2008 Headlines from The Bond Buyer...

Every month, CDFA provides the development finance industry with access to the headlines and top stories from that month's editions of The Bond Buyer. The Bond Buyer is a daily newspaper serving the bond finance industry. CDFA and The Bond Buyer have developed this strategic partnership as a way of education and highlighting the importance of municipal bond finance. CDFA Members can also receive discounts on new subscriptions to The Bond Buyer. >>>LEARN MORE>

Month/Year December 2008 November 2008 October 2008 September 2008 August 2008 July 2008 June 2008 May 2008 April 2008 March 2008 February 2008 January 2008

SEC Clarifies Disclosure Downgrade Stance
Monday, February 11, 2008
By ANDREW ACKERMAN

WASHINGTON - Securities and Exchange Commission officials this week sent bond lawyers a clarification meant to curb confusion in the market that stated issuers may have to file material event notices if their bonds are downgraded as a result of rating changes to bond insurers.

The clarification, which was informally sent to the National Association of Bond Lawyers late Wednesday, followed a statement SEC officials sent the group Jan. 18 that said issuers did not need to file material event notices notifying investors of Fitch Ratingse_SSRq downgrade of Ambac Assurance Corp. to double-A from triple-A.

The SEC clarification suggested the previous statement may have been misunderstood by some market participants.

"That statement should not be relied upon in a situation involving a change in rating in respect of a municipal security insured or guaranteed by Ambac or any other monoline insurers [whether as a result of a change in rating of the insurer or otherwise]," Wednesday's release said. "The SEC staff would like to clarify that, in such an event, it expects the issuer to review the terms of its specific continuing disclosure agreement to determine what action is required, and in particular whether a material event notice must be filed."

The clarification contrasted with the Jan. 18 statement, which said: "Staff of the Commission has informally stated that press coverage of the recent downgrade of Ambac by Fitch has been so widespread and extensive that, in the opinion of the Division of Trading and Markets, no material event notices of this event need be filed at this time."

Martha Mahan Haines, the SEC's chief of municipal securities, said yesterday that some bond lawyers who had contacted her office were confused because continuing disclosure agreements require the filing of material event notices and it was unclear if the SEC's original guidance meant that they would not be required to disclose the actual downgrades of the bonds wrapped by credit enhancement from downgraded insurers. There is typically a lag between the time the ratings agencies downgrade insurers and when they list the individual bonds affected by that rating.

"Now that the actual ratings downgrades of the individual bonds are out, you've got to disclose those as a material event under continuing disclosure agreements," Haines said. "We can't interpret around that."

The SEC's updated disclosure guidance came the same evening that Rep. Paul Kanjorski, D-Pa., released a Jan. 31 letter from SEC chairman Christopher Cox, along with a five-page memo that mentioned an SEC notice on disclosure would soon be released.

The memo, written by Erik Sirri, the commission's director of trading and markets, said that disclosure in the muni market "is substantially less comprehensive and less readily available than disclosure by public reporting companies." It also said that "recent problems of municipal bond insurers and the direct and indirect impact on municipal bond investors illustrate once again some of the shortcomings of the regulatory structure of this market."

"Despite the size and importance of this market, it lacks a variety of the systemic protections found in many other sectors of the U.S. capital markets," Sirri said.

"The National Association of Bond Lawyers recently asked commission staff for guidance on the potential impact of failures to file material event notices about downgrade issues pursuant to [SEC's Rule 15c2-12 on disclosure]," the memo continued. "Commission staff expects to issue such guidance shortly."

Kanjorski announced last month that he has launched an inquiry into the bond insurance industry and asked federal and state regulators for information, including whether statutory or regulatory reforms are needed. His staff released responses from the federal and state regulators late Wednesday, including the letter and memo from Cox and Sirri. Kanjorski plans to hold a hearing to discuss the issues on Feb. 14.

(c) 2008 The Bond Buyer and SourceMedia, Inc. All Rights Reserved.
http://www.bondbuyer.com/ http://www.sourcemedia.com

Buffett Offers Some Reinsurance
Pledges $800 Billion To Aid Bond Insurers
Thursday, February 14, 2008
By DAKIN CAMPBELL

Warren Buffett yesterday offered to reinsure $800 billion in municipal bonds now insured by Ambac Assurance Corp., MBIA Insurance Corp., and Financial Guaranty Insurance Co., through his Berkshire Hathaway Assurance Corp.

Speaking live via telephone on CNBC, Buffett gave the insurers 30 days to find a better deal. He said he offered the deal to the insurers last week and that one insurer - whom he refused to name - had already rejected his offer. The other two have yet to respond, he said.

Spokespersons for Ambac, MBIA, and FGIC declined to comment.

