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Treasury Dept. Unveils Program To Fund Mortgages

By Chris Arnold

Published October 20, 2009 6:00 AM

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The Treasury Department has unveiled a plan to pump billions of dollars into state housing finance agencies so they can increase loans to first-time homebuyers.

In a normal year, the so-called HFAs, or housing finance agencies, finance about $15 billion worth of mortgages, but the credit crisis has made it difficult for them to raise money for the loans.

Basically, the HFAs work like an affordable housing bank, says Steven Spears, acting executive director of the California Housing Finance Agency.

He explains that the agencies issue tax-exempt bonds to Wall Street and then the HFAs use the money to make loans. But investors have become reluctant to put their money into anything related to mortgages, especially in parts of the country, such as California, where home prices have fallen significantly since the market peak in 2006.

"They were just not interested," Spears said, explaining that his agency has been out of lending capital for a year now.

"Two years ago we had record lending, he said. "We had $1.7 billion in mortgages for first-time homebuyers. We're not making any loans at all really right now."

Treasury's plan is for the federal government to buy the bonds from HFAs, who will in turn have the money to lend to first-time homebuyers such as Natasha Henry, who is looking to buy a foreclosure in Boston's Dorchester neighborhood.

Natasha Henry, a single mom with a steady job and good credit, is the kind of first-time homebuyer that stands to benefit from the program. Henry moved back in with her parents to save for a down payment and enough money to fix up the house once she's bought it.

"I paid off all my credit cards — only held on to one, got my debt down," says Henry as she discusses her financing options with a housing counselor.

Henry is exactly the sort of person needed to turn the housing market around, analysts agree. But first, the HFAs need a shot in the arm.

"They have historically performed a critical function in serving first-time homebuyers across the country," explains Michael Barr, assistant treasury secretary for financial institutions. He says the current market has made it "very, very difficult" for the HFAs.

Barr has not said how much the federal government will spend on the housing agency bonds, but it is likely to be in the range of $15 billion to $20 billion.

But he says the government will be getting that money back.

"The expected cost to the federal government is zero. The expected cost is fully covered by the fees that HFAs are being charged for participation in the program," Barr says.

There is some risk, but most economists think the program is worthwhile.

Mark Zandi, chief economist of Moodys Economy.com says the HFAs are a small, but important part of the overall lending picture.

"At the moment, they just can't get credit liquidity and they may not survive if they can't get help," he says.

Others economists disagree. They say the programs for first-time homebuyers are already getting enough help from the federal government.

View Transcript

RENEE MONTAGNE, host:

This is MORNING EDITION from NPR News. I'm Renee Montagne. Good morning.

The federal government has a new plan to help the housing market. The government says it won't cost taxpayers money and could help provide loans to hundreds of thousands of first-time homebuyers. The Treasury Department announced the program yesterday, and NPR's Chris Arnold has the details.

CHRIS ARNOLD: The federal government will be propping up state-run affordable housing programs across the country. They're called housing finance agencies. In a normal year, they finance upwards of $15 billion worth of home loans for first-time homebuyers, but the past year's credit crisis has made it really hard for them to raise money for these loans.

Ms. MICHELLE CROCKETT (Homebuyer Counselor): In your case you're putting down five percent.

Ms. NATASHA HENRY (Homebuyer): Correct.

Ms. CROCKETT: Okay, so that'll leave 95…

ARNOLD: In Boston's Dorchester neighborhood, housing counselor Michelle Crockett(ph) is going over the details of a loan with Natasha Henry(ph). Henry is a single mom, she's got a steady job, and she's about to buy her first house. She's taking it seriously. She has taken home buying classes through a nonprofit, moved back in with her parents to save for a down payment.

Ms. HENRY: I closed all my credit cards, paid them off, only held onto one, got my debt down.

ARNOLD: Henry is exactly the kind of homebuyer that economists say the housing market needs right now. She's actually buying a house that was foreclosed on, she's got money to fix it up. But in many parts of the country, one of the sources of affordable loans for people like Henry is in trouble.

Mr. STEVE SPEARS (California Housing Finance Agency): We've been out of lending for a year.

ARNOLD: Steve Spears heads up the California Housing Finance Agency.

Mr. SPEARS: Two years ago, we had record lending. We had a billion-seven in mortgages for first-time homebuyers. We're not making any loans at all really right now.

ARNOLD: So here's what's going on. Spears explains that a state housing finance agency like his in California basically works like a bank.

Mr. SPEARS: A affordable housing bank.

ARNOLD: The bank gets its money by issuing what are called tax exempt bonds. So people on Wall Street invest money in the bonds, and the agency uses that money to make home loans. But people on Wall Street are still pretty nervous about investing in anything related to the housing market, especially in areas where home prices have fallen a lot.

Mr. SPEARS: They're just not interested.

ARNOLD: So this is where the government's now going to step in. Michael Barr is assistant Treasury secretary for financial institutions. He announced the new effort to help the state agencies on a conference call yesterday.

Mr. MICHAEL BARR (U.S. Treasury Department): They have historically performed a critical function in serving first-time homebuyers across the country. The state of the current market has made it very, very difficult for them.

ARNOLD: So the government is now going to basically buy bonds from the state housing agencies to provide them with the money that they need to lend. Barr didn't say exactly how much money would be spent doing this, but it would likely be upwards of $15 or $20 billion. Still, Barr stresses that the government would be getting that money back down the road. It's in effect just loaning the housing finance agencies that money.

Mr. BARR: The expected cost to the federal government is zero. Expected cost is fully covered by the fees that HFAs are being charged for participation in the program.

ARNOLD: Still, there is, of course, some risk that things might not go as planned, but some economists say they think that the effort is worth that risk. Mark Zandi is chief economist of Moody's Economy.com. He thinks these so-called HFAs play a small but important role in the overall housing market, providing these affordable loans.

Mr. MARK ZANDI (Moody's Economy.com): At the moment, they just can't get credit liquidity and they may not survive if they don't get help.

ARNOLD: But other economists aren't so sure. Some say the government's already doing enough to promote home ownership.

Chris Arnold, NPR News, Boston. Transcript provided by NPR, Copyright National Public Radio.

Source: NPR

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