Mamdani’s Housing Outlook
The mayor has expressed a goal of adding to the affordable housing stock. He targets selling an additional $70 billion municipal bonds to add to the $30 billion already in the financial plan. It has not been specified what the security pledge will be on the new bonds. GO bonds would greatly increase already high debt ratios. This perspective means that the new bonds would primarily be multifamily revenue bonds.
The revenue bonds would be issued through the New York City Housing Development Corporation and the NYC Department of Housing Preservation and Development. HFAs are at the state level. The bonds would be evaluated based on the portfolio of multifamily loans and their characteristics and performance.
According to rating criteria, there are four primary factors to focus on in the credit assessment.
- Loan portfolio
- Bond structure
- Financial profile
- Management & Governance
The loans for multifamily are generally speaking long term for either 20 or 30 years and are fixed rate. There is underlying credit support with FHA, MBS, GNMA, FNMA, Freddie Mac, Rent subsidies, or housing tax credits in the mix. Those programs have their own qualifying criteria. It is not known what will happen with these programs if Fannie and Freddie are privatized. In some instances, loans may be written for a shorter period of say ten years, but this opens up the refinancing risk. Also, some of the mortgages may be in variable rate mode with a swap to fixed rate. This alternative opens another range of issues including counterparty risks and bank bond provisions. Given the history of the city, there is reason to believe that long-term loans would be the approach. The HDC may have other balance sheet strengths to bring to the table to support the program.
Stress tests are a critical element of bond structuring. Scenarios are constructed and any fail rates must be evaluated and compensated for with other available features.
A tight real estate market is a plus that would apply in this case. Any seasoning of loans is also a plus.
Most housing bonds are structured to obtain an Aa/AA category rating. The Asset to Debt ratio (PADR) needs to be in the 1.0 x to 1.10x range. Essentially, there needs to be some over collateralization. Proceeds would be directed to mortgage loans and to reserves. Other prominent features would be whether the indenture is open or parity and whether cross calling is permitted. First lien fixed rate mortgages that comprise at least 75% of the pool are typically eligible for Aa/AA consideration. The basic security can either be Limited Obligations or GOs of the authority. The flow of funds may be a bit stronger if it is closed loop versus open loop. Bond reserves of up to MADS is a common feature.
The financial profile includes the history of issuance and whether the housing entity has built up other assets over time that may be called upon if necessary.
How the buildings are to be operated and maintained over time is also an important consideration. Usually, provisions are established with escalators over time. A selected rate at inflation or higher is a typical feature. Insurance and other provisions are also to be considered.
A rent freeze over the course of the mayor’s first term would put a lot of pressure on many of the factors that are incorporated into the evaluation. Clearly, this policy is populist in nature and is not easy to manage in practice. Also, $100 billion of bonds is a lot to issue and manage over time. The City is already facing a $12 B budget gap and is calling on the federal and state governments for more support. There is much volatility ahead to manage on the General Fund side while attempting to ramp up on a program of this size.
Other Matters:
It appears at this point that we may avoid another total shutdown of the federal government. A so-called review period for two weeks to consider DHS spending and procedures and practices given recent tragic events is a unique approach. So far, the reaction in the Treasury market has been muted.
Municipal issuance continues to ramp up. Absorption of the paper appears to be routine.
Budget issues are garnering more attention. How gaps will be closed by July 1 for most states and localities will command analytical consideration by market participants. Capital gains have bolstered income tax receipts over the last several years. No change is on the horizon in the near term, but this factor is quite challenging for revenue forecasters.
John Hallacy
John Hallacy Consulting LLC
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