More Housing Aid Is On the Way

Washington Aims to Shore Up State, Local Agencies That Help Buyers With Few Options

Wall Street Journal, By Nick Timiraos and Jessica Holzer

October 20, 2009

 The Obama administration unveiled steps to help state and local housing-finance agencies provide mortgages and rental housing to thousands of low- and moderate-income families, underscoring the expansive role the government has taken to stabilize the U.S. housing market.

State and local housing-finance agencies, or HFAs, play a modest role in the housing market but represent one of the few sources of mortgages for many first-time and low-income home buyers. The federal aid is designed to revive HFAs' lending by shoring up their financing. State agencies sharply curtailed their lending after the credit crunch deepened one year ago.

 Tax-exempt bond issuance by HFAs has fallen to $4 billion in 2009 from $10 billion last year and $16 billion in 2007, according to the National Council of State Housing Agencies.

 "This initiative is crucial to helping working families maintain access to affordable rental housing and homeownership in tough economic times," Treasury Secretary Timothy Geithner said.

Under the program, the Treasury Department will purchase securities from Fannie Mae and Freddie Mac that are backed by state and local housing-agency bonds. Before using the proceeds of new bonds under that program, the HFAs will have to sell a portion of new debt to private investors in an effort to attract private capital to the market.

Housing agencies were slammed by a host of market forces a year ago, when the pool of investors who could take advantage of tax-exempt securities shrank and interest rates rose on municipal securities. Administration efforts to lower mortgage rates through government purchases of mortgage-backed securities have also competed against state agencies, making it harder for them to offer attractive financing.

The Treasury program will also allow Fannie and Freddie to offer temporary funding mechanisms designed to lower the costs associated with short-term debt that states increasingly issued in recent years to fund long-term mortgages. Around 38 HFAs have some $30 billion in variable-rate debt outstanding.

 Some HFAs began a painful deleveraging process after that funding mechanism -- intended to increase the agencies' lending ability -- backfired. Some state housing agencies, including those in California and Wisconsin, have largely stopped making new loans.

 The Treasury said it hadn't yet determined the scale of either initiative and wouldn't provide a dollar amount.

 Officials said the program would be funded by fees paid by the HFAs, in order to avoid any taxpayer subsidy.

 "We thought this was an appropriate and confined area in which we should take action," said Michael Barr, an assistant treasury secretary.

 HFAs finance the development of affordable rental housing and offer a range of programs to first-time home buyers, including counseling for borrowers that begins before they buy a home and assistance programs that lend down payments and closing costs to borrowers. Loans from HFAs require full documentation of incomes, and have performed better than subprime loans.

"One of the unfortunate takeaways from the subprime crisis is that working people can't sustain homeownership. They can, if it's done right," said Barbara Thompson, executive director of the National Council of State Housing Agencies, a trade group that represents state HFAs.