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NALHFA 2012 Annual Educational Conference Meeting the Challenge: Creating Opportunities and Developing New Solutions in Affordable Housing April 25-28, 2012 Omni Austin Hotel Downtown Austin, Texas. Borrowing Taxable: A Viable Option?. Financing with Taxable Bonds Benefits & Challenges

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NALHFA 2012 Annual Educational ConferenceMeeting the Challenge:Creating Opportunities and DevelopingNew Solutions in Affordable HousingApril 25-28, 2012Omni Austin Hotel Downtown Austin, Texas

borrowing taxable a viable option
BorrowingTaxable: A Viable Option?
  • Financing with Taxable Bonds
  • Benefits & Challenges
  • Investors
programs by income level
Programs by Income Level

130%

50%

40%

60%

120%

110%

100%

175%

90%

80%

70%

HDC Offers a Mix of Affordable Housing Programs

$145,250

80% AMI HDC Applicable Program

Taxable 80/20, New Hop, Mixed Income

$107,900

60% AMI HDC Applicable Program

LAMP, Mixed Income

130% AMI HDC Applicable Program

New HOP, Mixed Income

$83,000

Income Level

Family of 4

40% AMI HDC Applicable Programs

80/20, Mixed Income

$66,400

100% AMI HDC Applicable Program

Taxable 80/20, New HOP, Mixed Income

$49,800

$41,500

175% AMI HDC Applicable Programs

Mixed Income, Co-Op, New HOP

50% AMI HDC Applicable Programs

80/20, Mixed Income

$33,200

Current AMI $83,000

Percent of NYC Area Median Income

hdc programs
HDC Programs

31,131 Affordable housing units have been created and/or preserved from 2003 to December 2011

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New Housing Opportunities Program

HDC’s New Housing Opportunities Program (New HOP) combines a first mortgage, funded through proceeds from the sale of variable or fixed rate taxable bonds, with a second mortgage, provided through HDC corporate reserves, to finance multi-family rental housing affordable to moderate and middle income families earning 80% to 130% of New York City’s median income

Program Features:

    • Bond funded senior loan available in multiple interest rate modes, sized at an overall DSCR of 1.15 and maximum LTV of 80%
    • Low interest subordinate loan up to $85,000/unit at a fixed rate of 1%
    • Qualify for §421-a, or J-51 tax benefits
    • Typically 30+ years of affordability

Income and Rent Limits:

  • Maximum income level of no more than 175% of AMI (currently $145,250 for a family of four)
  • Maximum rents up to 130% of AMI:
  • Studio $1,561; 1 BR $1,965; 2 BR $2,366, 3 BR $2,729
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Mitchell-Lama Preservation

HDC’s Mitchell-Lama Preservation program provides mortgage restructuring and repair loan funding financed through tax-exempt or taxable bonds, or HDC corporate reserves. Subject to the Mitchell-Lama rules, units are generally affordable to families earning approximately 100% of New York City’s median income(1)

Program Features:

  • Lower Interest Rate Financing – Existing debt is restructured at a lower interest rate and the loan term is extended
  • Subordinate Financing – Existing second mortgage no longer accrues interest
  • Repair Loans – New loans to finance needed capital improvements and upgrades
  • Grant Funds – Subsidized transaction costs and capital grants
  • Extended Affordability – 15 year commitment to stay in the Program

Income and Rent Limits(1):

    • Maximum income level of no more than 100% of AMI (currently $81,800 for a family of four)
    • Maximum rents up to 100% of AMI:
    • Studio $1,188; 1 BR $1,498; 2 BR $1,806, 3 BR $2,081

(1) Mitchell-Lama was designed to be a middle income program, but actual income and rent limits vary by each development.

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Other Financing Programs

Taxable 80/20 Program

  • Combines a first mortgage, funded through proceeds from the sale of variable or fixed rate taxable bonds, with a second mortgage, provided through HDC corporate reserves
  • At least 20% of the units affordable to moderate-income households who earn up to 80% or 100% of AMI.; remaining units are set at market levels and rented without income limitations

Affordable Co-operative Housing Program

  • Combines a construction loan and a permanent mortgage to the cooperative to be funded by taxable bonds financed under the NYCHDC Multi-Family Secured Mortgage Revenue Bonds Resolution.
  • 2nd mortgage during construction provided through HDC corporate reserves blended with the 1st position mortgage at permanent conversion.
  • Affordable to middle income families with incomes not to exceed 175% AMI; Up to 25% of units can be market rate
slide8

Securitizations

  • HDC makes 2nd position loans from its corporate reserves alongside loans funded with bond issuances
  • Loans can later be “packaged” with other loans and securitized through the issuance taxable bonds
  • Loans are then pledged as security for the bonds
  • Proceeds used to replenish the Corporation’s reserves and re-lent to new developments
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Taxable Issuances

