HDC leads nation in affordable housing bond financing

By Bendix Anderson

New York City — Emily Youssouf has upset the usual order of things. Usually, one would expect a city’s bond allocating agency to do considerably less business than a state agency.

But Youssouf, the president of New York City’s Housing Development Corp. (HDC) has made her agency into one of the biggest issuers of bonds backed by multifamily affordable housing properties.

HDC issued $1.5 billion in multifamily affordable housing bonds between Jan. 1, 2005, and Jan. 5, 2006, according to Thomson Financial.

But HDC needs to close many more deals if it hopes to complete its part of New York City’s 10-year New Housing Marketplace plan to create or preserve 165,000 units of affordable housing by 2013. Under the plan, HDC has committed to provide financing to create or preserve 45,000 units.

Youssouf charts HDC’s progress toward this goal on a banner hung in the lobby of her downtown Manhattan office, updating the large, red numbers every month: By April, HDC had closed loans that have financed 20,143 apartments since July 2003, exceeding its five-year goal and putting the agency close to halfway to its 10-year commitment.

HDC expects to keep expanding its affordable housing business despite some big changes in the bond financing world.

For example, Youssouf is no longer enthusiastic about mortgages with floating interest rates. “I think it makes a lot more sense to lock [the rate] in,” Youssouf said.

Many financing pros worry that the interest rates on floating-rate loans are likely to rise, especially if the Federal Reserve continues to raise its benchmark rates. The one-year London InterBank Offered Rate (LIBOR) stood at 5.4% at the end of April. That’s up from a low of 1.2% in June 2003, but down from LIBOR’s last peak of 7.4% in May 2000, according to Fannie Mae.

The threat of rising rates didn’t stop HDC from financing hedged, floating-rate loans two years ago when LIBOR was under 2% and even more certain to rise. Still, no hedge can totally protect a borrower from rising interest rates. “There is nothing like a perfect hedge – that does not exist,” Youssouf said. “The risk is always capped.”

At this point, HDC is unlikely to issue more bonds backed by floating-rate loans. “We have a huge amount of hedged, floating-rate debt on our books already,” Youssouf said. “We won’t have more than 10%.”

Even more importantly, floating-rate loans make little sense when short-term rates like one-year LIBOR are higher than fixed-rates like the yield on 10-year Treasury bonds, which was at 5.08% on April 27.

“If there was some benefit, we would look into it,” Youssouf said.

HDC has increased its business even though one of the biggest buyers of affordable housing bonds, Fannie Mae, has left the market.

“They used to make up 80% of the purchasers of long bonds,” Youssouf said.

But Fannie Mae’s investment activities have been sharply limited by Congress after a series of accounting scandals rocked the agency. The loss of Fannie Mae could have sharply reduced the demand for HDC’s bonds. But instead, HDC has found new bond buyers in banks and mutual funds.

“We haven’t seen any significant uptick in the cost of borrowing,” Youssouf said. “In a way, it’s a good thing: You don’t want to be dependent on one purchaser. When Fannie Mae controlled the market, they would set the pricing.”

To help sell debt to these new bond buyers, Youssouf has created an independent credit risk unit at HDC to formally access each loan. “It’s one of the things I’m most proud of,” Youssouf said.

New ideas are also contributing to the agency’s growth. HDC recently became one of the first agencies in the country to refinance the debt on a pool of Sec. 202 properties. The deal provided several affordable projects for elderly seniors with lower interest rates through a single transaction. Pooling the loans lowered the fees for refinancing.

The agency also lowered the interest rate it offered to a military housing project at Fort Hamilton in Brooklyn by separating the bonds backing the project into tranches. The bonds in the highest-risk tranche offered higher yields. Safer, lower-risk bonds offered lower yields.

“I encourage us to be creative and try new things,” Youssouf said. “If Merrill Lynch calls up and wants to do a tranche deal, I think, ‘Why not?’ I mean, I’ve done so many of them.”

A life on Wall Street

“Emily brings with her over 25 years of structuring innovative financing strategies,” said Mayor Michael Bloomberg.

Born in Brooklyn, Youssouf has spent most of her life working in affordable housing. One of her first jobs was writing position papers on affordable housing policy as a young staffer on the Ways and Means Committee of the New York State Assembly.

But Youssouf quickly moved toward Wall Street, with jobs at Standard & Poor’s, Credit Suisse First Boston and Prudential Securities. She was also a managing director in the housing finance department at Merrill Lynch. “We were the most innovative houses on the street,” she said.

In 2000 she started Natlis Settlements, LLC, a boutique financing firm. But by 2003, having survived more than 25 years on Wall Street and the crash of a private plane off the coast of Long Island, Youssouf was planning to retire.

“I didn’t think I was going to be anything, frankly,” she said. That was when Bloomberg asked her to lead HDC.

“I get to utilize all my skills,” Youssouf said. “I’ve gone back to where I started.”