On October 22, 2014, the federal regulatory agencies responsible for implementing regulations under Dodd-Frank finalized the risk retention rule for asset-backed securities (the “Risk Retention Rule”). For the securitization of multifamily loans, compliance with this rule is required beginning December 24, 2016. Securitizations for multifamily loans created before December 24, 2016 do not need to comply with the Risk Retention Rule requirements. While we will only discuss multifamily loans here, please note that the Risk Retention Rule applies to the securitization of residential (single family) mortgages beginning December 24, 2015. Also note loans originated through a state Housing Finance Agency (“HFA”) are exempt from the Risk Retention Rule.

On and after December 24, 2016, Section .7 of the Risk Retention Rule gives commercial mortgage-backed securities (“CMBS”) sponsors the option to satisfy their risk retention obligation by exercising the third-party purchaser option, which allows up to two third-party purchasers (“B-Piece Buyers”) to hold a pari passu portion of eligible horizontal residual interest (“B-Piece”). Below is a list of the requirements necessary if exercising this option:

  • Each B-Piece Buyer must perform an independent review of the credit risk of each securitized asset, pay for the B-Pieces in cash at closing, without financing, and must not be affiliated with any party to the securitization transaction, other than the Special Servicer, investors, and originators of less than 10% of the unpaid principal balance of the securitized assets in the transaction.
  • An unaffiliated “Operating Advisor” must be appointed, whose responsibility is to consult with the Special Servicer on any material decisions after the principal balance of the B-Piece has been reduced by principal payments, realized losses, and appraisal reduction amounts to a principal balance of 25% or less of its initial principal balance. The Operating Advisor is required to act in the best interest of the investors as a whole and has the authority to recommend that the Special Servicer be replaced.
  • Sponsors must make certain disclosures to potential investors, including the name and form of organization of each B-Piece Buyer, a description of each B-Piece Buyer’s experience in investing in CMBS; a description of potential conflicts; the fair value of each B-Piece, the dollar amount to be acquired by the B-Piece Buyer, the purchase price paid for the CMBS interest, and other material information.

A B-Piece Buyer must comply with the Risk Retention Rule’s requirements concerning hedging of interest as if it were the retaining sponsor and may not transfer its B-Piece for 5 years following closing of the securitized transaction. After 5 years, the B-Piece may be transferred to a different B-Piece Buyer, who complies with the requirements of B-Piece Buyers generally. All subsequent B-Piece Buyers must comply with the transfer restrictions. When all mortgage loans in a CMBS transaction have been fully defeased, the risk retention obligation is terminated.

Housing Plus BlogSeveral exciting developments have recently brought changes to the affordable housing industry and we are inviting you to explore them with us at our fifth annual Western Housing Conference. Ballard Spahr and CSG Advisors are pleased to announce this year’s Best of the West in Affordable Housing Development and Financing conference on March 13, in San Francisco. The conference features movers and shakers in affordable housing leading panels, roundtables, and discussion about the most pertinent issues and developments shaping the housing industry.

The Legislative Update Panel has its hand on the pulse of Capitol Hill. Discussion will explore the implication and future of legislation and policies that affect the affordable housing industry.

HUD’s Rental Assistance Demonstration (RAD) Program experienced a boost in governmental support with the recent cap increase. The RAD program now offers renewed opportunities for housing authorities and developers to finance, transform, and create long-term housing options for low-income residents. The RAD Panel brings together a panorama of perspectives to discuss the need-to-know policies, timelines, financing structures, and organizational approaches to the revitalized RAD program.

The Finance Trends and Innovations Panel will offer insights to new loan products, lender programs, and interest rate structures taking shape in affordable housing finance. The discussion will examine new funding sources as a strategic means to preserve and sustain affordable housing.

Roundtable forums will feature Year 15 challenges and the implications of Fair Housing: Disparate Impact. Discussion will examine these two important topics and provide strategies, considerations, and expectations for the future of affordable housing development and management.

Registration for the event is free, and a detailed program description is available.

It is our privilege to create such an informative and collaborative forum for dialogue, exploration, and networking within an industry about which we feel so passionate. Though we will certainly blog about conference updates and insights, we hope you will join us in person.

Prior to 2009, housing finance agencies (HFAs) financed nearly all of their single-family mortgage loans with tax-exempt bond financings.  Over the past five years as rates on conventional mortgage loans fell and remained at historical lows, HFAs found it difficult to compete using tax-exempt bonds to finance mortgage loans.  Many HFAs turned to the secondary market to do mortgage financings or stopped making new mortgage loans.

Last week, the National Council of State Housing Agencies (NCHSA) made mention of two recent Moody’s reports, one of which speaks to Moody’s expectation that more HFA bonds will be issued in the near future.  This report suggests that bond financings have re-emerged because the bond market is becoming more efficient and because of HFAs’ desire to rebuild their balance sheets.  Further, HFAs have created mortgage subsidies from prior issues that may be used in conjunction with future bond issues to make mortgage loans that are competitive in the market. It will be interesting to watch the issuance of single-family bonds in the future and see if the volume does increase.

SpreadsheetIf you have ever issued (or borrowed the proceeds of) bonds then you should know about the Municipalities Continuing Disclosure Compliance Initiative (the “Initiative”) and take the appropriate steps to determine your compliance with Rule 15c2-12 under the Securities Exchange Act of 1934 (the “Rule”).