In the interview, Buffett said he would seek only to reinsure the low-risk municipal bonds on the financial guarantors' books, choosing to steer clear of the companies' riskier credits tied to collateralized debt obligations or credit default swaps.

Buffett said he estimated that the three monoline companies insure about $800 billion in tax-exempt bonds, and that he was prepared to assume all of their liabilities.

"The municipals, in effect, get taken off the table," Buffett said. "Our system puts the municipals at the front of the line. What's going on now leaves the municipals at the back of the line because the funds will get depleted for all of these other types of insurance before they get to the municipals in very large part."

Buffett also said he would charge a premium equal to about one-and-a-half times the premium left on the life of the bonds, drawing on an example from Berkshire's efforts to reinsure select credits in the muni secondary market where it can command a 200% premium.

Buffett's announcement is the latest in a string of solutions proposed to help bail out the bond insurance companies, the monoline insurers that have seen their capital cushions deflated as losses have risen on the derivative instruments they guarantee. Several groups of investment banks are currently in negotiations to raise capital for the various insurers, led in part by efforts of the New York insurance superintendent Eric Dinallo.

Buffett's latest plan also appears to have the backing of Dinallo, who said in a statement that he was "pleased" with the option.

However, the success of the option remains to be seen. A number of questions would have to be answered going forward if the plan were to take shape, and one insurer's refusal to take up Buffett's offer shows their reluctance.

First, typical reinsurance contracts do not substitute the rating of the new reinsuring company, and bond ratings would continue to be based on the rating of the original financial guarantor. As a result, there is some question about the effectiveness of the plan in assuring municipal market participants that all was back to normal.

"The typical reinsurance contract runs between the seeding company and the reinsurer. Policyholders of the seeding company have no recourse to the reinsurer. They could only look to the [original bond insurer]," said Dick Smith, managing director at Standard & Poor's. "There would have to be some other element present here that gives the policy holder the right to go to the reinsurer."

At the moment, Berkshire is not rated by any of the three rating agencies.

Under the plan, Buffett would only reinsure the safe portion of the insurers' books, leaving them to hold the more risky credits. This would change the business model, and could have negative implications for the triple-A ratings regardless of the capital freed up. All three rating agencies have said their evaluations of "triple-A-ness" rest, in part, on the monolines' ability to write new business and exist as a going concern.

"By reinsuring a large chunk of the municipal portfolio, the bond insurer would be left with an insured portfolio that is more risky post transaction, as the debt remaining would largely be structured finance and international obligations," Andrew Wessel, an equity analyst at JPMorgan, wrote in a note yesterday.

In addition, muni bonds rarely default, meaning that rating agencies require the bond insurer to put up less capital reserves than they would for other asset-backed securities. This means that by offering to reinsure munis only, Buffett is offering the option that frees up the least amount of capital.

"It's easier to see that this is a transaction that would be good for the market," Smith said. "It's harder to see that this is a transaction that would be good for the companies."

(c) 2008 The Bond Buyer and SourceMedia, Inc. All Rights Reserved.
http://www.bondbuyer.com/ http://www.sourcemedia.com

Wrestling With Bond Insurance: It's a Matter of Scales
Tuesday, February 12, 2008
By JON FIEBACH BY JON FIEBACH

When I was a high school athlete, preparing for "away" wrestling matches I remember there were always one or two schools that had a reputation for tweaking their scales for the pre-match weigh-in.

For those unfamiliar with the sport, each wrestler has to weigh in before each match to confirm they are under the weight for each wrestling class. For example, a wrestler that grappled in the 145-pound class had to weigh 145 pounds or less just prior to the match. I suspected some unscrupulous schools would make sure all of its wrestlers were well under the prescribed weight and then adjust their scales to trap the visiting team.

Just the possibility of this would force us to arrive at least one pound underweight - naturally putting us at a disadvantage, whether the scale was fair or not. It became clear to me that familiarity with the scale allowed for an advantage.

Now that I am much older, and possibly a little wiser, I look back and realize that maybe the schools with the bad reputations were not really cheating. It's possible there was just natural error that occurred from scale to scale. Maybe they did not re-calibrate their scales frequently enough. Many of the scales were very old, and most of the floors were a bit uneven. There was definitely room for error that may not necessarily mean there was intent to cheat. Or maybe I am just being naive and there really was rampant cheating.

Either way, I cannot help but compare my thoughts on wrestling to the current dilemma in the municipal bond market. The rating agencies acknowledge having a different scale for rating corporate bonds than they use for rating municipal bonds. I would like to believe this calibration served a well-intended purpose at some point, but currently the scale used to rate munis is at the heart of a potential collapse in the funding markets for municipalities and must be changed. By rating municipal debt on a more burdensome scale than virtually any other type of debt in the world, rating agencies are inadvertently causing the potential for a liquidity crisis in the U.S. municipal bond market.

