Analysis of the Impact of the Treasury/Government Sponsored Enterprises New Issue Bond Purchase Program - “But for NIBP”

This analysis documents the very positive impact that NIBP has had in expanding affordable housing opportunities for first-time homebuyers and lower income renters as well as stimulating economic revitalization. NIBP has created thousands of direct and indirect jobs in construction and real estate. In addition, NIBP has helped enhance the financial strength of local HFAs allowing them to preserve their local lending infrastructure on the single-family side, and for many on the multifamily side, to bolster their balance sheets enabling them to subsidize additional affordable housing.

Background

On October 19, 2009 the Obama Administration announced its “HFA Initiative,” whereby the U.S. Department of Treasury committed to purchase $15.3 billion in tax-exempt single-family and multifamily housing bonds issued by local and state Housing Finance Agencies (HFAs). The bonds have been or will be, bundled into securities by Fannie Mae and Freddie Mac and sold to Treasury. Under the program, HFAs were able to borrow at the Treasury’s cost of funds, which, with the addition of fees to compensate the participants in the bond transaction,produced an interest rate that was significantly below convention interest rates and allowed the HFAs to be competitive in the marketplace. HFAs have largely been unable to sell their bonds in the capital markets since 2008 because conventional interest rates have been so low and without NIBP that would continue to be the case. Because the capital markets for housing bonds has not returned a Round 2 of NIBP is highly warranted.

As Treasury has indicated based on data compiled by its financial advisor State Street Global Advisors, NIBP to date has already financed 100,000 home purchases by first time homebuyers and resulted in the creation or preservation of 24,000 affordable rental units.

EXECUTIVE SUMMARY

Based on the following analysis and the attached tables and Exhibits, it is conservative to estimate that NIBP had the following impacts:

  1. Rate Benefit
  1. The net benefit in interest rates from NIBP varied depending on when bonds were issued but was well over 1% compared to an all-market tax-exempt issue.
  1. This net benefit fluctuated, as intended, depending on the spread between Treasury and tax-exempt bond yields. That differential is now at its widest since early 2009, indicating how crucially important it is to provide a new round of NIBP.
  1. Single-Family without NIBP
  1. HFAs would have issued virtually no single-family bonds without NIBP, since rates would have been well above the market and the negative arbitrage that would have been produced was prohibitive.
  1. For borrowers – without the combination of lower rates on HFA mortgages, limits on lender charges, downpayment assistance and homebuyer counseling – we conservatively estimate less than10% of the 100,000 first time homebuyers who utilized NIBP would have otherwise been able to afford the home in which they now live.
  1. This means that NIBP generated more than $10 billion of home purchases by first-time buyers that would not otherwise have occurred. Purchases by first time buyers are particularly important in helping stabilize the bottom end of soft housing markets, in reducing inventories and in enabling existing homeowners to move up. They are thus critical for stabilizing prices.
  1. Multifamily without NIBP
  1. Without NIBP, tax credit projects would have required at least 10% and likely 15% more public subsidy funds in order to be feasible.
  1. The benefit of NIBP to these projects was of the same magnitude as an increase in tax credit pricing from 70 cents to 90 cents (e.g. the very reason Congress instituted the Tax Credit Assistance Program).
  1. Given limited subsidy sources, at least one quarter of the 24,000 units financed by NIBP would not have proceeded.
  1. Impact of NIBP in Current Housing and Financial Market
  1. NIBP was able to have these impacts because the yields, as intended, provided a positive spread to the Treasury and were approximately 85% to 90% of GNMA yields. Providing NIBP Program Bond rates below GNMA yields were the key to making both single-family and multifamily NIBP successful.
  1. The same conditions that led to the President’s support for NIBP in 2009 are equally present today:
  1. an extremely weak economy,
  1. recovery efforts undermined by the continuing extraordinary weakness in more than half of all housing markets,
  1. need to stabilize home prices and stimulate homebuying, and
  1. tax-exempt bond rates above Treasury rates, making publicly sold tax-exempt bonds for housing very difficult or impossible without NIBP.
  1. Tax-exempt rates are the highest percentage of treasuries in 3 years with 10 year MMD at times this December at 112% of 10 year treasuries and 30 year MMD at 130% of 30 year treasuries, far higher than at any time since NIBP was created. Exhibit I shows this dramatically. By comparison, from Jan. 2006 through the summer of 2008, the 10 year MMD averaged 84% of 10 year treasuries. NIBP is precisely valuable when this imbalance occurs.
  1. With the ongoing European debt crisis creating a continuing international flight to treasuries (and to federally-backed debt such as GNMA’s), NIBP is needed more in 2012 than ever before.
  1. NIBP Terms and Impacts of a New Round
  1. This analysis was based on the NIBP terms utilized during the program in 2010 and 2011 which led to the use of more than $11 billion of Program Bonds and more than $15 billion of overall lending by establishing Program Bond rates at levels of approximately 85% of GNMA yields.
  1. We understand that for the limited number of issuers who were not able to fully utilize their allocations, Treasury [in the recently announced extension of NIBP 1] needed to establish higher rates for funds being released in the 3rd year of such escrows to make up for the extension of Escrow Bonds for 2+ years at short-term rates. Since a new round of NIBP would not involve any such past short-term investments from several years ago, such changes would not and should not apply.
  1. Thus the impacts of a new round of NIBP on the same terms as the initial round would have the same relationship to GNMA market yields and can be expected to have similar benefits for borrowers and the economy as the initial round of NIBP in 2010 and 2011.
  1. In addition, given the two years of successful utilization and familiarity with this program and how to effectively leverage it, HFAs are likely to be much faster and more efficient in utilizing such funds.
  1. Finally, Exhibit V shows graphically what difference NIBP has made in the rates HFAs can offer, and how – without a second round – tax-exempt all-market issues are at rates far above GNMA yields and HFAs will not be able to continue playing a key role in efforts at housing recovery.

