As housing affordability worsens, Midwest HFAs go to bond market

As housing costs remain high, housing finance agencies in the Midwest are selling bonds to finance mortgage loans to buyers of single-family and multifamily homes.

Existing home sales declined in August to their lowest level since October 2010, and a strong jobs report earlier this month drove mortgage rates higher, deepening affordability barriers.

Against this backdrop, housing authorities in Indiana, Wisconsin and Nebraska are issuing bonds whose proceeds will finance loans to first-time and low-income homebuyers.

According to Freddie Mac’s Oct. 18 economic, housing and mortgage market outlook, first-time homebuyers account for much of the demand in today’s housing market. But they often have less financial leverage than homeowners, and the Mortgage Bankers Association has found that refinance activity accounted for 55% of total application activity as of September.

And even as existing home inventory reached its highest level since July 2019, total home sales fell 2.9% in August. The National Association of Home Builders’ Housing Market Index has homebuilder confidence below 50, which shows, Freddie Mac said, “that building conditions are expected to remain poor in the near term.”

In Wisconsin, the Wisconsin Housing and Economic Development Authority will issue $93.8 million of Series 2024A and 2024B housing revenue bonds. The bonds are general obligations of the authority, with the proceeds, the revenues, the pledged funds and the rights and interests of the authority in and to the financed mortgage loans all pledged for the payment of principal or redemption price and interest on the bonds.

The deal prices todayW, according to WHEDA Public Affairs Program Manager Raechelle Belli. The lead managers on the deal are Wells Fargo Securities and Ramirez & Co. Co-bond counsel are Kutak Rock LLP and MWH Law Group LLP. WHEDA does not use a municipal advisor.

“Historically, the demand for WHEDA’s housing revenue bonds has been good,” Belli said. “WHEDA groups multiple developments into one bond issue. The timing of the bond issue is driven by the development closing timelines.”

Belli said the authority has made progress on the housing affordability front, but “from our perspective, the cost to develop multifamily affordable housing remains high and developers still encounter labor shortages for skilled workers. The financing is intended to close the gap to move projects forward to completion.” 

Moody’s Ratings rates the bonds Aa3 with a stable outlook. The rating agency said in its rating action that the rating stems from the authority’s sound financial position. 

S&P Global Ratings assigns a rating of AA-plus with a stable outlook.

Credit analyst Raymond Kim pointed to “program management and operational risk assessment, which we consider to be neutral overall; overcollateralization and cash flows capable of withstanding S&P Global Ratings-projected loss assumptions; sufficient liquidity to cover short-term disruptions in asset cash flows; and market-position characteristics in line with the national housing market, which we view as neutral.” 

The bond proceeds will fund mortgage loans secured by multifamily housing projects, to make a deposit into the capital reserve fund and to pay the costs of issuance, according to the preliminary official statement.

The authority had $868.84 million of bonds outstanding as of June 30. The prior bonds are on a parity with the Series 2024 bonds.

Those prior bonds financed 280 long-term mortgage loans for 219 developments containing 14,592 units, according to the preliminary official statement. About 39 of the previously financed developments are subject to housing assistance payments under Section 8.

The Nebraska Investment Finance Authority will issue $130.5 million of Series 2024G and 2024H single family housing revenue bonds, with the proceeds used to finance loans through the First Home Program and Welcome Home Program.

“Market conditions have been somewhat favorable for [housing revenue bond] issuance over the past year or so, and with more focus on housing than ever before, it has brought HFAs more in focus in the market with realtors and lenders,” said Elizabeth Fimbres, communication manager at NIFA.

Fimbres said NIFA times bond issuances based on the need for additional funding for its single-family lending program.

“NIFA continues to track program volume weekly in deciding when to schedule issuances,” she said.

Recently, NIFA has been providing interest rate options that are 50 to 75 basis points below regular market interest rates, and down payment and closing cost assistance up to 5% of the purchase price of the home, she noted. 

According to the POS, the Series 2024G and 2024H bonds are limited obligations of NIFA, payable solely from revenues from the operation of the program.

NIFA had $1.923 billion in aggregate bond principal outstanding as of Sept. 30.

