Kelly Carlson, 36, said she couldn’t have afforded her new two-story home in Shoreview, Minnesota, without the $4,500 grant and the mortgage offered through the state’s Housing Finance Agency.
After four years of renting, Carlson, who earns $54,600 a year as a technology project coordinator at Wells Fargo & Co., bought the two-bedroom townhouse for $105,350 in May. She got a 3.875 percent, 30-year mortgage and a grant to cover most of the closing costs. Her daughter Keira Walquist, who turns five years old in August, has already staked out the loft as her playroom. “She loves it,” Carlson said by telephone.
State housing agencies are contributing to the nascent housing recovery in the U.S. by making more grants and loans to cover costs such as origination fees, third-party appraisals and insurance premiums that have jumped about 9 percent since the U.S. housing collapse that has brought average home prices down 34 percent from their July 2006 peak. In the area where Carlson bought, prices are up 4 percent since hitting their low in March 2011, according to the S&P/Case-Shiller Index for metropolitan Minneapolis.
The Minnesota agency expects to increase lending this year by about 2 percent, while Iowa’s will expand by about 15 percent and Maryland’s by about 30 percent.
That’s boosting the revenue and creditworthiness of the agencies, some of which also bundle the mortgages into securities for sale to investors to recoup the cost of down payment assistance at a profit, said Ping Hsieh, a senior analyst at Moody’s Investors Service. The mortgage securities have higher interest rates than conventional loans.
State housing finance agencies have $107 billion in outstanding tax-free muni debt that’s rated by Moody’s. The debt is “very solid,” Tim Milway, director at New York-based BlackRock Inc., which oversees $105 billion of municipal debt, said in a telephone interview.
The bonds are generally ranked double-A, and are cheaper compared with other muni debt because the bonds are callable, said Milway.
“It’s a valuable sector for picking up a little additional yield without having to take additional credit risk,” he said.
“If you’re looking to diversify your portfolio within the muni space, housing would be one spot where you can put your money.”
Housing finance agency debt offers 80 to 100 basis points more than triple-A rated debt, said Jamie Iselin, who helps oversee $11 billion as head of municipal fixed-income at New York-based Neuberger Berman Group LLC. This reflects some investors’ aversion to anything with housing, although generally these bonds have strong backing, Iselin said.
“It’s a scary word for some people,” Iselin said. “There’s some real value here.”
If interest rates remain steady, state housing finance debt can outperform the highest-rated bonds that offer less in yield, Iselin said.
“The additional yield spread that they provide investors could allow them to outperform high-grade triple-A bonds that have a much lower yield component of their return,” he said.
A Bank of America Merrill Lynch bond index tied to state housing agencies has returned 4.3 percent this year after an 8.5 percent gain last year.
Housing agencies in Minnesota, Iowa and Maryland are lending more to people needing down-payment help than those who don’t, and officials there said they expect the trend to continue. Those in Tennessee, South Carolina, Louisiana, Wyoming and West Virginia are also seeing increases, said Moody’s Hsieh in a telephone interview.
“We definitely think it’s going to maintain at these higher levels especially as the general market stays low as it is right now,” said Rob Tietz, finance and funding manager for the Iowa Finance Authority. “It’s not very likely that you’re going to see the big home lenders go out there and use their own balance sheet for down-payment assistance for borrowers. We’re the only game in town as far as that goes.”
This year, 75 percent of the authority’s loans are those requiring grants for down payments, up from about 50 percent in previous years, he said. This year, the agency will lend $150 million, a 15 percent increase from last year, he said.
The mission of agencies such as Tietz’s is typically to help residents with low to moderate incomes afford homes, and aid can range from grants to loans along with mortgages. The increase in demand for loans with assistance is “serving to expand opportunities to those populations who are traditionally underserved,” such as single people and minorities, said Michael Haley, assistant commissioner at the Minnesota Housing Finance Agency.
Housing agency mortgages typically charge higher interest rates than conventional loans. The average rate for a 30-year fixed mortgage fell to 3.66 percent in the week ended June 21 from 3.71 percent, Freddie Mac said in a statement. It was the lowest in the McLean, Virginia-based mortgage-finance company’s records dating to 1971. While that’s kept the agencies partially sidelined since 2008, they are seeing increasing demand as prospective homebuyers encounter bank restrictions and higher closing costs.
They’re “formidable,” even for lower-priced homes, Haley said by telephone. Nationally, closing costs have jumped 8.8 percent to $4,070 on a $200,000 mortgage from 2010, according to Bankrate Inc.’s annual survey in July.
In Minnesota, they’ve risen to 10 percent of the average purchase price, from 6.5 percent in 2010, Haley said. Higher mortgage insurance premiums and expenses related to documentation may be driving the transaction costs, he said. His agency is seeing mortgages with assistance jump to 73 percent of all loans this year, compared with 35 percent historically through 2008.
Carlson was surprised when she first was told her closing costs would total $5,300, a figure that “just seemed really expensive, and I didn’t understand why,” she said. Ultimately, the fees were reduced to $4,800, which the grant helped to cover.
The higher interest rate for loans from state agencies means the debt can be sold at a premium.
“There will be investors who prefer higher coupon MBS versus the others,” said Moody’s Hsieh.
Such premiums can help recoup the cost of the down-payment assistance and boost programs offered by housing finance officials. Maryland’s participation in the MBS market “helps by allowing us to offer lower interest rates” and stimulate the turnover of foreclosed and short-sale properties, said Bill Ariano, deputy director of the community development administration of Maryland’s Department of Housing and Community Development. Almost the state’s entire portfolio is mortgages with assistance, the highest in its history, compared with 75 percent in 2008. Maryland expects to lend over $300 million to homeowners in 2012, a 30 percent increase from the previous fiscal year, he said.
The Iowa Finance Authority offers mortgages with 3.75 percent and 4.25 percent rates for those needing down payment assistance, Tietz said. The former gets bundled in a 3.5 percent pass-through security, while the security for the down payment assistance mortgages gets a 4 percent rate. Investors therefore receive an extra 50 basis points, he said.
The agency last month sold a 4 percent pass-through security forward for July settlement and got an almost 108 dollar price, more than the 102.5 dollar price needed to recoup the cost of homebuyer help, he said.
“We’re making a lot of money on those trades, which more than offsets” the down payment assistance, Tietz said.
That goes back into the agency’s work promoting affordable home ownership. Officials point to examples such as Carlson, who wanted a stable environment for her and her daughter, who enters kindergarten later this year.
“As an investment, instead of just renting and giving someone else my money, it’s nice to own my own property,” she said.