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Publication Date

October 2013


Roberto G. Quercia, Stephanie Moulton


Ford Foundation, Bank of America, NeighborWorks America


State Housing Finance Agencies (HFAs) entered the homeownership policy scene in the early 1970s through the sale of tax-exempt mortgage revenue bonds, which HFAs would then pass along as an interest rate savings on mortgages to qualified low and moderate-income (LMI) first-time homebuyers. With mortgage interest rates rising as high as 18 percent in the early 1980s, many otherwise creditworthy homebuyers were cut off from the mortgage market simply because the monthly payments associated with the mortgage were too high. HFAs helped to reduce this barrier to entry by offering mortgages at below market interest rates (often 2 to 4 percentage points below market), thereby reducing the monthly mortgage payment burden for the homebuyer. This mortgage payment “subsidy” was often viewed as the primary benefit of state HFAs for mortgage markets.

Since their creation four decades ago, HFAs have issued a cumulative total of nearly $260 billion in mortgage revenue bonds, funding mortgages for more than 2.9 million LMI households.1 HFAs have further evolved to offer mortgage markets more than monthly payment subsidies. Many have helped develop statewide infrastructures that bring together lenders, realtors, nonprofit organizations, and local governments to address the needs of LMI first-time homebuyers. Through their structures and programs, HFAs not only offer subsidies to homebuyers, but they are positioned to address informational barriers that contributed to the recent financial crisis. Borrowers often lack information about loan products for which they can qualify, originators may lack information about borrowers’ ability to repay their loan, and investors may lack information about the true default risk of a pool of mortgages. HFAs can address these challenges by increasing the flow of information about mortgage products, risks, and costs between borrowers, lenders, and investors, and by increasing the incentives for participants to use information in origination and servicing decisions. The Great Recession and its aftermath, along with recent regulatory reforms, have also created challenges and opportunities for HFAs to reassess their business models and strategies.

While state HFAs administer a variety of housing programs, including the Low Income Housing Tax Credit (LIHTC) program for rental housing development and the recent U.S. Treasury’s Hardest Hit Fund (HHF) initiative for homeowners in financial distress, in this chapter we limit our focus to state HFA programs for single-family home purchase. More narrowly, using administrative and survey data, we catalog the different financing instruments, products, and activities employed by HFAs to promote and sustain first time homeownership. We also discuss the central role that HFAs may be able to play in a national housing finance infrastructure post-reform. As important as the later point is, it has little attention in the research literature. From this perspective alone, this chapter addresses an important void.

Overall, we find HFAs to be highly effective in addressing important market functions while at the same time fulfilling the public purpose of facilitating access to mortgages to creditworthy but otherwise underserved borrowers. The fact that the performance of HFA loans compares favorably with that of similar non-HFA loans is a reflection of that effectiveness. We find that HFAs’ traditional mortgage revenue bond business remains critical. At the same time, most HFAs are diversifying funding for single-family mortgage assets in significant ways, including direct participation in the mortgage backed securities market. Not surprisingly, we find that the capacity to undertake this and other new, flexible, and diversified activities varies by HFA. Efforts to increase HFA sophistication in these areas are likely critical to future success.

Pending regulatory changes may create opportunities for HFAs to develop new products to serve borrowers otherwise cut off from mortgage financing. HFAs have the potential to become a key mechanism to provide sustainable mortgage credit for low-income, minority, and other underserved borrowers in a future reformed national housing system. However, the discretion of HFAs to set innovative standards for their loan programs is often constrained by the private market participants on whom they rely for origination, servicing, and/or investments. Changes to servicing strategies and the secondary market environment, in addition to innovative product development, may be necessary to create additional demand for future HFA mortgage products.

Topics(s): Affordable Homeownership, Housing Policy, Mortgage Finance