Like the Universe, the Short-term Bond Opportunity Continues to Expand R. Wade Norris, Esq. Eichner Norris & Neumann PLLC 1225 19th Street, N.W ., 7th Floor Washington, D.C. 20036 Phone: (202)973-0100 Fax: (202)296-6990 email: wnorris@ennbonds.com website: www.ennbonds.com
• Since the worldwide financial crisis in the 2008, interest rates on certain types of taxable debt, especially debt explicitly or implicitly backed by the US government, such as debt issued or guaranteed by GNMA, and now Freddie Mac and Fannie Mae , have actually fallen below the rates on AA+ or Aaa rated tax-exempt municipal bonds backed by the same credits. • We rolled out the short-term cash backed bond structure in early 2009. For the first 4 ½ years the program was used almost exclusively with FHA insured loans and RD loans, because of the extremely low rates achievable in taxable GNMA sales and the critical elimination of devastating construction period negative arbitrage which the program achieves on most Section 221(d)(4) new construction/sub rehab loans. R. Wade Norris, Esq. Eichner Norris & Neumann PLLC (202) 973-0100 2
Long Term Rate Comparison: 30-Year MMD (Tax Exempt) Versus 10-Year Constant Maturity Treasury (Taxable) 9.00% 8.00% Early 2008 – Taxable US Government Securities Rates Fall Below Tax Exempt Municipal Rates 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 30-Yr MMD 10-Yr US Treasury R. Wade Norris, Esq. Eichner Norris & Neumann PLLC (202) 973-0100 3
Long Term Rate Comparison: 30-Year MMD (Tax Exempt) Versus 10-Year Constant Maturity Treasury (Taxable) January 1, 2008 - Present 6.00% 5.00% 400 BPS 4.00% 153 BPS 3.00% 2.00% 1.00% Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 30-Year MMD 10-Year US Treasury R. Wade Norris, Esq. Eichner Norris & Neumann PLLC (202) 973-0100 4
The “big bang” in the short-term bond universe occurred last summer. An article in the October 30, 2013 Wall Street Journal describes the dramatic improvement in yields on taxable GSE Fannie/ Freddie risk share securities in 3 months since Chairman Bernanke’s threat to pull $85 billion per month stimulus in June. The price on M-2 Class of Freddie Mac Structured Agency Credit Risk Notes (a hybrid GSE/ private credit) soared from $105 to about $118 and yield fell almost a third - from 7.3% in July to 4.67% in late October. R. Wade Norris, Esq. Eichner Norris & Neumann PLLC (202) 973-0100 5
Markets in 100% GSE backed securities (like the ones we use) are less volatile. But these yields also fell relative to long-term credits. Why? What happened? 1. The market believes that the tapering of Fed MBS purchases suggests economic and housing recovery is real – strengthens Fannie and Freddie 2. Both GSE’s are now quite profitable – have fully reimbursed the $188 billion of federal bailout funds; federal government needs money; perhaps a better political future in Congress??? R. Wade Norris, Esq. Eichner Norris & Neumann PLLC (202) 973-0100 6
3. We now have a new head of Fannie and Freddie’s regulator, the Federal Housing Finance Administration, Mel Watt, who is dramatically more friendly to the mission of affordable housing than his predecessor, Edward DeMarco. 4. Most important, regrowth in private capital for housing since private securitization markets largely destroyed in Fall of 2008 has been painfully slow. Two GSE’s plus FHA still provide 90% of funding for U.S. housing loans (single family and multifamily) versus about 60% before financial crisis. Federal Government’s (FHA/Fannie/Freddie) Role in US Mortgage Originations Wall Street Journal September 6, 2013 R. Wade Norris, Esq. Eichner Norris & Neumann PLLC (202) 973-0100 7
Federal Government (FHA/Fannie/Freddie) v. Private Credit in US Mortgage Markets Wall Street Journal August 6, 2013 Regrowth in private mortgage credit in the US since the securitization markets were virtually destroyed in the 2008 financial crisis has been anemic at best. R. Wade Norris, Esq. Eichner Norris & Neumann PLLC (202) 973-0100 8
