VHDA is using a new federal bond purchase program, provided by the U.S. Department of the Treasury (Treasury) and enacted through government-sponsored housing enterprises Fannie Mae and Freddie Mac (GSEs). This program, entitled the Single Family New Issue Bond Program, was created to help VHDA and other state and local housing finance agencies acquire cost-effective mortgage loan capital. Although VHDA is currently able to access the housing bond market, the rates we obtain on our tax-exempt single family bonds are not low enough to generate an attractive borrower interest rate in comparison with rates offered by the GSEs. This is because Treasury’s purchase of GSE securities is holding their mortgage rates artificially low, while at the same time, the tax-exempt bond market is underperforming.
Using this new program, Treasury will fund the purchase of tax-exempt bonds issued by HFAs. Bonds issued by HFAs will actually be purchased by the GSEs. The GSEs will then aggregate the bonds and create a new security that will be eligible for Treasury purchase.
The new program consists of two financing components. The first is HFA bonds that will be purchased by Treasury via the GSEs (treasury bonds). The second component is HFA market bonds sold directly to investors. VHDA will issue $482.9 million in treasury bonds and $322 million in market bonds. This will provide just over $800 million in total bond proceeds to finance our single family mortgage loans over calendar year 2010.
Treasury established the $482.9 million treasury bond amount based on an application and allocation process. The $322 million in market bonds is two thirds of the treasury bond amount, as required under the new program. These treasury bonds are initially being issued bearing short-term interest rates. On no more than three dates during calendar year 2010, VHDA may elect to convert the interest rate on all or a portion of the treasury bonds to a fixed tax-exempt rate. Both the fixed-rate treasury bonds and the market bonds will use the state’s private activity bond volume cap.
In the short-term rate mode, the interest rates on the treasury bonds will be primarily based on the earnings on the corresponding short-term investments (expected to be approximately 0.10 percent). Should we elect to convert to a fixed rate, interest on the treasury bonds will be based on the market yield on a 10-year treasury bond plus 0.75 percent. This rate begins 60 days after the election to convert.
The new program also requires a pro rata portion of all receipts of principal on the mortgage loans originated with proceeds of the treasury bonds and market bonds be used to redeem treasury bonds. This prevents VHDA from recycling the pro rata portion of loan prepayments into new mortgage loans. The program also:
- Prohibits the future use of variable rate debt in any form other than the treasury bonds.
- Limits withdrawal of assets from the lien and pledge of the bond resolution.
- Requires treasury bonds proceeds be exclusively pledged to treasury bonds bearing short-term interest rates, until such proceeds become available for mortgage loans following issuance of the market bonds.
For these reasons VHDA has elected to issue the treasury and market bonds under a new general bond resolution adopted by our Board of Commissioners on December 2, 2009. This should provide us with a reliable, cost-effective source of capital to fund single family mortgage lending in 2010.