  • Direct Placement
    • No Liquidity
    • No Credit Enhancement
    • No Remarketing
    • Rates reset with a spread to an Index such as 3 month LIBOR or 3 month FHLB Discount Note

Outstanding FHLB Index Floaters (As of 1/31/2012)

slide10

Refunding

  • Portfolio Analysis
  • Yield Curve: use current historic low interest rate environment to evaluate where interest savings can be achieved
  • Are there opportunities within the portfolio for taking advantage of refunding of Tax-Exempt AMT bonds into taxable bonds
borrowing taxable a viable option1
BorrowingTaxable: A Viable Option?
  • Financing with Taxable Bonds
  • Benefits & Challenges
  • Investors
slide12

Benefits & Challenges

  • Historic low interest rate environment
  • No Yield Restrictions
  • No Arbitrage
  • No additional credit risk: same security as their tax-free counterparts
  • No Volume Cap Allocation
  • Supply & Demand
investors have increased focus on european fiscal issues influencing u s treasury movements
Investors Have Increased Focus on European Fiscal Issues, Influencing U.S. Treasury Movements

Taxable Fixed Rate Overview

US Treasury Rates Over The Last 10 Years

%

  • While the U.S. released slightly weaker than expected economic data reports last week, investors focused on the deteriorating position of the European economy
    • Manufacturing, labor market, and housing data all suggested some slowing from the U.S. economic strength shown at the start of the year
  • 10-year spreads across Spain, Italy, and France widened an average of 8 bps last week, and are now 51 bps wider this month
    • Over this time period, 10-year UST yields have declined 25 bps in a flight to quality movement
  • This week, the federal reserve will auction $35 billion in 2-year notes, $35 billion in 5-year notes, and $29 billion in 7-year notes on Tuesday, Wednesday, and Thursday, respectively
  • In addition to these auctions, the FOMC statement release expected on Wednesday and Q1 Real GDP released on Friday may impact Treasury movements

US Treasury Yield Curve

%

Source: Bloomberg

Source: Bloomberg

short term market tone remains positive
Short-Term Market Tone Remains Positive

Short-Term Market Update

SIFMA vs. LIBOR (Since Jan 2008)

  • SIFMA drifted higher last week in the final days before the U.S. tax deadline and as traditional cross-over investors continued to shift out of the short-term tax-exempt market in search for higher yields
    • SIFMA increased to 0.26% this week, its highest level since April 2011
    • The overnight repo rate has remained elevated over the last several weeks, contributing to the decreased short-term municipal demand from cross-over investors; however, should repo rates continue to decline there may be an influx in tax-exempt demand
  • 1M LIBOR has not increased in the last 72 trading sessions, and is currently at 0.23975%, its lowest level since October 2011

%

SIFMA/LIBOR Ratio (2011 to 2012 YTD)

Source: Bloomberg

Source: Bloomberg SIFMA

slide17

Municipal and Treasury Rates and Ratios

10-year MMD, 10-year UST, and MMD/UST Ratios

30-year MMD, 30-year UST, and MMD/UST Ratios

Source: Bloomberg; TM3

Source: Bloomberg; TM3

slide18

Benefits & Challenges

  • Historic low interest rate environment
  • No Yield Restrictions
  • No Arbitrage
  • No additional credit risk: same security as their tax-free counterparts
  • No Volume Cap Allocation
  • Supply & Demand
slide19

Taxable Municipal Issuance Has Continued to Fall

Year-to-date supply

$bn

Source: Thomson Reuters, excludes debt subject to AMT, as of April 23rd, 2012

Note: Data includes all supply with YTM of 1.088 and greater

borrowing taxable a viable option2
BorrowingTaxable: A Viable Option?
  • Financing with Taxable Bonds
  • Benefits & Challenges
  • Investors
slide21

Investors

  • Banks – CRA motivation
  • Insurance Companies
  • Pension Funds
  • Bond Funds
  • Corporations
  • High Net Worth Individuals
taxable investor base overview
Taxable Investor Base Overview

Taxable Investor Allotment Trends in 2011

Taxable Investor Breakdown

  • In 2011, insurance companies made up the largest single investor base of taxable bonds offered by an indicative firm, totaling 32.75% of all allotments
    • Retail investors and investment advisors purchased 33.00%of all taxable bonds offered
    • Bond funds made up 14.70% of all allotments of taxable paper offered in 2011
  • In 2011, insurance companies were allotted taxable bonds most heavily concentrated in the 11-20 year sector of the curve
  • Retail buyers were heavily invested in shorter term bonds (1-10 years), while investment advisors focused on the 11-20 year sector

Taxable Investor Breakdown by Rating Category

Taxable Investor Breakdown by Maturity

$000

$000

slide23

THANK YOU

Please visit our website: www.nychdc.com

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