SINGLE-FAMILY

For single-family housing, very little of this activity would have occurred without NIBP. This is shown in several ways:

  1. ‘But For’ Impact on Interest Rates. Table 1 below(and also Exhibit II) shows a detailed analysis of the interest rate impact for a major single-family issuer. The table shows the rate impact on each of 5 financings from September 2010 through November 2011, which is the period when almost all NIBP issues nationally were priced. Since the NIBP rates on any given date for all issuers were based on the same 10 year Treasury and since publicly sold tax-exempt bond yields on any given date are virtually the same for all HFAs in the same rating category, the difference between these – the net benefit of NIBP – would generally be the same for all HFAs.
  1. Net Benefit of 1%+. Table 1 measures the net benefit of NIBP at each pricing as the difference between the yield that would have been required for an all-publicly sold market issue versus the yield on a 40% market / 60% Program Bond issue.[1] This differential fluctuated as spreads between treasuries and municipal bonds fluctuated. Historically, tax exempt yields before the financial crisis had been about 85% of treasuries.
  • When those spreads were relatively tight, as in Sept 2010 and June 2011, the net benefit of NIBP was about 0.95% in annual interest rate.
  • When spreads are wider because of an international flight to quality, as in August and again in December due to the European financial crisis, the NIBP net benefit was much greater, about 1.51%. Perhaps most important, this is the case today going into 2012.
  • The average benefit in these five pricings was about 1.25%.

Table 1. Minnesota Housing Single-Family

Pricing Date / September 2010 / March 2011 / June 2011 / August 2011 / November 2011 / Average
NIBP Yield for AAA Program Bonds / 3.01% / 3.55% / 3.55% / 2.48% / 2.49%
Yield on 60% Program / 40% Market Bonds / 2.98% / 3.57% / 3.35% / 2.75% / 2.85%
Yield on All-Market Bond Issue / 3.94% / 4.84% / 4.50% / 4.26% / 4.20%
Net Benefit / 0.96% / 1.27% / 1.15% / 1.51% / 1.37% / 1.25%
Comparison: 10 Year MMD as % of 10 Year Treasury / 89.5% / 97.9% / 87.4% / 98.7% / 112.4% / 97.2%
  1. ‘But For’ Impact on Loans from HFAs. Based on this data the interest rate that HFAs would have had to charge borrowers from all market-bond issues would have been 1% higher. This would have consistently resulted in loan rates above market rates, so that HFA issuers would not have made very few, if any, of these 100,000 loans.

Negative arbitrage on publicly sold bonds would have also made normal tax-exempt bond issuance prohibitive; only the hedge provided by NIBP’s critical rate-lock feature, and for small issuers the $25 million small issue exception, enabled issuers to finance loans at all.

  1. ‘But For’ Impact on Borrowers. HFAs were able to provide four identifiable benefits to homebuyers from being able to make these loans. These benefits were critical to the homebuyers, since those assisted by HFAs were those who would have had the most difficulty in buying a home using conventional financing.

In the NALHFA report we provided to you at our meeting, “Local Housing Finance Agency Participation in the Treasury/Government Sponsored Enterprises New Issued Bond Purchase Program: A Tremendous Story of Success” (November 2011) an analysis of more than 7,500 homebuyers indicated that 97% were first-time homebuyers. These are precisely the borrowers who help reduce the inventory of both existing and newly constructed homes and thus help stabilize home prices and neighborhoods.

Moreover, these first-time homebuyers would have had the most difficulty in buying a home from both an income and downpayment perspective. The benefits that HFAs provided these borrowers were:

  1. Affordability. Based on detailed information regarding homebuyers using local NIBP programs, the average income was 78% of area median. This indicates that NIBP financed precisely those homebuyers for whom the savings from below market mortgage rates was most crucial in being able to afford a loan, and willing to do so in this weak economy.

Perhaps the most useful way to measure the relative affordability is to compare the NIBP rate with new issue GNMA yield, since this reflects how the most competitive, FHA mortgages are priced. In the initial design of NIBP, the intent was for NIBP to provide a yield of approximately 80% to 90% of GNMA yields, helping assure that mortgage loan rates would be competitive and make a crucial difference in increasing homebuying.

