Borrowing Taxable: A Viable Option?

1

NALHFA 2012 Annual Educational ConferenceMeeting the Challenge:

Creating Opportunities and DevelopingNew Solutions in Affordable Housing

April 25-28, 2012Omni Austin Hotel Downtown

Austin, Texas

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Borrowing Taxable: A Viable Option?

Financing with Taxable Bonds

Benefits & Challenges

Investors

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Programs by Income Level

Percent of NYC Area Median Income

50% 40% 60%

$33,200

$41,500

$49,800

175%

$107,900

$145,250

40% AMI HDC Applicable Programs

80/20, Mixed Income

60% AMI HDC Applicable Program

LAMP, Mixed Income


Mixed Income, Co-Op, New HOP


80/20, Mixed Income

Inco

me

Leve

lFa

mily

of 4

Current AMI $83,000

70% 80%


Taxable 80/20, New Hop, Mixed Income

90% 100%


Taxable 80/20, New HOP, Mixed Income

110% 120% 130%


New HOP, Mixed Income

$83,000

$66,400

HDC Offers a Mix of Affordable Housing Programs

HDC Programs

New Housing Opportunities Program

(5,223 NEWHOP Units)

Mitchell-Lama and Preservation Programs

(25,908 Units)

AMI Served: <130%

(Family of 4 - $107,900)

Multi-family rental housing affordable to moderate and middle income households

Taxable bonds (variable or fixed rate) Tax-exempt recycled bonds may be available if low-income set asides are met

HDC subordinate loans of 65,000- $85,000/unit

AMI Served: approximately 100% (Family of 4 - $83,000) Multi-family rental or cooperative housing affordable to middle

income households

Taxable or tax-exempt recycled bonds (variable or

fixed rate) Senior debt restructured at lower rate. Subordinate debt

restructured at 0%. Low interest repair loans available to address capital needs Extended affordability and commitment to stay in the Mitchell-Lama

program for a minimum of 10-15 years

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31,131 Affordable housing units have been created and/or preserved from 2003 to December 2011

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HDC’s New Housing Opportunities Program (New HOP) combines a first mortgage, funded through proceeds from the sale of variable or fixed rate taxable bonds, with a second mortgage, provided through HDC corporate reserves, to finance multi-family rental housing affordable to moderate and middle income families earning 80% to 130% of New York City’s median income

Program Features: Bond funded senior loan available in multiple interest rate modes, sized at an overall DSCR of

1.15 and maximum LTV of 80% Low interest subordinate loan up to $85,000/unit at a fixed rate of 1% Qualify for §421-a, or J-51 tax benefits Typically 30+ years of affordability

Income and Rent Limits: Maximum income level of no more than 175% of AMI (currently $145,250 for a family of four) Maximum rents up to 130% of AMI: Studio $1,561; 1 BR $1,965; 2 BR $2,366, 3 BR $2,729

New Housing Opportunities Program

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HDC’s Mitchell-Lama Preservation program provides mortgage restructuring and repair loan funding financed through tax-exempt or taxable bonds, or HDC corporate reserves. Subject to the Mitchell-Lama rules, units are generally affordable to families earning approximately 100% of New York City’s median income(1)

Program Features: Lower Interest Rate Financing – Existing debt is restructured at a lower interest rate and the

loan term is extended Subordinate Financing – Existing second mortgage no longer accrues interest Repair Loans – New loans to finance needed capital improvements and upgrades Grant Funds – Subsidized transaction costs and capital grants Extended Affordability – 15 year commitment to stay in the Program

Income and Rent Limits(1): Maximum income level of no more than 100% of AMI (currently $81,800 for a family of four) Maximum rents up to 100% of AMI: Studio $1,188; 1 BR $1,498; 2 BR $1,806, 3 BR $2,081

Mitchell-Lama Preservation

(1) Mitchell-Lama was designed to be a middle income program, but actual income and rent limits vary by each development.

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Taxable 80/20 Program Combines a first mortgage, funded through proceeds from the sale of variable or fixed rate

taxable bonds, with a second mortgage, provided through HDC corporate reserves At least 20% of the units affordable to moderate-income households who earn up to 80% or

100% of AMI.; remaining units are set at market levels and rented without income limitations

Affordable Co-operative Housing Program Combines a construction loan and a permanent mortgage to the cooperative to be funded by

taxable bonds financed under the NYCHDC Multi-Family Secured Mortgage Revenue Bonds Resolution.

