Why Treasury Should Extend the New Issue Bond Program
Expiration in 2012 Would Reduce Access to Affordable Housing
SOURCE: AP/Bill Sikes
Our still-ailing housing markets need all the first-time homebuyers and affordable rental housing investors we can find. The New Issue Bond Program, which the Department of the Treasury launched in 2009 to help state and local housing finance agencies continue financing housing for working families during the housing crisis, is set to expire at the end of 2011. The program’s imminent expiration threatens access to affordable rental housing and homeownership for many of those hardest hit by the housing crisis.
Fortunately, Treasury has the authority to extend the program beyond its current deadline. With half of all American renters devoting more than a third of their income to housing alone, and with private lenders writing off struggling communities and households that the housing finance agencies are uniquely able to serve, Treasury should extend the existing authority of the New Issue Bond Program so that it remains available through at least the end of 2012.
The New Issue Bond Program “has helped housing financing agencies continue their sustainable homeownership and rental housing financing activities in an economic climate when such activity would not have been possible otherwise,” said Barbara Thompson, executive director of the National Council of State Housing Agencies. “The New Issue Bond Program has been a key element helping to stabilize housing markets and finance homes for tens of thousands of families.”
Housing finance agencies are state-chartered institutions that provide financing for affordable housing for low-income households. They emerged in the 1960s in response to the failure of private lenders and developers to finance affordable, low- and moderate-income housing. Today there are more than 50 state housing finance agencies and local housing finance agencies operate in cities across the United States. With an intimate knowledge of local housing markets, housing finance agencies are uniquely positioned to responsibly underwrite mortgages—often with down payment assistance—for low-income, first-time homebuyers, and finance the development of multifamily affordable rental housing to meet the specific needs of local communities often overlooked by mainstream financial institutions.
To fund their activities, housing finance agencies borrow money in the tax-exempt bond market by issuing mortgage revenue bonds and multifamily housing bonds. Because the interest income from the bonds is exempt from federal income taxes, individual investors are willing to purchase the bonds at lower interest rates. These lower borrowing costs allow housing finance agencies to turn around and use these proceeds to make loans for affordable housing at below market rates.
Since their inception, multifamily housing bonds have helped finance the creation of nearly 1 million affordable rental units, and mortgage revenue bonds have funded low-cost mortgages for more than 4 million low-income families. But when the housing market dropped off a cliff during the financial and housing crises in 2008, so too did investor demand for these housing bonds. This occurred for several reasons. First, investors did not want to purchase assets closely linked to the housing market. And second, investors began to shy away from tax-exempt bonds in general due to credit downgrades of the bond insurance companies that backed many of these bonds.
By October 2009, when President Barack Obama unveiled the New Issue Bond Program, housing finance agencies were struggling to maintain access to the tax-exempt bond market, with bond issuance dropping to one-fourth of what it had been in prior years. Without sufficient access to the tax-exempt bond market at competitive rates, housing finance agencies’ ability to provide low-cost financing for affordable housing was put in jeopardy.
To help housing finance agencies through the difficult market conditions, Treasury created the New Issue Bond Program. The program authorizes the two housing finance giants now in government conservatorship, Fannie Mae and Freddie Mac, to securitize housing finance agency bonds and sell them to Treasury at below market rates while maintaining private-market discipline by requiring simultaneous issuance of a portion of the housing bonds in the private tax-exempt market.
The New Issue Bond Program has been a success. In maintaining access to the longer maturity tax-exempt market at low rates, it allowed housing finance agencies to continue funding their affordable mortgage programs. All told, $15.3 billion in housing finance bonds were authorized to be issued through the program, some of which have already been used to finance low-cost mortgages on approximately 60,000 single-family units and affordable financing for the development of 7,800 multifamily units (as of the second quarter of this year).
General state and local government tax-exempt issuers have recently struggled to access the tax-exempt market but issuances of housing finance bonds have remained relatively stable—a sign that the program has worked as intended. And the program is inexpensive to taxpayers. The cost to administer the program and to cover any losses under a wide range of plausible scenarios is covered by fees paid by participating housing finance agencies to the Treasury.
Unfortunately, the program’s expiration on December 31, 2011, spells trouble for the financing of housing for working families. As it stands, it is unlikely that more than three-quarters of the bond proceeds will be used by the end of this year because housing finance agencies need to take time to responsibly underwrite mortgages. If the deadline is not extended, these agencies will be required to use the proceeds to purchase the outstanding bonds.
To continue their financing operations, they will be forced to borrow primarily from the private tax-exempt bond market, which remains weak. As of July, marketwide issuance levels were down 39 percent, and investor demand for longer maturity bonds remains low today. In a report released in October, Moody’s Investors Service noted that housing finance agencies’ access to the tax-exempt market at affordable rates is expected to become more difficult when the program expires.
The program’s expiration is particularly worrying given the current need for affordable rental housing and the tight credit conditions in the communities hardest hit by the housing crisis. A recent study by Harvard University’s Joint Center for Housing Studies found that the percentage of renters who spend more than half of their monthly income toward housing is at its highest level in 50 years. According to the Federal Reserve’s Senior Loan Officer Opinion Survey, mortgage lending remains tight for borrowers. This is especially so for low- to moderate-income neighborhoods that were disproportionately harmed by the housing crisis.
Fortunately, Treasury has the power to extend the existing authority of the New Issue Bond Program so that it remains available through the end of 2012. Doing so would provide continued stability to housing finance agencies during a period of prolonged distress in the housing market and weakened demand from investors for longer-maturity, tax-exempt housing bonds. But most importantly, it would allow for the continued financing of affordable housing at a time when rental costs are rising and mortgage credit conditions are tight.
Jordan Eizenga is a Policy Analyst on the Economic Policy team at the Center for American Progress.
. Bureau of the Census, 2010 American Community Survey (Department of Commerce, 2010).
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