NCSHB 2015 Educational & Development Workshop

The Latest Single-Family Lending Executions

Richard Godfrey

cfX Incorporated55 Broadway, Suite 2608

New York, NY 10006212-431-5800

richard.godfrey@cfX.com

cfX - Optimizing Affordable Housing Finance

Single Family Executions

Structured Tax-exempt Bonds (MRBs) This is the way that most HFAs operated for decades - issuing bonds in various maturities and structures, making loans in accordance with IRS requirements and sometimes creating mortgage backed securities. When loans are repaid or prepaid, agencies can call out their highest cost debt or make new loans at no additional cost. Periodic refunding of bonds offers opportunities for additional agency revenues.

Tax Exempt Mortgage Pass-through Bonds These are bonds in which borrower mortgage payments and pre-payments get passed along to the investors. Investors may offer lower interest rates because agency discretion on managing payments is eliminated.

TBA (To Be Announced) Market Agencies collect loans from participating lenders and convert them into mortgage backed securities (MBSs). They then sell these MBSs to investors just like any other major lender. Mortgage payments go via a servicer to the MBS investor. By increasing interest rates, agencies can get premium payments to fund down payment assistance.

Structured Tax Exempt BondsProsCreates substantial net worth through optimal management of liabilitiesProvides long term income streamProvides opportunities for portfolio leveragingProvides resources for agency activities including down payment

assistanceHistoric reason for agency existenceConsRequires active management for best performanceRequires rating agency and tax complianceInvolves market, arbitrage and cost of issuance riskRequires volume cap and doesn’t allow mcc’s

Mortgage Pass-through BondsProsPreserves tax exempt bond advantageRating agency, portfolio management and tax compliance is

simplerProvides greater assurance to investors on payment timingProvides predictable income streamConsRequires a pool of interested investors – works best in high tax

statesNo opportunity for portfolio optimization and balance sheet

leveragingRequires volume cap and doesn’t allow mcc’sSensitive to market pricing

TBA Market

ProsSteady access to highly liquid marketUp-front 1-time payment to agencyNo bond or tax issuesNo long term bond riskConsNo long term income No portfolio growthNo creation of agency assetsNo significant rate advantage over private sectorInterest rate risk until loan is deliveredRaises questions about need for an independent HFA

HFA Weekly rate survey*

State A 3.125State B 3.375States C,D,E 3.5States F 3.625States G,H,I 3.75State J 3.875

Freddie Mac Survey Average (no MI and 0.6 points) 3.91Mortgage News Daily Survey Average (no MI) 3.96

States K,L,M,N 4+*Published rates for FHA loans w/ 0 points and w/out DPA for week of August 10, 2015

Key MRB Observations

State HFAs have helped 3 million families become homebuyers with MRBS (1)

$277 billion in MRBs issued by State HFAs (1)

HFA balance sheets are down 11.4% from 2010 (2)

HFA equity equaled $26.9 billion in 2014 (2)

In 2012, 72% of HFAs said Down Payment Assistance was the top benefit they provided (3)

(1) NCSHA Factbook 2013(2) Fitch Report March 2015

(3) 2012 Survey by Stephanie Moulton and Roberto Quercia, “Access and Sustainability for First-time Homebuyers:The Evolving Role of State Housing Finance Agencies”

Recent Issue ObservationsOver the past 2 months, cfX has been working on MRB transactions with 14

different HFAs. Over the course of this work, I have made a few observations worth noting:

• HFAs are paying much more attention to tax-exempt bond

issuance than they have for many years

• More HFAs are rebuilding bond portfolios in response to concerns about public purpose and long term income

• Increased attention to variable rate debt – value, risks, ratios, internal hedging

• More restructuring refundings

Additional Observations

• Down payment assistance is a driving force at HFAs

• Several HFAs have concerns about short-term income loss if TBA is reduced

• HFAs are paying more attention to lender relationships

• Maximum financing flexibility is important!

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Optimizing Affordable Housing Finance

cfX is the country’s leading provider of municipal advisory services to HFAs and has, over the past 4 years, provided advice in connection with the issuance of more than 35% of state housing bonds.

cfX is dedicated to the mission of:Providing affordable housing opportunities for all Americans;Advancing the role of state Housing Finance Agencies in providing affordable homes; Helping HFAs to optimize their financial and programmatic success.