Presentation, discussion, and possible action regarding Resolution No. 25-004 authorizing the issuance, sale and delivery of Texas Department of Housing and Community Affairs single family mortgage revenue bonds or residential mortgage revenue bonds, in one or more series and installments; approving the form and substance of related documents; authorizing the execution of documents and instruments necessary or convenient to carry out the purposes of this resolution; and containing other provisions relating to the subject
RECOMMENDED ACTION
Adopt Resolution No. 25-004.
BACKGROUND
On September 7, 2023, the Board approved Resolution 24-002, which authorized the issuance during the Department’s fiscal year ending in 2024 of single-family mortgage revenue bonds in a maximum aggregate amount not to exceed $1,100,000,000 in various series from time to time, under one of the Department’s single family bond indentures. Such resolution delegated final approval for the sale of any individual issue of bonds to an Authorized Representative of the Department, subject to a determination by the Authorized Representative that the issue was in the best interests of the Department and in compliance with the parameters outlined in the resolution.
With this item, the Department seeks Board approval of Resolution 25-004 (“Resolution”) to authorize the issuance during FYE 2025 of single-family mortgage revenue bonds (“Bonds”) in a maximum amount not to exceed $1,100,000,000 in various series from time to time. Proceeds of the Bonds will be used to purchase Ginnie Mae mortgage-backed securities (MBS) backed by tax-exempt eligible mortgage loans, to pay all or a portion of the costs of issuance related to the Bonds, and to finance a portion of the down payment assistance, lender compensation, and second loan servicing fees related to the underlying mortgage loans and/ or to refund other outstanding bonds of the Department issued under the indentures. Depending on market conditions, proceeds of the Bonds may be invested in a Guaranteed Investment Contract (GIC) until expended.
As with Resolution 24-002, the Resolution delegates final approval by an Authorized Representative of the Department, subject to a determination by the Authorized Representative that the issue is in the best interests of the Department and in compliance with the parameters outlined in the Resolution. Such parameters will require that (i) the total amount of all Bonds issued not exceed $1.1 billion; (ii) the maturity date of any series of Bonds not exceed 40 years from their date of delivery; (iii) the net effective interest rate on any series of Bonds not exceed the maximum allowable under state law (currently 12%); and (iv) that the purchase price of the Bonds not exceed 108% or be less than 95% of the principal amount. Additionally, any refunding shall require a showing of at least 3% savings compared to the debt service requirements of the refunded bonds. The Authorized Representative may also determine whether to issue the Bonds as fixed rate or variable rate.
Demand for mortgage loans funded by TDHCA is expected to remain reasonably strong over the next twelve months. Over the past two years, the Department has issued $1.67 billion across seven tax-exempt deals totaling $1.27 Billion and five taxable deals totaling $400 million.
The Federal Reserve Board (the Fed) recently cut the Fed Funds Rate by 50 basis points and is projected to continue easing for the foreseeable future. The yield curve remains inverted, which has historically portended a recessionary economic environment. However, as 10-Year US Treasury Rates have fallen off of recent highs, they still remain at their highest levels since December 2009. Economic growth remains fairly strong, the unemployment remains low, and inflation appears to be waning. As the Fed works to maneuver lower staff and the Department’s financial advisor anticipate increased interest rate volatility. As a result, the proposed course of action is smaller bond deals issued more frequently, which is facilitated by the flexibility provided through the Board’s approval of the Resolution.
The $1.1 billion maximum bond amount represents the Department’s expectation of FYE 2025 issuance, projected at around $800 million in Tax Exempt, $250 million in Taxable, and $50 million in recycling/refunding related tax-exempt issuance.
This annual “not to exceed” issuance approval provides several benefits to the Department, including:
• Increased flexibility on timing of issuance to take advantage of market opportunities and changes in interest rates.
• Enable the Department to better manage market risk and non-issuance exposure.
• Enhance availability of ‘bond funded’ mortgage loans.
Department Contribution
The contribution by the Department for any series of bonds issued under the Resolution will not exceed $10 million, which will to be used to fund a portion of the down payment and closing cost assistance and costs related to the acquisition of qualifying mortgage loans (including the payment of lender compensation and servicing fees for second mortgage loans) and to pay all or a portion of the costs of issuance of the Bonds. The contribution will be funded from amounts on deposit in the respective indenture. The Resolution will additionally authorize capitalized interest of up to $10 million that may be paid from the respective indenture, as necessary. As with prior transactions, these amounts are maximums; the actual contribution and capitalized interest expense are expected to be less than that approved in the Resolution.
Summary
Staff will continue to work with the Department’s financing team to ensure the economic viability of the Bonds. Depending on market conditions and other factors, the actual amount of Bonds issued may be less than the maximum approved by the Board.