After months of discouraging news on the state of the housing market, a new initiative unveiled by the Obama administration on Oct. 19 may just be what Americans need these days. The initiative is designed to support new lending among state and local housing finance agencies (HFAs), so low-and-moderate-income Americans can have access to low-cost housing.
For a long time, the state and local HFAs have helped over three million working families obtain financing for new homes, and have helped finance over three million affordable rental homes. However, because of the housing crisis and credit crunch, HFAs experienced difficulties in raising money to help low-income Americans afford housing. The new initiative is expected to increase the number of mortgages supported by HFAs.
Under the initiative are two programs: the New Issue Bond Program (NIBP) and the Temporary Credit and Liquidity Program (TCLP). It is administered by the Department of the Treasury and the Department of Housing and Urban Development (HUD), in coordination with the Federal Housing Finance Agency (FHFA), Fannie Mae, and Freddie Mac.
The NIBP will provide temporary financing for HFAs to issue new mortgage revenue bonds. Fannie Mae and Freddie Mac will issue securities backed by these new mortgage revenue bonds. These bonds will in turn be purchased by the Treasury Department (using the authority granted under the Housing and Economic Recovery Act of 2008 [HERA]). Funds generated through these bonds may support several hundred thousand new mortgages for first-time homebuyers this coming year, provide opportunities for at-risk homeowners to refinance, and support the development of tens of thousands of new rental housing units for working families.
The TCLP is administered by Fannie Mae and Freddie Mac. Fannie and Freddie will provide replacement credit and liquidity facilities to HFAs. These will reduce the costs of maintaining existing financing for the HFAs. This program will enable HFAs to continue their work in providing affordable housing to low-and-moderate-income working families. In the event of loan defaults, any losses will be covered by fees paid by the state agencies.
It is not clear how much the Obama administration will be spending on the HFA bonds but it is estimated to be between $15 billion and $20 billion. The duration of the program is also not announced.
Just like the other programs developed by the federal government, this new initiative entails some risks. One of these risks is that it encourages loans to individuals, who are really unable to qualify, which some critics point out is one of the causes of the housing meltdown. However, this initiative will certainly allow HFAs to offer Americans a product that not only provides flexibility and promotes sustainable homeownership but also fits the current economic circumstances.
Whether this program will provide a temporary or permanent solution to the housing crisis remains to be seen.