Table 2. NIBP Single-Family Yields Compared to GNMA

Pricing Date / September 2010 / March 2011 / June 2011 / August 2011 / November 2011 / Average
NIBP Yield for AAA bonds / 3.01% / 3.55% / 3.55% / 2.48% / 2.49% / 3.02%
GNMA yield / 3.45% / 3.98% / 3.75% / 3.18% / 2.85% / 3.44%
NIBP as % of GNMA / 87% / 89% / 95% / 78% / 87% / 87%

Exhibit V shows that without NIBP, tax-exempt all market issues would produce mortgage rates far above GNMA yields rather than slightly below them.

  1. Limiting Costs to Borrowers. As indicated in articles in the Wall Street Journal and other sources, private lenders throughout the country have significantly increased their charges to borrowers during the financial crisis, taking advantage of low Treasury and GNMA yields, to require higher points in cash or significantly higher spreads. HFAs, however, set standard limits on the modest cash fees that lenders can charge borrowers on their loans, helping assure that benefits are passed on to the borrower.
  1. Downpayment Assistance. More than half of HFAs provided downpayment assistance to borrowers. For many local HFAs in fact, virtually all loans had downpayment assistance from local funds. In choosing these loans, borrowers indicated how critical such assistance was in being able to buy their first home, since they were given a choice of lower rate loans without downpayment assistance. For example, 91% of the borrowers assisted by the Southern California Home Finance Authority needed downpayment assistance more than an even a lower interest rate.

NIBP was essential for all of these loans. Under FHA guidelines, downpayment assistance can now only be provided by state and local governments in conjunction with mortgages they finance, and other sources have been prohibited.

  1. Homeownership Counseling. Most HFAs also provide and/or require homebuyer counseling for first-time buyers, helping inexperienced potential borrowers to understand the homebuying process and the ongoing responsibilities of homeownership, before applying for a loan.

As a result of this combination of benefits, and in comparison with the major Federal Reserve (and past Treasury) purchases of more than $1 trillion of Fannie Mae and Freddie Mac MBS’ which lowered interest rates for existing homeowners seeking to refinance but largely did not assist first time homebuyers, we believe that the vast majority of these borrowers would not otherwise have purchased a home.

  1. ‘But For’ Impacts on Units Financed. The NIBP structure provided that, except for single-family issuers with allocations of $25 million or less, HFAs needed to leverage NIBP with at least 40% market bonds. The result nationally was that more than $15 billion of single-family mortgages were financed. This resulted from combining the market bonds together with the $9.3 billion of single-family Program Bonds by the end of 2011. (This takes into account both small issuers not subject to the market bond requirement and other HFAs who increased their market bond percentage.)

As an example, Minnesota used its $260 million single-family allocation to leverage almost $300 million in market bonds, thereby increasing the number of homebuyers assisted from 2,200 to 4,600. In addition, many small issuers leveraged their $25 million allocation by selling GNMA securities from their initial loans that had been hedged by NIBP. This increased local HFA lending by approximately $265 million or 25%.

  1. ‘But For’ Impacts on Neighborhoods With High Foreclosure Rates. One of the great benefits of NIBP (compared to simply purchasing MBS on a national basis) is the impact on neighborhoods and home prices. This comes partly from assuring that all loans are used for home purchases, rather than refinancings, that they are distributed across counties and states including those hardest hit by the ongoing foreclosure crisis and from the ability of HFAs to particularly target these areas. One HFA for example provided more than 43% of its more than $500 million of NIBP-assisted single-family lending for home purchases in the 1/8 of state zip codes with the highest foreclosure rates. No other initiative, whether private or federal, provides the same tools for providing this critical benefit.

Conclusion. As a result of NIBP, Treasury and the GSEs were able to assist more than 100,000 first time homebuyers, less than 10% of whom would have otherwise been able to obtain financing from HFAs or in the marketplace to purchase their home as outlined above. Moreover very few of these borrowers would have received conventional mortgages for the reasons outlined above.

It is possible that some additional HFAs might have chosen to issue Mortgage Credit Certificates (MCCs) if NIBP had not been available, but given historical experience the issuance of MCC’s has been a very small percentage of bonds. It is also true that some state HFAs, but not locals, could have moved forward in selling GNMAs in the private market, but the fact that 53 HFAs have used 100% of single-family allocations indicates how essential it was and will continue to be to have single-family NIBP available.

MULTIFAMILY

  1. ‘But For’ Impact on Interest Rates. As with single-family, we have analyzed the net effect on bond yields by using an active state multifamily issuer who priced bonds 4 times between November 2010 and December 2011. In this case, the issues were all the same in providing 40 year FHA risk-sharing loans, making it easier to compare the net benefits on each issue. Exhibits III and IV measure the rate benefit on each issue as the difference between what an all-market bond issue would have been versus an all-Program Bond issue (since NIBP allows 100% of a multifamily issue to be Program Bonds).[2] The impact on each issue fluctuated depending on the spread between 10 year treasuries and long-term tax-exempt bond rates. For this risk-sharing issuer, the average benefit in bond yield was slightly over 2%.

Table 3. Multifamily Issuer (Risk-Sharing)