2nd mortgage during construction provided through HDC corporate reserves blended with the 1st position mortgage at permanent conversion.

Affordable to middle income families with incomes not to exceed 175% AMI; Up to 25% of units can be market rate

Other Financing Programs

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HDC makes 2nd position loans from its corporate reserves alongside loans funded with bond issuances

Loans can later be “packaged” with other loans and securitized through the issuance taxable bonds

Loans are then pledged as security for the bonds

Proceeds used to replenish the Corporation’s reserves and re-lent to new developments

Securitizations

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Direct Placement No Liquidity No Credit Enhancement No Remarketing Rates reset with a spread to an Index such as 3 month LIBOR or 3 month FHLB Discount

NoteOutstanding FHLB Index Floaters (As of 1/31/2012)

Taxable Issuances

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Portfolio Analysis

Yield Curve: use current historic low interest rate environment to evaluate where interest savings can be achieved

Are there opportunities within the portfolio for taking advantage of refunding of Tax-Exempt AMT bonds into taxable bonds

Refunding

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Investors

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Historic low interest rate environment

No Yield Restrictions

No Arbitrage

No additional credit risk: same security as their tax-free counterparts

No Volume Cap Allocation

Supply & Demand


13

1/14

/200

25/

6/20

028/

12/2

002

12/2

/200

23/

10/2

003

6/23

/200

39/

29/2

003

1/12

/200

44/

26/2

004

8/2/

2004

11/8

/200

42/

14/2

005

5/23

/200

59/

2/20

0512

/12/

2005

3/20

/200

66/

26/2

006

10/2

/200

61/

12/2

007

4/23

/200

77/

30/2

007

11/5

/200

72/

11/2

008

5/19

/200

88/

25/2

008

12/1

/200

83/

9/20

096/

15/2

009

9/21

/200

912

/28/

2009

4/5/

2010

7/12

/201

010

/18/

2010

2/28

/201

16/

27/2

011

10/3

1/20

113/

5/20

12

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

5.50%

6.00%

Historical Interest Rate Graph 10 Year Treasury versus 10 Year MMD

10 Year Treasury 10 Year MMD

14

1/14

/200

2

5/6/

2002

8/12

/200

2

12/2

/200

2

3/10

/200

3

6/23

/200

3

9/29

/200

3

1/12

/200

4

4/26

/200

4

8/2/

2004

11/8

/200

4

2/14

/200

5

5/23

/200

5

9/2/

2005

12/1

2/20

05

3/20

/200

6

6/26

/200

6

10/2

/200

6

1/12

/200

7

4/23

/200

7

7/30

/200

7

11/5

/200

7

2/11

/200

8

5/19

/200

8

8/25

/200

8

12/1

/200

8

3/9/

2009

6/15

/200

9

9/21

/200

9

12/2

8/20

09

4/5/

2010

7/12

/201

0

10/1

8/20

10

2/28

/201

1

6/27

/201

1

10/3

1/20

11

3/5/

2012

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

5.50%

6.00%

6.50%

Historical Interest Rate Graph 30 Year Treasury versus 30 Year MMD

30 Year Treasury 30 Year MMD

15

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

Apr 02 Apr 04 Apr 06 Apr 08 Apr 10 Apr 12

5Y UST 10Y UST 30Y UST

Investors Have Increased Focus on European Fiscal Issues, Influencing U.S. Treasury Movements

Taxable Fixed Rate OverviewTaxable Fixed Rate Overview

US Treasury Yield CurveUS Treasury Yield Curve

0.00

1.00

2.00

3.00

4.00

5.00

1 5 10 15 20 25 30

Current

Last Month

Last Year

Source: Bloomberg Source: Bloomberg

US Treasury Rates Over The Last 10 YearsUS Treasury Rates Over The Last 10 Years

While the U.S. released slightly weaker than expected economic data reports last week, investors focused on the deteriorating position of the European economy Manufacturing, labor market, and housing data all suggested some

slowing from the U.S. economic strength shown at the start of the year

10-year spreads across Spain, Italy, and France widened an average of 8 bps last week, and are now 51 bps wider this month Over this time period, 10-year UST yields have declined 25 bps in a

flight to quality movement This week, the federal reserve will auction $35 billion in 2-year notes,

$35 billion in 5-year notes, and $29 billion in 7-year notes on Tuesday, Wednesday, and Thursday, respectively

