The Minnesota Housing Finance Agency hit the market Wednesday with $75 million of tax-exempt homeownership finance bonds that mark its third use of a mortgage-backed pass-through structure that’s helped jumpstart new-money, tax-exempt borrowing for single-family housing.

Under the pass-through structure, MHFA will issue tax-exempt bonds marketed to MBS buyers with a 30-year bullet maturity that pays a significantly lower yield in the current market than a traditional housing bond.

MHFA first used the structure, which is crafted by RBC Capital Markets, in late July, and is now on its third tranche due to its success, said MHFA chief financial officer Don Wyszynski.

The structure taps into the universe of traditional buyers of MBS backed by Ginnie Mae, Fannie Mae or Freddie Mac. RBC is the senior manager. Morgan Stanley and Piper Jaffray & Co. are co-managers.  

Moody’s Investors Service assigned a ‘AAA’ rating and negative outlook on the bonds based on the U.S. government’s rating. The rating reflects “the high-quality collateral comprised of GNMA and Fannie Mae mortgage-backed securities, as well as the 1.024 times program asset-to-debt ratio,” Moody’s wrote in a presale report on the deal.

The bonds are also backed by the finance authority’s general obligation pledge, which carries a ‘Aa1’ rating from Moody’s.

“We have taken a traditional 30-year housing bond with semiannual principal and interest payments and turned it into a monthly pay, pass-through bond,” said RBC housing sector banker Cory Hoeppner, a managing director, who helped craft the bank’s program.

The agency will use the proceeds to purchase a package of mortgage-backed securities. Income generated from the spread allows the authority to offer competitive mortgage rates for first-time single-family low to moderate-income home buyers. The loan portfolio will be comprised of securities pooled by the authority and guaranteed by Ginnie Mae, Fannie Mae and-or Freddie Mac regardless of performance of the underlying mortgages.

As the underlying mortgages are repaid, all of the principal received is passed through to the investor to ensure parity between the bonds and the MBS, hence the direct pass-through designation. MBS are commonly referred to as “pass-through” certificates because the principal and interest of the underlying loans is passed through to investors.

Unlike most other pass-through structures, the Minnesota agency’s bonds are publicly offered with a 10-year par call found in traditional housing bond issues. Variations of a pass-through structure have been offered as private placements with Fannie Mae, but MHFA’s July issue marked the first public offering. Other banks are now pitching variations of the structure.

The structure it settled on isolates cash flow to win over traditional MBS investors. The firm identified a class of traditional investors who purchase MBSs in the TBA (to be announced) market and offered up the agency’s new securities as an alternative investment with an added benefit of being sold at par, and not at a premium.

RBC initially sought out traditional tax-exempt buyers of single-family bonds but they ultimately rejected the securities because of low yields.

“This bond has a number of attractive characteristics, including the ability to purchase at par, which isolates investors from price and yield fluctuations resulting from prepayments, a defined MBS portfolio that can be easily modeled by investors and tracked on Bloomberg, isolation from traditional cross-calling of bonds within the indenture, and, of course, tax-exempt income, which is not available to traditional MBS buyers,” RBC said in its written overview.

Without the success of the new structure, Wyszynski said the agency would have been forced to directly sell MBSs in the TBA market as other housing agencies have done. That avenue is less efficient, he said, because all of the agency’s profits are taken upfront and HFAs prefer a financing model with smoothed income that flows in over time.

“We have been very happy with structure and will use it as long as it works,” Wyszynski said. “We are able to get an interest rate that allows us to still charge a below-market interest rate on loans.”


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