This article is reprinted with the permission of Nixon Peabody LLP. Originally released on Oct. 25, 2011
On September 23, Governor Cuomo signed legislation that permits the New York City Housing Development Corporation (HDC) and the New York State Housing Finance Agency (HFA) to privately place unrated bonds for the purpose of financing affordable housing projects. This law took effect immediately.
Prior to passage of this legislation, HFA and HDC could only issue bonds that had been rated by a rating agency. These bonds were generally publicly offered, and the State of New York Mortgage Agency (SONYMA), Fannie Mae or Freddie Mac, or other financial institutions typically provided credit enhancement. Other issuers in New York State, such as Industrial Development Agencies (IDAs), have long had the power to issue unrated bonds, which were then purchased by a financial institution. The new law permits HFA and HDC to issue unrated bonds for private placement as an alternative form of financing for the development and preservation of affordable housing.
Under this structure, the real estate credit risk is assumed by the financial institution that purchases the bonds. The direct purchase structure should reduce transaction costs substantially, as it eliminates the need for involvement of the rating agencies, underwriters, and credit enhancers. Some financial institutions may elect to continue to seek credit enhancement from Fannie or Freddie for certain types of transactions, but the new law provides a mechanism through which HFA and HDC would still be able to issue bonds were Fannie and Freddie to cease providing credit enhancement.
The direct purchase option could not come at a better time, with the New Issue Bond Program (NIBP) expiring on December 31, 2011. The NIBP program has been enormously popular and successful in New York State, and has facilitated dozens of transactions over the past two years. It is hoped that the private placement option will facilitate some transactions that may have been structured as NIBP deals, but are not positioned to close before the end of this year.
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