In addition to these auctions, the FOMC statement release expected on Wednesday and Q1 Real GDP released on Friday may impact Treasury movements

%

%

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Jan-08 Jan-09 Jan-10 Jan-11 Jan-120.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

SIFMA LIBOR

Short-Term Market Tone Remains Positive

SIFMA drifted higher last week in the final days before the U.S. tax deadline and as traditional cross-over investors continued to shift out of the short-term tax-exempt market in search for higher yields SIFMA increased to 0.26% this week, its highest level since

April 2011 The overnight repo rate has remained elevated over the

last several weeks, contributing to the decreased short-term municipal demand from cross-over investors; however, should repo rates continue to decline there may be an influx in tax-exempt demand

1M LIBOR has not increased in the last 72 trading sessions, and is currently at 0.23975%, its lowest level since October 2011

SIFMA vs. LIBOR (Since Jan 2008)SIFMA vs. LIBOR (Since Jan 2008)

Source: Bloomberg

%

Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-120%

20%

40%

60%

80%

100%

120%

140%

SIFMA/LIBOR Ratio (2011 to 2012 YTD)SIFMA/LIBOR Ratio (2011 to 2012 YTD)

Source: Bloomberg SIFMA

Short-Term Market UpdateShort-Term Market Update

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Source: Bloomberg; TM3

Municipal and Treasury Rates and Ratios

Source: Bloomberg; TM3

10-year MMD, 10-year UST, and MMD/UST Ratios10-year MMD, 10-year UST, and MMD/UST Ratios

January February March April1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

85%

90%

95%

100%

105%

110%

115%

120%

10 Year MMD (left) 10 Year UST (left) MMD/UST (right)

30-year MMD, 30-year UST, and MMD/UST Ratios30-year MMD, 30-year UST, and MMD/UST Ratios

January February March April2.4%

2.6%

2.8%

3.0%

3.2%

3.4%

3.6%

3.8%

95%

105%

115%

125%

135%

145%

30 Year MMD (left) 30 Year UST (left)MMD/UST (right)

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Historic low interest rate environment

No Yield Restrictions

No Arbitrage

No additional credit risk: same security as their tax-free counterparts

No Volume Cap Allocation

Supply & Demand


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Jan-April 2010 Jan-April 2011 Jan-April 20120.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

85

48

97

41

10

7

Tax-Exempt Taxable

Taxable Municipal Issuance Has Continued to Fall

$bn

Source: Thomson Reuters, excludes debt subject to AMT, as of April 23rd, 2012Note: Data includes all supply with YTM of 1.088 and greater

Year-to-date supplyYear-to-date supply

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Investors

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Banks – CRA motivation

Insurance Companies

Pension Funds

Bond Funds

Corporations

High Net Worth Individuals

Investors

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Taxable Investor BreakdownTaxable Investor Breakdown

Taxable Investor Base Overview

Taxable Investor Allotment Trends in 2011Taxable Investor Allotment Trends in 2011

Taxable Investor Breakdown by MaturityTaxable Investor Breakdown by MaturityTaxable Investor Breakdown by Rating CategoryTaxable Investor Breakdown by Rating Category

In 2011, insurance companies made up the largest single investor base of taxable bonds offered by an indicative firm, totaling 32.75% of all allotments Retail investors and investment advisors purchased 33.00% of all

taxable bonds offered Bond funds made up 14.70% of all allotments of taxable paper

offered in 2011 In 2011, insurance companies were allotted taxable bonds most

heavily concentrated in the 11-20 year sector of the curve Retail buyers were heavily invested in shorter term bonds (1-10

years), while investment advisors focused on the 11-20 year sector

AAA AA A0

200,000

400,000

600,000

800,000

1,000,000Retail

Investment Advisor

Bond Fund

Other

Insurance Company

Bank Trust

Bank Portfolio

Arbitrage Account

1-10 Years 11-20 Years 21-30 Years0

200,000

400,000

600,000

800,000

1,000,000Retail

Investment Advisor

Bond Fund

Other

Insurance Company

Bank Trust

Bank Portfolio

Arbitrage Account

$000$000

Retail16%

Investment Advisor

17%

Bond Fund15%Other

7%

Insurance Company

33%

Bank Trust1%

Bank Portfo-lio0%

Arbitrage Account

11%

2323

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Borrowing Taxable: A Viable Option?

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