by Michael Scholl
When the Obama admin-istration rolled out an emergency funding initiative to inject credit into the slumping housing market last year, DTCC’s Depository Trust Company (DTC) worked with market participants and government agencies to get the program up and running quickly. The capital-raising part of the initiative is designed “to help support low mortgage rates and expand resources for low and middle income borrowers to purchase or rent homes,” according to the U.S. Treasury Department, which also said the program “is expected to come at no cost to taxpayers.”
– Cheryl Lambert, DTCC managing director, Asset Services
The two-part initiative consisted of the New Issue Bond Program (NIBP), which is providing new lending to homeowners by housing finance agencies (HFAs), and the Temporary Credit and Liquidity Program, which backed bonds and shored up existing debt for 90 state and local HFAs. It is part of the administration’s Homeowner Affordability and Stability Program.
DTC was involved in executing the NIBP, which employed a new type of housing bond to get capital into the hands of lenders that are now providing new mortgages for first-time homebuyers, mortgage refinancing for existing homeowners and rental opportunities for other families. The NIBP resulted in a total new issuance of $15.3 billion.
Combating the recession
HFAs are state and local agencies that offer mortgages to families seeking to buy new homes. They also provide financing for the construction and renovation of rental units.
Typically, HFAs raise capital to lend to families by floating bonds. But investor demand for housing bonds has declined since the U.S. economy took a nosedive in 2008, making it difficult for HFAs to raise cash. The NIBP helped address this problem by giving the federal government a mechanism to inject capital directly into the HFAs.
In announcing the NIBP last fall, U.S. Treasury Secretary Tim Geithner said, “This initiative is critical to helping working families maintain access to affordable rental housing and homeownership in tough economic times. [It] aims to help HFAs jumpstart new lending to borrowers who might not otherwise be served and to better support the financing costs of their current programs – key components in stabilizing the housing market overall.”
The program called for HFAs to issue a new series of privately placed housing bonds purchased by Fannie Mae and Freddie Mac, which, in turn, securitized the bond portfolio. The U.S. Treasury Department then purchased the resulting securitized securities. “By the U.S. Treasury purchasing the securities, the funding flows back to the HFAs, giving them the cash they need to create mortgages, which in turn stimulates the housing market,” said Joseph Graziano, DTCC vice president, Underwriting.
President and executive director of the Idaho Housing and Finance Association Gerald Hunter described how his state would benefit from the program. “Many prospective home buyers will be able to purchase homes because of this financing opportunity,” he said. “And it comes at a time when our economy needs all the assistance it can get.”
Program poses special challenges
As is normally the case with the creation of any new security, DTC played a key role in launching the new HFA bonds. But the process involved several unique challenges, some of which stemmed from the fact that the HFAs had never dealt directly with DTC before.
“HFAs are not traditional issuers,” said Graziano, who noted, “DTC typically deals with broker/dealers for the issuance of new securities.”
DTC worked with the HFAs and other parties to the deal to help ensure the new securities launched quickly. The education process included a series of webinars in which DTC spelled out the benefits of making securities DTC-eligible and the procedures for obtaining eligibility.
“We wanted to ensure the swift, error-free and cost-effective execution of this first-ever transaction, which will bring much-needed liquidity to the housing market,” said Cheryl Lambert, DTCC managing director, Asset Services.
For most new offerings, DTC works with underwriters to obtain the information needed to make the issues eligible for its services. Because the HFA deals involved private placements, they did not require underwriters. However, the 92 participating HFAs hired advisors or broker/dealers to advise them on the eligibility process and other aspects of the transaction.
Working with U.S. Bank
Fannie Mae and Freddie Mac had hired U.S. Bank to be custodian for the bond portfolio, to collect and aggregate monthly reporting from trustees and HFAs and to provide consolidated, reconciliated reporting. When the transaction parties realized there was no underwriter to coordinate the DTC settlement of the HFA bonds in partnership with the HFAs and their advisors, U.S. Bank accepted new responsibilities. These included coordinating the submission of requests for DTC eligibility for the HFA bonds and directly receiving the bonds into U.S. Bank’s participant account as custodian.
The bank worked closely with DTC to ensure the deal proceeded in a standardized, expedited manner. “U.S. Bank did an excellent job in making sure DTC was supplied with the information necessary to make the new securities DTC-eligible,” Lambert said. “It was a pleasure to work in partnership with the bank’s team in helping to make sure this important housing-affordability initiative got off the ground smoothly.”
To help the process move quickly and cost effectively, the bank submitted information related to the deal’s eligibility requests though UW SOURCE, DTC’s new platform for underwriting processing. “UW SOURCE captures all of a security’s underwriting information electronically, allowing firms to avoid submitting paper documents to DTC,” explained Graziano.
While a longstanding DTC customer, U.S. Bank had not previously used UW SOURCE, although it had experience submitting eligibility requests through DTC’s legacy systems. To achieve the goals of the clients, U.S. Bank and DTC worked closely together to meet the unique challenges presented by the NIBP. The U.S. Bank and DTC partnership enabled U.S. Bank to navigate the new UW SOURCE platform and successfully launch the program.
“We enlisted the assistance of DTC’s Underwriting group, which provided us with a crash course in how to complete UW SOURCE applications, verify information, gather specific details and upload data, such as an offering circular, so that DTC could make the security eligible for trading,” said Patrick Crowley, U.S. Bank vice president.
DTC also assigned dedicated staff to oversee the settlement of the new securities. This work included performing the reconciliation of offering data, such as the offering amounts and the names of the issues and agents, prior to the closing dates. Graziano noted that final reconciliations normally are done on the closing dates, rather than before. But, in this case, all parties agreed that pre-closing reconciliations would help ensure the NIBP avoided any last-minute glitches.
“The swift execution of the NIBP was a priority for all parties involved, and thanks to a successful collaboration across the public and private sectors, new capital is now flowing into the hands of families to help meet their housing needs,” said Lambert. @