Homeownership Symposium - The Evolving Role of State Housing Finance Agencies

Stephanie Moulton, Roberto Quercia

HBTL-10: 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.  

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.