Philadelphia Kelly Carlson said she couldn’t have afforded her new two-story home in Shoreview, Minnesota, without the $4,500 (Dh16,335) grant and the mortgage offered through the state’s Housing Finance Agency.
After four years of renting, Carlson, who earns $54,600 a year as a technology project coordinator at Wells Fargo & Co, bought the two-bedroom townhouse for $105,350 in May.
She got a 3.875 per cent, 30-year mortgage and a grant to cover most of the closing costs.
State housing agencies are contributing to the nascent housing recovery in the US by making more grants and loans to cover costs such as origination fees, third-party appraisals and insurance premiums that have jumped about 9 per cent since the US housing collapse that has brought average home prices down 34 per cent from their July 2006 peak.
In the area where Carlson bought, prices are up 4 per cent since hitting their low in March 2011, according to the S&P/Case-Shiller Index for metropolitan Minneapolis.
The Minnesota agency expects to increase lending this year by about 2 per cent, while Iowa’s will expand by about 15 per cent and Maryland’s by about 30 per cent.
That’s boosting the revenue and creditworthiness of the agencies, some of which also bundle the mortgages into securities for sale to investors to recoup the cost of down payment assistance at a profit, said Ping Hsieh, a senior analyst at Moody’s Investors Service. The mortgage securities have higher interest rates than conventional loans.
State housing finance agencies have $107 billion in outstanding tax-free muni debt that’s rated by Moody’s.
The debt is “very solid,” Tim Milway, director at New York-based BlackRock Inc, which oversees $105 billion of municipal debt, said.
The bonds are generally ranked double-A, and are cheaper compared with other muni debt because the bonds are callable, said Milway.
“It’s a valuable sector for picking up a little additional yield without having to take additional credit risk,” he said.
“If you’re looking to diversify your portfolio within the muni space, housing would be one spot where you can put your money.”
Housing finance agency debt offers 80 to 100 basis points more than triple-A rated debt, said Jamie Iselin, who helps oversee $11 billion as head of municipal fixed-income at New York-based Neuberger Berman Group LLC. This reflects some investors’ aversion to anything with housing, although generally these bonds have strong backing, Iselin said.
“It’s a scary word for some people,” Iselin said. “There’s some real value here.”
If interest rates remain steady, state housing finance debt can outperform the highest-rated bonds that offer less in yield, Iselin said.
“The additional yield spread that they provide investors could allow them to outperform high-grade triple-A bonds that have a much lower yield component of their return,” he said.
A Bank of America Merrill Lynch bond index tied to state housing agencies has returned 4.3 per cent this year after an 8.5 per cent gain last year.
Housing agencies in Minnesota, Iowa and Maryland are lending more to people needing down-payment help than those who don’t, and officials there said they expect the trend to continue. Those in Tennessee, South Carolina, Louisiana, Wyoming and West Virginia are also seeing increases, said Moody’s Hsieh in a telephone interview.
Housing agency mortgages typically charge higher interest rates than conventional loans. The average rate for a 30-year fixed mortgage fell to 3.66 per cent in the week ended June 21 from 3.71 per cent, Freddie Mac said in a statement. It was the lowest in the Virginia-based mortgage finance company’s records dating to 1971. While that’s kept the agencies partially sidelined since 2008, they are seeing increasing demand as prospective homebuyers encounter bank restrictions and higher closing costs.
They’re “formidable,” even for lower-priced homes, Haley said by telephone.
Nationally, closing costs have jumped 8.8 per cent to $4,070 on a $200,000 mortgage from 2010, according to Bankrate Inc’s annual survey in July.
In Minnesota, they’ve risen to 10 per cent of the average purchase price, from 6.5 per cent in 2010, Haley said.
Higher mortgage insurance premiums and expenses related to documentation may be driving the transaction costs, he said.
His agency is seeing mortgages with assistance jump to 73 per cent of all loans this year, compared with 35 per cent historically through 2008.