When North Dakota in February issued two new series of multi-million-dollar housing finance bonds, its second such issuance in the last four months, it was both catering to a need for housing assistance and capitalizing on favorable market conditions.
Ansel Caine, municipal advisor at Caine Mitter, a New York City-based firm that works with state housing finance agencies, said the North Dakota deal, on which his firm advised, is part of a broader increase in issuance of mortgage revenue bonds.
Such bonds tend to be countercyclical, he said. Whereas the rest of the market will hike issuance when interest rates are low, mortgage revenue bonds usually have the reverse dynamic.
"Mortgages financed with mortgage revenue bonds have a greater value relative to the private sector when interest rates are high, and therefore the value of tax exemption is also high," Caine said. "The other element is that mortgage revenue bonds also tend to work really well when the yield curve is flat, which also makes the product that HFAs can offer more attractive."
Municipal bond issuance for single-family housing was $23.7 billion in 2023, up from $11.8 billion in 2020, according to data from LSEG. And with the present moment offering both high interest rates and a flat yield curve, the time is ripe for more such issuance.
"Certainly the volume of issuance has gone up because the demand for their mortgage product is greater," Caine said. "And we're seeing that across the country. In 2023, mortgage revenue bond issuance was up 50% relative to 2022."
Don Bernards, partner in Baker Tilly's real estate group, said they are "seeing more tax-exempt mortgage revenue bonds issued than ever." He cited a number of factors, among them the overall need for housing and increasing project costs and rents, leading to more debt per unit than in the past.
"Another factor is that there are over 20 states that have some type of state low-income housing tax credit that often pairs with the 4% credit, making these tax-exempt bond projects more financially feasible," he said. "Over the past couple of years, [American Rescue Plan Act] funds have also helped fill gaps in these bond projects."
RBC Capital Markets was lead underwriter on North Dakota's $189 million February sale for the North Dakota Housing Finance Agency.
Managing Director Cory Hoeppner agreed that state housing finance agencies are ratcheting up issuance all over the U.S. As the broader mortgage market has tightened lending standards, he said, the need for various forms of assistance has grown. And because HFAs can borrow in the tax-exempt market, while the broader mortgage market cannot, they have an advantage in these times.
"Many HFAs increased the amount of down payment assistance they provide in order to keep up with higher rates, thus helping the affordability gap," he said.
The Federal Reserve has hiked interest rates
"High interest rates are affecting affordability across the board, and rising home prices are largely driven by a lack of supply," Caine said. The Fed's actions, he said, have "reverberated throughout the fixed income markets, including the mortgage market."
In 2023, his firm, Caine Mitter, ranked seventh nationally in the league table of financial advisors, credited by LSEG with $8.427 million of deals, up from $4.5 billion in 2022.
The housing affordability issue has certainly hit home in North Dakota. In its 2023 Statewide Needs Assessment, the Community Action Partnership of North Dakota found a strong consensus about where residents were feeling the most economic pain.
According to
Broken down by region, respondents in every part of the state identified housing assistance as their number one need.
The problem extends beyond North Dakota. By early 2023, housing starts across the Midwest had dropped 61% from December 2021, according to a
"There's an urgent need for more affordable housing," said Bernards, pointing to a recent National Low Income Housing Coalition
"We are seeing unaffordable housing in all parts of the country, and the Midwest is no different," he said. "There are numerous factors driving this, and the first driving factor is supply and demand. After the recession in 2008 and 2009 and for a few years thereafter, production of rental housing was down significantly. That put us behind and we haven't caught up yet. This was further exacerbated by the pandemic and inflation."
North Dakota is one of the states trying to help by stepping up to fund its Home Mortgage Finance Program, which had $1.762 billion of bonds outstanding at the start of this year. Under the finance program's umbrella are four loan programs: the FirstHome, HomeAccess, North Dakota Roots and Targeted Area Loan programs.
The Feb. 21 pricing was comprised of $149 million of 2024 Series A tax-exempt social bonds and $40 million of 2024 Series B taxable bonds.
The Series A bonds will go toward the purchase of $141.56 million in aggregate principal amount of program loans.
The firm Kestrel provided an independent review confirming the social bond designation on the tax-exempt series.
The Series B bond will be used to buy $38.42 million in aggregate principal amount of program loans and program securities for the Roots Program, which helps people who do not qualify for other programs due to their income and purchase price limits.
Moody's Investors Service assigns
RBC Capital Markets as lead underwriter was joined by Fidelity Capital Markets, JPMorgan Securities and Raymond James & Associates. Caine Mitter is municipal advisor and Kutak Rock LLP is bond counsel.
The tax-exempts priced at par to yield between 3.1% for the January 2025 maturity and 3.4% for the July 2029 maturity,
The negotiated deal is backed by NDHFA's revenues, according to
North Dakota's housing finance programs are a local response to a nationwide problem. Of course, each region has its own specific housing issues, Caine said. But the biggest distinction he sees from his vantage is the urban versus rural divide. To varying degrees, housing affordability has always been an issue in major cities, but now "you're seeing affordability becoming a bigger issue in suburban and rural areas as well," he said.
In North Dakota — which just took advantage of the current environment to issue
"The timing of the bonds depends on the timing of reservations, which have continued to remain strong over the past few months," she said. "Therefore, for cash flow purposes, our pipeline of loans to fund requires that we issue additional bonds."
Through the programs funded by the bonds, Axtman said, North Dakota can offer lower interest rates and down payment assistance.
"There is demand for mortgage revenue bonds, but a lot of this depends on how other markets are performing, when investors have cash available and how we structure our bond deals, just to name a few things," she added. "Investors are being much more specific on what they want."
Caine said the North Dakota program "is a great example of how HFAs can be effective in addressing the lack of affordability within the housing market at the current time."
