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Borrowing Taxable: A Viable Option?

NALHFA 2012 Annual Educational Conference Meeting the Challenge: Creating Opportunities and Developing New Solutions in Affordable Housing April 25-28, 2012 Omni Austin Hotel Downtown Austin, Texas. Borrowing Taxable: A Viable Option?. Financing with Taxable Bonds Benefits & Challenges

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Borrowing Taxable: A Viable Option?

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  1. NALHFA 2012 Annual Educational ConferenceMeeting the Challenge:Creating Opportunities and DevelopingNew Solutions in Affordable HousingApril 25-28, 2012Omni Austin Hotel Downtown Austin, Texas

  2. BorrowingTaxable: A Viable Option? • Financing with Taxable Bonds • Benefits & Challenges • Investors

  3. Programs by Income Level 130% 50% 40% 60% 120% 110% 100% 175% 90% 80% 70% HDC Offers a Mix of Affordable Housing Programs $145,250 80% AMI HDC Applicable Program Taxable 80/20, New Hop, Mixed Income $107,900 60% AMI HDC Applicable Program LAMP, Mixed Income 130% AMI HDC Applicable Program New HOP, Mixed Income $83,000 Income Level Family of 4 40% AMI HDC Applicable Programs 80/20, Mixed Income $66,400 100% AMI HDC Applicable Program Taxable 80/20, New HOP, Mixed Income $49,800 $41,500 175% AMI HDC Applicable Programs Mixed Income, Co-Op, New HOP 50% AMI HDC Applicable Programs 80/20, Mixed Income $33,200 Current AMI $83,000 Percent of NYC Area Median Income

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

  5. New Housing Opportunities Program 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

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

  7. Other Financing Programs 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

  8. Securitizations • 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

  9. Taxable Issuances • 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 Note Outstanding FHLB Index Floaters (As of 1/31/2012)

  10. Refunding • 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

  11. BorrowingTaxable: A Viable Option? • Financing with Taxable Bonds • Benefits & Challenges • Investors

  12. Benefits & Challenges • 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. Investors Have Increased Focus on European Fiscal Issues, Influencing U.S. Treasury Movements Taxable Fixed Rate Overview US 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 US Treasury Yield Curve % Source: Bloomberg Source: Bloomberg

  14. Short-Term Market Tone Remains Positive Short-Term Market Update SIFMA vs. LIBOR (Since Jan 2008) • 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/LIBOR Ratio (2011 to 2012 YTD) Source: Bloomberg Source: Bloomberg SIFMA

  15. Municipal and Treasury Rates and Ratios 10-year MMD, 10-year UST, and MMD/UST Ratios 30-year MMD, 30-year UST, and MMD/UST Ratios Source: Bloomberg; TM3 Source: Bloomberg; TM3

  16. Benefits & Challenges • 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

  17. Taxable Municipal Issuance Has Continued to Fall Year-to-date supply $bn Source: Thomson Reuters, excludes debt subject to AMT, as of April 23rd, 2012 Note: Data includes all supply with YTM of 1.088 and greater

  18. BorrowingTaxable: A Viable Option? • Financing with Taxable Bonds • Benefits & Challenges • Investors

  19. Investors • Banks – CRA motivation • Insurance Companies • Pension Funds • Bond Funds • Corporations • High Net Worth Individuals

  20. Taxable Investor Base Overview Taxable Investor Allotment Trends in 2011 Taxable Investor Breakdown • 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 Taxable Investor Breakdown by Rating Category Taxable Investor Breakdown by Maturity $000 $000

  21. THANK YOU Please visit our website: www.nychdc.com 23

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