In another attempt to reinvigorate the housing market, the Obama administration has announced new steps designed to make it easier for state and local agencies to reduce mortgage costs for low- and moderate-income home buyers. The two-pronged effort—which includes a bond-buying initiative and a credit facility—will enable state and local housing finance agencies, or HFAs, to extend "hundreds of thousands" of new, affordable home loans, the administration said Monday. The program represents Uncle Sam's latest stab at stimulating enough housing demand to mop up the glut of unsold properties that is putting downward pressure on home prices. “Through the years, many low and moderate income Americans have been well served by state and local HFAs, but the housing downturn has hit these organizations too," Treasury Secretary Tim Geithner said in a statement. "Through this initiative, the Administration aims to help HFAs jumpstart new lending to borrowers who might not otherwise be served and to better support the financing costs of their current programs—key components in stabilizing the housing market overall.” Here are five things you need to know about the program.
1. Housing finance agencies: Housing finance agencies, which operate throughout the country, are state or local authorities that help low- or moderate-income Americans obtain housing. The agencies do so through a number of ways, such as subsidizing home loans. HFA loans are typically fully-underwritten, 30-year fixed rate mortgages, many of which go to first time home buyers. "Performance of HFA loans has materially outperformed most other loan types, especially when controlling for borrower profile," according to a Treasury Department fact sheet. All told, these agencies have enabled more than 3 million borrowers get mortgages, while helping to finance more than 3 million affordable rental units.
2. Credit crisis: The credit crisis has upended the HFAs ability to function. In the absence of private buyers for their bonds, many agencies don't have the funds they need to make new loans. At the same time, jittery investors are driving up the costs of rolling over their existing debt to alarming levels. "With the market upheaval, we've been unable to sell new mortgage bonds for a year," Bob Kucab, the executive director of the North Carolina Housing Finance Agency, said in a statement accompanying the release. "Despite all the ingenuity we can muster, we're now helping only about a quarter as many first-time buyers as normal."
3. Obama's plan: The Obama administration's plan addresses the issue through two main components. First, the Treasury Department will begin buying securities backed by HFA bonds from government-controlled mortgage finance giants Fannie Mae and Freddie Mac. The transactions will provide the funding the HFAs need to get home loans to buyers. Fannie and Freddie will also provide the HFAs a credit and liquidity facility that will reduce the financing costs associated with rolling over their debt. "For the moment, [the program] is replacing the private market function, which does not exist," says Keith Gumbinger of HSH.com. "With capital markets still so impaired, with investors still staying away, all these structures that were built over time still kind of collapsed."
4. Costs to taxpayer: The initiative draws on the authority the Treasury Department obtained in the Housing and Economic Recovery Act of 2008. Furthermore, since the HFAs will pay a fee to participate in the program, the Treasury says the program comes "at little or no cost to the taxpayer." The fees increase over time, which the Treasury hopes will motivate HFAs to go back to the private markets as soon as possible.
5. Impact: HFA-related loans represent a tiny portion of the mortgage market, less than 1 percent of all home loans, according to Guy Cecala, publisher of Inside Mortgage Finance. Still, the new program is significant because it is "one of the few [components of Obama's housing rescue] that is clearly targeted at low- and moderate-income borrowers," he says. And while he doesn't expect the new steps to turn the housing market around by itself, Howard Glaser, a mortgage industry consultant and former HUD official under President Clinton, says every little bit helps. "Overall, [the new initiative] should put more capital into the mortgage finance system at a time when the credit markets are still pretty well frozen for mortgages," he says. "We have a very fragile beginning of a recovery in housing, and I think the administration's goal is to try and keep that on track going forward so that we don't slip backwards."