2. BONDS FOR BEGINNERS National Association of Local Housing Finance Agencies WELCOME!!

3. BONDS FOR BEGINNERS National Association of Local Housing Finance Agencies PART I - Bonds & Yields PART II - Credit Worthiness PART III - Issuing Bonds PART IV - Getting Best Rates

4. BONDS FOR BEGINNERS Think of an object that helps you describe your impression of the housing bond business.

5. BONDS FOR BEGINNERS National Association of Local Housing Finance Agencies PART I Bonds & Yields

6. What you will learn n What is a bond? n How a bond differs from a note? n Why are securities heavily regulated? n Why tax-exempt bonds are attractive to investors? n What is the difference between interest and yield? n How to measure interest & yield.

7. Bonds are debt instruments like Notes n Compare a bond with a note and identify the key components. u Principal or Face Value (1) u Interest Rate or Coupon Rate (2) u Term or Maturity Date (3) u Payment Schedule (4) u Prepayment Clause or Redemption (‘Call’) Provision (5) u Legal Authentication (6)

8. Similarities between Bonds & Notes n Both notes & bonds are debt instruments n Both have face values, coupon rates, maturity dates, payment schedules & ‘call’ dates.

9. Differences between Bonds & Notes n Bond issues can have multiple interest rates & maturity dates. n Interest on notes are taxable, but interest on bonds may be tax-exempt.

10. Bonds & Notes are also Regulated Securities n A “security” evidencing a debt n Securities can be bought or sold and are therefore “negotiable”. n Negotiable Securities u stocks u bonds u notes u checks u currency

11. Who Regulates Securities? n 1929 Market Crash n Congress regulates securities to insure the integrity & efficiency of commerce. [ Commerce Clause ] n The issuance, trade, evaluation and tax treatment of bonds are regulated by the SEC, Fed & IRS.

12. A Balance of Public Interests n ‘Safety & Soundness’ Rules u 80% LTV Limitation u Total lending limited by deposits u Monitoring loan loss risk n Promote the ‘American Dream’ u Democracy in America u FHA (1934) u Fannie Mae (1938), GNMA (1968), Freddie Mac (1970)

13. Why are bonds attractive to investors? n Safety u Risk of financial loss is low n Predictable revenue stream u Interest is paid semi-annually n Tailored bond mix u Different types of maturities & interest rates to meet bond purchasers needs n Yield u Interest earned can be tax-exempt

14. Taxable vs. Tax-exempt Yields

15. Measuring Interest & Yield by Basis Point n The basis point is one hundredth of one percent. u 100 basis points = 1% =.01 u 75 basis points =.75% =.0075 u 50 basis points =.50% =.0050 u 25 basis points =.25% =.0025 u 15 basis points =.15% =.0015

16. What we have learned n What is a bond? n How a bond differs from a note? n Why are securities heavily regulated? n Why tax-exempt bonds are attractive to investors? n What is the difference between interest and yield? n How to measure interest & yield.

17. BONDS FOR BEGINNERS National Association of Local Housing Finance Agencies PART II Credit Worthiness

18. What you will learn n What is credit worthiness & underwriting? n How to use the 5 C’s of credit worthiness analysis for a mortgage loan and for issuing bonds. n What are the key tools to enhance credit worthiness?

19. Credit Worthiness n Issuing bonds is taking out a loan for a public purpose. n Ever wonder how lenders decide on approval or denial of a loan?

20. Evaluating Credit Worthiness for a Loan n Character n Capacity n Credit n Collateral n Cash n Loan Application n Income Ratios n Credit Reports n Appraisal n Downpayment & Closing Costs

21. Evaluating Credit Worthiness for a Bond n Character n Capacity n Reputation of Issuer u market history, management, issuer & bond counsel opinions n Cash Flows u worst cast tests on origination, prepayments

22. Evaluating Credit Worthiness for a Bond (continued) n Credit n Collateral n Cash n Bond Rating u Moody’s/ Standard & Poors n Pledge of revenues u mortgages & MBS n Cost of Issuance u Underwriting & marketing fees

23. Enhancement of Credit Worthiness n Purpose is to get a lower coupon (interest) rate n Credit Enhancement tools u mortgage-backed security u bond insurance u bank letter of credit u guarantee

24. What you have learned n What is underwriting? n What are the 5 C’s of credit worthiness? n How do underwriters make sure the bond issue is credit worthy? n What are the key tools to enhance credit worthiness?

25. BONDS FOR BEGINNERS National Association of Local Housing Finance Agencies PART III Issuing Bonds

26. What you will learn n What is the difference between a GO bond and a revenue bond? n What is the private activity volume cap? n How does a public agency issue & sell bonds? n Who are the key professionals used to issue bonds? n What is the basic Flow of Funds?

27. Key types of Tax-Exempt Bonds n GO Bonds & Revenue bonds n Bondholders of ‘general obligation’ bonds are paid back by the full faith & credit of the agency of government. n Bondholders of ‘revenue’ bonds are paid back from a particular revenue stream. n The revenue stream is the monthly note payments from the mortgage.

