GSE News

Fannie Mae stops buying tax-exempt bonds

By John Zipperer

(Affordable Housing Finance, June 23, 2005) — Mortgage finance giant Fannie Mae has pulled back from the tax-exempt bond market for an indefinite amount of time, according to reliable sources. They cited “a long-standing tax rule” that limits corporations from investing in tax-exempt obligations amounting to more than 2% of their assets.

The move is attributed wholly to tax treatment of tax-exempt bond investments and does not reflect the government-sponsored enterprise’s (GSE) view of the creditworthiness of bond projects, according to insiders. Fannie Mae is near the 2% limit, so the only way it will increase its tax-exempt bond purchases is if its overall portfolio grows.

"I think it's going to be a temporary thing," said John Murphy, executive director of the National Association of Local Housing Finance Agencies (NALHFA). He wouldn't predict when Fannie would return to buying tax-exempt bonds, but he said it's purely a tax-treatment issue. He estimated Fannie's bond holdings at $20 billion.

Fannie’s position on the sidelines, even temporarily, could have a significant impact on the tax-exempt bond market, in which it is the largest corporate purchaser. Exact investment figures were not available. But the NALHFAhas noted in recent years that Fannie Mae and its fellow GSE, Freddie Mac, together make up 25% of the market for these bonds and “their absence would raise borrowing costs for local housing finance agencies.” Murphy said Freddie Mac is still below the 2% level and has actually increased its purchases of tax-exempt bonds recently.

The bond move, which involves Fannie’s purchases of the bonds in private placements, will not affect its investments in low-income housing tax credits, which will continue. It also will not affect the GSE’s credit-enhancement activities for bonds that are publicly sold.

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