Mortgage industry executives may be forgiven for thinking that housing bonds are starting to look like pass-through mortgage-backed securities. They are.
Our sister publication The Bond Buyer reported that at least 30 pass-throughs have been issued in the past year, giving the staid old sector some new zip ($900 million this year to date).
Housing bonds are generally issued by state Housing Finance Authorities for lending money for their core market of low income and first time borrowers. But there has been pressure on them as mortgage yields have dropped, and the pass-through structure is used as a way to stay flexible and competitive.
The mortgage pass-through MBS has been a workhorse of the market for decades, so this represents a canny move by the HFAs. The collateral is generally prime mortgages bought by the housing secondary agencies and therefore of high credit quality.
One key difference, according to The Bond Buyer, is the handling of prepayments. With traditional HFA issues, any prepayments go back to the agencies, which can use them to fund new loans. With an MBS, the prepayments go to the bondholders.
The Minnesota HFA was the first to go to market with this product, in July 2012, but since then, Illinois, Indiana and Florida have followed suit.
In another recent development reported by Tonya Chin, HFAs have seen a boost to creditworthiness because the nation’s mortgage insurers, who the HFAs use to mitigate mortgage defaults, have been doing better.
Currently, according to Moody’s Investors Service, 15 HFAs use mortgage insurers. According to our sister pub, the ones that use them the most are Wisconsin (85.69% with MI) and Illinois, at 67.33%.
HFAs generally use the money they raise from bonds to offer mortgages at discount rates to their clientele. But while an HFA might offer a borrower a 1% loan (current fixed-rate mortgages have returned to more than 3.5%), that’s not going to appeal to investors to buy the bonds. The closer the returns to market rates, the more attractive they are for investors.
With credit still tight, low-mods and first timers are finding it harder to get credit. The HFAs always have offered them a good deal, and with the new structure, it seems as if an even better deal is being offered, as more borrowers are being served.
