Responding to credit market problems that have hampered housing finance agency (HFA) bond programs, the Treasury Department has announced an initiative to support new housing bonds and help HFAs carry existing bonds.

The program will work through Fannie Mae and Freddie Mac, making use of authority granted to Treasury by the Housing and Economic Recovery Act (HERA) of 2008 to support the government-sponsored enterprises (GSEs). It will provide backing for both single-family and rental housing bonds.

“This initiative is critical to helping working families maintain access to affordable rental housing and homeownership in tough economic times,” says Treasury Secretary Timothy Geithner. “The administration aims to help HFAs jump-start new lending to borrowers who might not otherwise be served and to better support the financing costs of their current programs.”

The initiative has two components: a new issue bond program (NIBP) to support fresh agency bond activity and a temporary credit and liquidity program (TCLP) to reduce financing costs for existing bonds.

Under the NIBP, Treasury will purchase Fannie Mae and Freddie Mac securities that are backed by new homeownership and rental housing bonds acquired by the GSEs. HFAs will generally be able to issue bonds equal to the amount they normally would issue under the volume limits set by Congress, but they have been unable to sell because of market conditions.

HFAs desiring to participate in the program must develop a request in consultation with Treasury, Fannie Mae, and Freddie Mac, indicating the amount of bonds they want to issue. The requests generally should not exceed what the HFAs would have been allocated through 2010, using the HERA formula for 2008. HFAs can ask to issue single-family bonds, multifamily bonds, or both.

Multifamily bonds will be subject to a program-level cap, and they can be issued to finance either single projects or multiple projects approved or guaranteed by Fannie Mae, Freddie Mac, or the Federal Housing Administration (FHA).

All bond issuances and Treasury securities purchases must be completed by Dec. 31, 2009, and the bond proceeds will be escrowed to fund new mortgages in 2010. To leverage the Treasury financing, HFAs will be required to sell shorterterm bonds in the private market equal to 40 percent of their aggregate bond proceeds, with the NIBP bond purchases covering the remaining 60 percent.

The TCLP, which will be administered by Fannie Mae and Freddie Mac, will provide replacement credit and liquidity facilities to help reduce HFA costs in maintaining their existing bond financing. Treasury will backstop the program by purchasing a participation interest in the facilities, which must be arranged through the GSEs by Dec. 31.

HFAs will pay fees to cover program costs and risks. The TCLP fee will increase over time, as an incentive to HFAs to transition to private market financing as soon as possible.

“We are pleased that the federal government recognizes the critical role that HFAs play in the housing and economic recovery,” said Susan Dewey, executive director of the Virginia Housing Development Authority and president of the National Council of State Housing Agencies. “This proposal allows HFAs to continue offering below-market-rate financing to first-time home buyers, and we are ready and well-positioned to immediately begin implementing these critical programs.”

HUD proposes to eliminate tax credit escrow for FHA projects

The Department of Housing and Urban Development (HUD) has issued a proposed regulation that would prohibit the requirement to escrow low-income housing tax credit (LIHTC) proceeds to guarantee the completion of FHAfi nanced projects.

The rule would implement a HERA provision.

HUD regulations generally require the mortgagor to deposit with the mortgagee cash deemed by the FHA commissioner to be sufficient, when added to the mortgage proceeds, to ensure completion of the project and to pay the initial service charge, carrying charges, and legal and organizational expenses.

For LIHTC projects, HUD's practice has been to require a substantial portion of the tax credit equity to be escrowed at initial endorsement for possible use over the life of the project. Since borrowers may not have received the tax credit equity proceeds at that point, costly bridge financing has been needed to meet the escrow requirement.

The proposed rule would prohibit the commissioner from requiring the mortgagor to escrow tax credit proceeds or provide any other form of security, such as a letter of credit, to ensure project completion. As a result, according to HUD, the need for borrowers to obtain bridge loans will be substantially reduced, and multifamily housing will be made more available and affordable.

Although the HERA provision applies only to LIHTCs, the HUD regulation would extend the ban on escrow requirements to New Markets and historic rehab tax credit projects. New Markets Tax Credit proceeds also would be added to the types of funding that don't have to be fully disbursed before FHA mortgage funds can be drawn down.

Congress approves rural funds

Congress has approved a fiscal 2010 appropriations bill (H.R. 2997) that provides $69.5 million for direct Sec. 515 rural rental housing loans and $129.1 million for Sec. 538 guaranteed multifamily loans. The Sec. 538 loans can't be subsidized, and no guarantee fee can be charged.

The bill also includes $980 million for rural rental assistance for Sec. 515 and farm labor housing projects, for one-year contracts, with at least $2 million for aid for newly constructed Sec. 515 units and $3.4 million for new farm labor housing units. It also provides $43.2 million for multifamily housing revitalization.

Barry G. Jacobs is editor of Housing and Development Reporter, the nation's premier source for in-depth, factual coverage of all aspects of affordable housing and community development. The two-part publication includes informed reports and insightful analyses in “HDR Current Developments,” and an up-to-date compilation of essential documents in the “HDR Reference Files.” Jacobs is also the author of the annually updated HDR Handbook of Housing and Development Law. For more information, call (800) 723-8077.