates several percentage points lower than regular housing bonds. Housing agencies sell them to investors who resell them daily, weekly or monthly at low short-term rates. About 38 HFAs have $30 billion in such debt outstanding.
The likely buyers have vanished, however, in part because many of the intermediaries that used to resell the bonds have been downgraded by credit-ratings firms and so investors are unwilling to do business with them. When an investor that's bought VRDOs thinks they can't be resold, it can demand that agencies pay off the debt under accelerated schedules and at high interest rates.
To ease the strain, Fannie Mae and Freddie Mac will temporarily act as a buyer of last resort for this debt. The administration hopes this will encourage debt holders to hold onto the debt, forestalling the need to pay it back quickly.
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