Notice two things about the o range bars atop the green bars for 2009 – 2013 in the chart above: (i) They are teenie weanie , and (ii) They are hardly growing . Implies Fannie Mae and Freddie Mac may be restructured, but government credit will play huge role in U.S. mortgage markets until private capital can be enticed back in. This would significantly raise mortgage interest rates, which presents a major policy dilemma for the US government. All of the above suggests that the markets are coming to view Fannie Mae and Freddie Mac as much better long- term credits than previously thought. Much like Ginnie Mae and the U.S. Government and perhaps better than any long-term private credits. R. Wade Norris, Esq. Eichner Norris & Neumann PLLC (202) 973-0100 9
• As a result of these developments, the pricing on these Freddie Mac and Fannie Mae credits has recently improved versus other credits, including long-term municipal bonds. • A developer can now achieve a lower all-in borrowing rate by selling a Freddie or Fannie mod rehab loan in the taxable market, rather than putting the same Freddie or Fannie credit backed 18-year fixed rate municipal bonds. • On a Freddie Mac mod rehab loan, the Freddie Mac Lender will fully fund the affordable housing loan at closing (except for certain rehab escrows). Freddie Mac will then simply purchase the loan from the Freddie Mac Lender two to three weeks post-closing. • In the case of a Fannie Mae moderate rehabilitation affordable housing loan, the Fannie Mae Lender can “wrap” the taxable loan with a Fannie Mae Mortgage Backed Security (“MBS”) , which the Fannie Mae Lender can simply sell in the taxable marketplace for MBS securities. R. Wade Norris, Esq. Eichner Norris & Neumann PLLC (202) 973-0100 10
• In today’s markets, such loans may be sold at interest rates producing an all-in borrowing cost of about 5.5% to 5.60% versus 6.00% for an 18-year Freddie/Fannie backed municipal bond financed loan . • Moreover, due to certain regulatory priorities at Freddie Mac vis-à-vis the Federal Housing Finance Administration, as its GSE regulator, if a project has roughly 50% or more of its tenants at income levels of 50% of AMI or lower (due to Section 8 subsidy or other factors), at least for the time being, Freddie Mac will purchase the taxable loan at rates as low as 5.0% to 5.25%. R. Wade Norris, Esq. Eichner Norris & Neumann PLLC (202) 973-0100 11
Estimated All-In Borrowing Rates from Alternative Executions Short-Term Cash Long-term (18, 35 Estimated Backed Tax-Exempt or 40-year) Tax- Approximate Bond + Taxable Exempt Bonds Savings in Rate Loan Sale Backed by FHA/GNMA, Freddie Mac or Fannie Mae FHA Insured Section 223(f) (Acq/ Mod Rehab) 4.50% v. 5.40% 0.90% 5.00% v. 5.45% 0.45% Section 221(d)(4) (New Cons/ Sub Rehab) Plus: Dramatic Reduction in Construction Period Negative Arbitrage; 1%-1.5% v. 8-10% for Long-term Bonds. Freddie Mac or Fannie Mae – Moderate Rehab Loans 5.50% – 5.75% v. 6.00% 0.25% to 0.50% (100% @ 60% affordability) Freddie Mac (>50% of units at <50% of 5.0% to 5.25% v. 6.00% 0.75% to 1.00% AMI) R. Wade Norris, Esq. Eichner Norris & Neumann PLLC (202) 973-0100 12
TAXABLE FREDDIE MAC OR FANNIE MAE SALE WITH TAX EXEMPT BONDS AND 4% LIHTC 9 Bond Payoff (after Project is placed Trustee in service) 2-Yr Bonds 1 Bond 2 Collateral Project Bond Proceeds Fund Fund Purchaser 7 5 Freddie Lender delivers full Loan to Freddie Tax Exempt Bond Proceeds Bond Proceeds Mac or equal to Collateral Fund or Fannie MBS to (to Lender or Borrower Deposit Released to Lender/ Fannie Borrower’s Submits Full MBS Purchaser at Closing) Borrower Loan Draw Request at (after Closing Mae MBS Closing 3 2-3 weeks) Freddie Mac Purchaser Borrower or Fannie Mae Freddie Mac or Fannie Mae Lender 8 Bond Proceeds 6 MBS Purchaser delivers Loan Disbursement to Borrower purchase price to Lender 4 to cover project costs – at Closing Cash Lender Funds Full Loan Paper / Securities Advance from its funds into Collateral Fund – at Closing Benefits: Qualifies for 4% LIHTC; 0.5% to 1.0% Reduction in Mortgage Rate R. Wade Norris, Esq. Eichner Norris & Neumann PLLC (202) 973-0100 13
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