NCSHB 2015 Educational & Development Workshop The Latest Single-Family Lending Executions Richard Godfrey cfX Incorporated 55 Broadway, Suite 2608 New York, NY cfX - Optimizing Affordable Housing Finance

Single Family Executions Structured Tax-exempt Bonds (MRBs) This is the way that most HFAs operated for decades - issuing bonds in various maturities and structures, making loans in accordance with IRS requirements and sometimes creating mortgage backed securities. When loans are repaid or prepaid, agencies can call out their highest cost debt or make new loans at no additional cost. Periodic refunding of bonds offers opportunities for additional agency revenues. Tax Exempt Mortgage Pass-through Bonds These are bonds in which borrower mortgage payments and pre-payments get passed along to the investors. Investors may offer lower interest rates because agency discretion on managing payments is eliminated. TBA (To Be Announced) Market Agencies collect loans from participating lenders and convert them into mortgage backed securities (MBSs). They then sell these MBSs to investors just like any other major lender. Mortgage payments go via a servicer to the MBS investor. By increasing interest rates, agencies can get premium payments to fund down payment assistance.

Structured Tax Exempt Bonds Pros Creates substantial net worth through optimal management of liabilities Provides long term income stream Provides opportunities for portfolio leveraging Provides resources for agency activities including down payment assistance Historic reason for agency existence Cons Requires active management for best performance Requires rating agency and tax compliance Involves market, arbitrage and cost of issuance risk Requires volume cap and doesn’t allow mcc’s

Mortgage Pass-through Bonds Pros Preserves tax exempt bond advantage Rating agency, portfolio management and tax compliance is simpler Provides greater assurance to investors on payment timing Provides predictable income stream Cons Requires a pool of interested investors – works best in high tax states No opportunity for portfolio optimization and balance sheet leveraging Requires volume cap and doesn’t allow mcc’s Sensitive to market pricing

TBA Market Pros Steady access to highly liquid market Up-front 1-time payment to agency No bond or tax issues No long term bond risk Cons No long term income No portfolio growth No creation of agency assets No significant rate advantage over private sector Interest rate risk until loan is delivered Raises questions about need for an independent HFA

HFA Weekly rate survey* State A State B3.375 States C,D,E3.5 States F3.625 States G,H,I3.75 State J3.875 Freddie Mac Survey Average (no MI and 0.6 points) 3.91 Mortgage News Daily Survey Average (no MI) 3.96 States K,L,M,N4+ *Published rates for FHA loans w/ 0 points and w/out DPA for week of August 10, 2015

Key MRB Observations State HFAs have helped 3 million families become homebuyers with MRBS (1) $277 billion in MRBs issued by State HFAs (1) HFA balance sheets are down 11.4% from 2010 (2) HFA equity equaled $26.9 billion in 2014 (2) In 2012, 72% of HFAs said Down Payment Assistance was the top benefit they provided (3) (1)NCSHA Factbook 2013 (2)Fitch Report March 2015 (3)2012 Survey by Stephanie Moulton and Roberto Quercia, “Access and Sustainability for First-time Homebuyers: The Evolving Role of State Housing Finance Agencies”

Recent Issue Observations Over the past 2 months, cfX has been working on MRB transactions with 14 different HFAs. Over the course of this work, I have made a few observations worth noting: HFAs are paying much more attention to tax-exempt bond issuance than they have for many years More HFAs are rebuilding bond portfolios in response to concerns about public purpose and long term income Increased attention to variable rate debt – value, risks, ratios, internal hedging More restructuring refundings

Additional Observations Down payment assistance is a driving force at HFAs Several HFAs have concerns about short-term income loss if TBA is reduced HFAs are paying more attention to lender relationships Maximum financing flexibility is important!

Optimizing Affordable Housing Finance cfX is the country’s leading provider of municipal advisory services to HFAs and has, over the past 4 years, provided advice in connection with the issuance of more than 35% of state housing bonds. cfX is dedicated to the mission of: Providing affordable housing opportunities for all Americans; Advancing the role of state Housing Finance Agencies in providing affordable homes; Helping HFAs to optimize their financial and programmatic success. 10