28. Who can issue tax-exempt bonds? n Agencies of government, but only for a public purpose n Issuance of tax-exempt bonds is limited by Congress through the private activity volume cap n Limited annually to the greater of $95 per capita or $278 million n ‘Private activity’ means 10% private use, ownership or security

29. Cooking with Bonds Due Diligence Testing the Ingredients Professionals Associate Chefs Legal Actions Shaking & Baking Market Bonds Adding Seasoning

30. How to issue & sell bonds n Identify public purpose n Hire quality bond counsel & financial advisor n Hire quality underwriters n Review & test bond structure n Conduct public hearings n Acquire volume cap allocation n Acquire lender participation n Authorize issuance & sale of bonds

31. How to issue & sell bonds (continued) n Hire Trustee, bond insurer & GIC n Acquire credit enhancement n Acquire bond rating n Execute Bond Closing Documents n Monitor the origination of loan and repayment of principal & interest to bondholders n Perform continuing SEC disclosure, IRS rebate calculations, and cash flow analysis

32. Basic Flow of Funds Single Family

33. Basic Flow of Funds Multi-family

34. What you have learned n What is the difference between a GO bond and a revenue bonds n Who can issue tax-exempt bonds? n What is the private activity volume cap? n What are key steps to issue & sell bonds? n Who are the key professionals used to issue bonds? n What is the basic Flow of Funds?

35. BONDS FOR BEGINNERS National Association of Local Housing Finance Agencies PART IV Selling Safety & Quality Adding Seasonings

36. What you will learn n How to get a better rate by reducing perceived risk. n How to reduce common risk factors n Why the Official Statement is so important. n What are the key due diligence requirements. n Needed credit enhancements

37. What do bond purchasers want? n Bond purchasers want a secure & quality yield. n The lower the perceived risk, the lower the expected return (interest).

38. What are the common fears of perceived risk? n Tax risk u Are the bonds really tax-exempt? n Prepayment risk u Am I really going to get my yield to maturity? n Credit risk u Is there really a safe & sufficient revenue stream?

39. What must be proven to ease fears of risk? n Interest on bonds is tax-exempt; n The revenue stream is sufficient & timely to pay debt service; n There is sufficient security in place in the event that the revenue stream is interrupted.

40. How does the Agency prove bond quality to the bond purchaser? n Credit Enhancement n Due Diligence n Disclosure

41. Credit Enhancements n Gives investors more comfort n Four important credit enhancements are: u bond insurance u mortgage-backed securities u letters of credit u guarantee

42. Mortgage-backed security n Mortgages are pooled by master servicer; n Pool of mortgages are exchanged for pass-through certificates; n The certificates are backed by the full faith & credit of Fannie Mae, Freddie Mac and/or Ginnie Mae. n The certificates act as additional security for the bondholders.

43. Due Diligence n Tests the safety & quality of the bond structure n Most common due diligence are: u Cash flow analysis u Legal structure & integrity analysis u Management capacity analysis

44. Duty to Disclose n The SEC places the responsibility & liability on the Agency for accurate & complete disclosure. n The primary instrument of disclosure is the Official Statement.

45. The Official Statement n Gives all the information that investors would reasonably need in evaluating the merits, as well as the risks, of buying the Agency’s bonds. n Prepared by the underwriter. n Underwriter’s counsel issues SEC 10b-5 opinion. n SEC wants approval by issuer.

46. What’s in the Official Statement ? n States yields & offering prices n Identifies payment terms n Reveals redemption provisions n States method of bond registration n Describes the Agency & its management n Explains the flow of funds n How fund balances will be invested n Summarizes the trust indenture

47. What you have learned n What are the common perceived fears of the bond purchasers? n How are the common fears reduced? n Name the key credit enhancements. n What are the key due diligence requirements. n Why the Official Statement is so important.

48. BONDS FOR BEGINNERS National Association of Local Housing Finance Agencies THANK YOU VERY MUCH!!

49. BONDS FOR BEGINNERS National Association of Local Housing Finance Agencies THANK YOU VERY MUCH!!

50. BONDS FOR BEGINNERS National Association of Local Housing Finance Agencies THANK YOU VERY MUCH!!

51. BONDS FOR BEGINNERS The Finance Authority of New Orleans Mtumishi St. Julien Executive Director

52. The Finance Authority of New Orleans n Created by the City Council in 1978 n Provide low interest financing for home purchase & renovation n Provide down-payment assistance n Issued more than $500 million in mortgage revenue bonds n Helped more than 7000 home purchasers

53. BONDS FOR BEGINNERS The Finance Authority of New Orleans PART I Bonds & Yields

54. BONDS FOR BEGINNERS The Finance Authority of New Orleans PART II Credit Worthiness

55. n Ever wonder how lenders decide on approval or denial of a loan?

56. Evaluating Credit Worthiness for a Loan n Character n Capacity n Credit n Collateral n Cash n Loan Application n Income Ratios n Credit Reports n Appraisal n Downpayment & Closing Costs

57. Evaluating Credit Worthiness for a Bond n Character n Capacity n Reputation of Issuer u market history, management, issuer & bond counsel opinions n Cash Flows u origination, prepayment & worst case tests

58. Evaluating Credit Worthiness for a Bond (continued) n Credit n Collateral n Cash n Bond Rating u Moody’s/ Standard & Poors n Pledge of revenues u mortgages & MBS n Cost of Issuance u Underwriting & marketing fees

59. Enhancement of Credit Worthiness n Purpose is to get a lower coupon (interest) rate n Credit Enhancement tools u bank letter of credit u mortgage-backed security u bond insurance u guarantee

60. BONDS FOR BEGINNERS The Finance Authority of New Orleans PART III Issuing Bonds

61. BONDS FOR BEGINNERS The Finance Authority of New Orleans PART IV Selling Safety & Quality Adding Seasonings

62. BONDS FOR BEGINNERS The Finance Authority of New Orleans Thank You