The Rule generally prohibits underwriters from purchasing or selling municipal securities unless the issuer has agreed to provide continuing disclosure to the marketplace regarding annual financial information, certain operating information and certain events in the form of annual reports and event notices. The Rule also requires that an offering document prepared for a primary offering of municipal securities include a description of any material noncompliance with any prior continuing disclosure undertaking in the last five years.

The Securities and Exchange Commission (“SEC”) recently launched the Initiative, which was designed to motivate municipal issuers (defined in the Initiative to include obligated persons) and underwriters of municipal securities to police themselves.  The Initiative encourages self-reporting related to possible material misstatements in offering documents regarding issuers’ compliance with past continuing disclosure undertakings for what the SEC deems to be “favorable settlement terms.”  The Initiative’s settlement terms expire on September 10, 2014.

On July 8, 2014 the SEC announced its first cease and desist order under the Initiative.  The SEC found that the Kings Canyon Joint Unified School District of California (“District”) made a material misstatement in a 2010 official statement.  The SEC alleged that the District incorrectly represented that it had not failed to comply in all material respects with its continuing disclosure agreements in the previous five years, and found the failure to comply itself to be material.

Participants in the municipal market, including housing authorities which have issued bonds or borrowed the proceeds thereof, should begin reviewing (or hire a third party to review) their compliance with any continuing disclosure undertakings over the past decade and ascertain if such compliance was accurately reported in all primary offerings in the past five years.  If any noncompliance is found, you should consult with counsel to determine the potential repercussions of self-reporting or not self-reporting. Ballard Spahr will continue to monitor the Initiative and stands ready to address your questions or explore these issues with you in greater detail.

Rows of HousesDid you know that an estimated 20 million people in the United States live in mobile home or manufactured home communities?  These communities make up a significant component of the nation’s affordable housing stock.  Manufactured homes can be an intermediate step for some individuals and families between apartments and owner occupied housing such as condominiums and detached homes.  And, while individuals with sufficient income and cash for down payments typically prefer to buy traditional homes, there are many manufactured home communities – for example retirement communities in Florida and California and communities located near the ocean – with tenants of all income levels.

Historically, manufactured home communities were owned primarily by for profit entities and developers.  Recently, however, many such communities have been purchased or developed by nonprofit entities, municipalities and tenant cooperatives.  These nonprofit owners may be unaware that their acquisition of a manufactured home community can be financed with the proceeds of tax-exempt bonds.  In addition, nonprofit owners of older communities may be unaware that they can finance improvements to their communities with tax-exempt bond proceeds. 

The tax requirements for issuing tax-exempt bonds to finance the purchase and/or improvement of a manufactured home community are similar to the requirements for financing a multifamily housing development.  The nonprofit owner is required to, among other things, set aside a certain number of spaces in the community for lower income households.

Investor demand for tax-exempt bonds secured by manufactured home communities has steadily increased over the last decade.  In the past, rating agencies were not as comfortable rating these types of bonds, so the bonds that were issued were often either unrated or credit enhanced by bond insurance companies.  Today, investors and rating agencies are more comfortable with a bond issue backed by a manufactured home community.  They recognize that manufactured home communities have a stable tenant base because it is costly for tenants to move their homes.  Recently, bonds secured solely by a manufactured home community and its rental revenues have been rated as high as “A” by S&P. 

The current economic environment could potentially provide nonprofit owners with an opportunity to use tax-exempt bonds to finance or refinance the acquisition and/or improvement of their manufactured home communities at historically low interest rates.

One session at the recent Ballard Spahr and CSG Advisors Western Housing Conference included an interesting discussion about the effects of Community Reinvestment Act (CRA) investment on affordable housing in the nation.  Panel members shared some insight into how banks fulfill some of their CRA requirements by investing in affordable housing for low or moderate income individuals.

Under CRA and related regulations and guidelines, banks are evaluated on a periodic basis by federal examiners to determine if they are, among other things, providing enough lending, investing and financial services to low and moderate income individuals in the geographic areas where they operate.  These evaluations result in ratings ranging from “Outstanding” to “Substantial Noncompliance.”  A bank’s CRA rating is taken into account by the banking regulatory agencies when a bank seeks to expand through merger, acquisition or branching.  The OCC posts its latest examination procedures here.

Large national and multinational banks collect a substantial amount of deposits in highly populated metropolitan areas such as New York, Los Angeles, San Francisco and Atlanta, so these large banks make substantial investments in those areas in order to comply with their CRA goals.  Interestingly, one panel member mentioned that a disproportionate amount of CRA investment is also made in some less populated states like Utah and South Dakota because several large banks maintain a substantial amount of assets in branches located in those states. 

Banks receive CRA credit by investing in affordable housing, so they are motivated to make mortgage loans and/or purchase bonds or other securities backed by mortgage loans made to low and moderate income individuals.  Banks are also motivated to purchase Low-income Housing Tax Credits (LIHTC) for affordable multifamily housing projects. One panelist mentioned that pricing for LIHTC in the larger metropolitan areas can be as much as 25% higher than in less populated areas where banks do not have as much CRA investment need.  Some of this pricing difference can be attributed to higher property values and rental rates in high population areas, but CRA is also a factor.  Does this mean that CRA requirements encourage banks to invest in high population areas at the expense of investment in less populated areas?  The panel discussed a potential change to allow banks to receive CRA credit for investments on a larger regional basis.

Another challenge facing CRA is the move towards online banking.  CRA regulations will need to adapt to address the way that banking services are delivered to consumers today.

More information on CRA can be found on the OCC website.