NALHFA 2012 Annual Educational Conference
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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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Borrowing Taxable: A Viable Option?

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Borrowing taxable a viable option

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


Borrowing taxable a viable option

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


  • Borrowing taxable a viable option

    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.


    Borrowing taxable a viable option

    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


    Borrowing taxable a viable option

    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


    Borrowing taxable a viable option

    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)


    Borrowing taxable a viable option

    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


    Borrowing taxable a viable option

    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


    Borrowing taxable a viable option

    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


    Borrowing taxable a viable option

    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


    Borrowing taxable a viable option

    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


    Borrowing taxable a viable option

    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


    Borrowing taxable a viable option

    THANK YOU

    Please visit our website: www.nychdc.com

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