Home Finance Agencies to Get Lending Boost

A new program to help low- and moderate-income homebuyers obtain mortgages has been announced by the Obama administration.

The initiative will provide financing assistance to state and local home finance agencies (HFAs), which provide low-cost loans to homebuyers who might not otherwise be able to obtain mortgages. Lending by such agencies has been severely reduced and practically come to a halt in some states over the past two years owing to difficulty in finding investors to back the mortgages they issue.

Under the new program, the Treasury Department will essentially become the investor backing the mortgages made by HFAs. Government-supported lenders Fannie Mae and Freddie Mac will issue mortgage revenue bonds backed by HFA mortgages, which will in turn be purchased by the Treasury Department. This will provide fresh revenue for HFAs to make issue mortgages, since the previous loans were essentially sold to the Treasury Department.

In addition, Fannie Mae and Freddie Mac will also provide temporary credit and liquidity to HFAs separate from the bond sales, to enable them to begin lending again. Inability to obtain temporary credit has been one of the things preventing HFAs from making new loans.

Will support mortgages, refinancing, rentals

The Treasury Department estimates the new initiative will support several hundred thousand new mortgages to first-time homebuyers this coming year, as well as refinancing opportunities to put at-risk but responsible and performing borrowers into more sustainable mortgages. The program will also support loans to rehabilitate tens of thousands of rental properties, thereby making rental units more available as well.

Tight credit markets have severely restricted the ability of HFAs, which are supposed to be self-financing, to issue mortgages in recent years. According to the National Council of State Housing Agencies, HFAs have issued only $4 billion in tax-exempt mortgage bonds in 2009, down from $16 billion in 2007.

HFAs account for only a small share of the mortgage market, but represent the lender of last resort for many low- and moderate-income homebuyers. Some have criticized the new initiative as encouraging loans to persons who cannot really afford to buy a home, saying that was a primary cause of the collapse of the housing and credit markets in the first place. However, HFA mortgages have seen relatively few of the problems that affected the rest of the market during the subprime meltdown.

No set figure has been announced for the HFA assistance program, though administration officials were talking about a figure of $35 billion in the weeks before the program was announced. Nor has the duration of the initiative been disclosed, although the administration is calling it a temporary program. The initiative is intended to be self-funding, with Treasury officials saying it has been designed to weather further downturns without requiring taxpayer assistance.