The authority will use bond proceeds from the Series 2024G bonds, which are designated social bonds, to make funds available under the First Home Program to acquire, buy and finance about $92.275 million of mortgage-backed securities issued or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac, and to acquire, buy and finance roughly $2.43 million in principal amount of community program loans.

Bond proceeds from the Series 2024H bonds, and funds available under the indenture in the amount of $20 million, will be used under the Welcome Home Program to acquire, buy and finance about $52.867 million of mortgage-backed securities issued or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac, and to acquire, buy and finance about $1.68 million of community program loans.

S&P rates the bonds AAA with a stable outlook. In its rating report, the rating agency noted that bonds issued through the authority’s single-family housing revenue bond program are on parity with other obligations outstanding under the master indenture.

“The stable outlook reflects the credit quality of the underlying MBS assets supported by Ginnie Mae, Fannie Mae, and Freddie Mac, as well as our assessment of program management and operational risk,” S&P credit analyst Daniel Pulter said.

JP Morgan is the lead underwriter on the deal. The bond counsel is Kutak Rock, LLP. The municipal advisor is cfX.

In Indiana, the Indiana Housing and Community Development Authority is issuing $198.62 million of single family mortgage revenue bonds, Series 2024 D-1, consisting of $97.125 million of tax-exempt bonds, D-2, $2.875 million of tax-exempts subject to the AMT, and D-3, a$98.62 million taxable tranche. 

The proceeds of the social-designated bonds will refund prior bonds, make money available to buy mortgage certificates so as to finance the origination of mortgage loans to eligible single-family borrowers, and finance down payment assistance loans, according to the POS.

The 2024D bonds are special obligations of the authority, payable from and secured by revenues and assets pledged under the indenture. They are secured on parity with other obligations issued by the authority, which as of Oct. 1 totaled $1.765 billion.

The Series 2024D mortgage loans that will be purchased with the proceeds will include loans for the acquisition or acquisition and rehabilitation of homes in Indiana, and will span the authority’s First Place, First Step and Step Down programs, as well as possibly its Next Step program using only Series 2024 D-3 proceeds.

According to the POS and the authority’s website, First Place and First Step help first-time homebuyers or those buying in a targeted Census tract through down payment assistance worth about 6% of the home’s purchase price. Step Down is an interest rate-only program. Next Step is a refinancing program for First Place and First Step mortgages. 

The authority expects the Series 2024D mortgage loans to be financed through the purchase of Ginnie Mae certificates and conventional loans through the purchase of uniform mortgage-backed securities representing Fannie Mae loans and Freddie Mac loans by the trustee, the POS said.

In 2019, Fannie Mae and Freddie Mac started issuing a new form of single mortgage-backed securities known as UMBS. The UMBS that Fannie and Freddie issue finance fixed-rate mortgages that back Fannie and Freddie securities and are guaranteed by whichever enterprise issues the UMBS.

Fitch Ratings assigns its AA-plus rating with a stable outlook to the bonds. Fitch said the rating reflects the strong asset quality of the mortgage-backed securities portfolio, and the fact that the government-sponsored entities “guarantee the full and timely payment of principal and interest on the respective MBS regardless of actual performance of the underlying loans.”

The rating also reflects strong financial and cash flow asset parity ratios and a solid program structure. 

“Historically, management has not withdrawn substantial amounts from the indenture’s surplus funds and has maintained high asset parity ratios in the indenture,” Fitch said.

Moody’s assigns the bonds its Aaa rating with a stable outlook. Moody’s said the Aaa ratings on the authority’s single family mortgage revenue bonds derive from the authority’s programs’ strong financial position, with an asset-to-debt ratio of 1.18, high-quality loan portfolio, sound legal structure and cash flow projections ensuring timely debt service.

The rating agency also noted the programs’ declining share of variable rate debt, which is down to 4% of total debt outstanding.

Hayley Wolf, communications specialist for IHCDA, said that last year, the authority’s homeownership programs distributed $26.03 million in down payment assistance for 2,520 mortgages in 89 counties.

“The Homeownership Department is on track to have a record volume year, by offering up to 6% in down payment assistance along with competitive interest rates to make homeownership more attainable,” she said.

Wolf did not respond to questions about the pricing date for the Series 2024D bonds.  

The lead underwriter on the deal is JP Morgan. The bond counsel is Ice Miller LLP. The municipal advisor is cfX.