The key to understanding the problem lies with the realization that bond ratings are extraordinarily important. When investors look at a bond they are often completely dependant on the rating. Given a choice between a corporate bond with a rating of double-A and a municipal bond with a rating of single-A, it is likely the majority of investors will believe the corporate bond is stronger as analyzed by the rating agency.

In the municipal bond market, where there are over 50,000 unique issuers of debt (100 times the number of companies in the S&P 500 stock index), it is virtually impossible for any investor to employ a staff that is able to continuously oversee the credit quality of each of these issuers, leaving the market dependant on the services of the rating agencies. This makes for the perfect business relationship - in essence, all municipal bond investors outsource their research to the rating agencies, so we need to know the ratings are proper, relevant, and up to date.

Furthermore, and most important, mutual funds and money market funds have developed large and successful businesses based on ratings. Money markets, the foundation of the liquidity of the U.S. dollar, invest based on rules that revolve around ratings. Under the current draconian system, when providing a muni bond a rating of single-A, the rating agencies are giving a rating that is not generally eligible for a money market investment under SEC Rule 2a-7.

In order to move the rating up to a level that is consistent with money market eligibility, the issuer would need to pay a bond insurer to enhance the rating. This seems to be an unfair consequence that has significant, if unintended, financial penalties. The A-rated municipal would likely be eligible for money markets on its own merit if debt was rated equally across all asset classes.

It seems strange that double-A corporate debt is money-market eligible, while single-A municipal is not, even though the cumulative default rate for double-A corporate debt is approximately 10 times that of single-A municipal debt. Though the rating agencies have carved out a unique scale to rate municipal bonds, the general public and the SEC do not recognize it.

Until recently, the solution to normalize muni ratings between the municipal rating scale and the 2a-7 regulation was the use of bond insurance, which provided the municipalities and money market funds with the ultimate show of strength, a triple-A rating. Over the last year, bond insurance has become increasingly irrelevant as many investors, along with the rating agencies, are coming to realize that the majority of bond insurers may lack the financial capability to sustain triple-A or even double-A ratings perpetually.

That is why this is precisely the correct time to make a change in the rating scale. Adjusting municipal ratings to be on parity with corporate ratings would level the playing field. It would allow municipalities to operate fairly within a marketplace that is inclusive of all debt issuers, and will end the system that currently leaves municipalities paying approximately $2 billion a year to buy credit enhancement just to increase their debt ratings to where they would be rated without the prejudice of the current methodology.

Maybe I am being naive now, but I would like to hope the difference in rating scales is nothing more than an oversight that needs to be resolved, an overdue need to re-calibrate. I would hate to revert back to my distrustful youthful thoughts where I might wonder if the rating agencies are acting deliberately to hold municipal ratings down on behalf of their largest clients - the bond insurers. By using two different scales, the visiting team - in this case municipal governments - are playing at a consistent disadvantage.

Jon Fiebach is managing director at Duration Capital.

(c) 2008 The Bond Buyer and SourceMedia, Inc. All Rights Reserved.
http://www.bondbuyer.com/ http://www.sourcemedia.com

S&P Takes Action on Five Bond Insurers
MBIA, Ambac, CIFG Affirmed; FGIC, XL Fall
Tuesday, February 26, 2008
By Dakin Campbell

Standard & Poor's yesterday released rating actions on five of the bond insurers, downgrading two and maintaining AAA ratings on the others, although with indications that they will continue to monitor the insurers' capital positions and subprime exposure closely.

The rating agency lowered Financial Guaranty Insurance Co. to A from AA, maintaining a credit watch with developing implications, while downgrading XL Capital Assurance Inc. to A-minus from AAA and keeping it on negative watch.

The agency affirmed the AAA rating for MBIA Insurance Corp. but took it off credit watch and gave it a negative outlook. Ambac Assurance Corp. remained at AAA, and on credit watch with negative implications. CIFG Guaranty also saw its AAA rating affirmed and its negative outlook maintained.

Late yesterday, in a letter to shareholders, Joseph "Jay" Brown, chief executive officer of MBIA Inc., the parent of the financial guarantor, for the first time specified his plans for the insurer's future.

"As soon as it's feasible but within a five-year period, we will restructure the company in such a way as to insure public and structured finance business from separate operating entities," Brown said.

The rating actions follow from the latest stress tests conducted by Standard & Poor's, in which they looked at the exposure of the financial guarantors to non-prime U.S. mortgages. The loss estimates were the same as those released on Jan. 17, with the exception of the 2006 and 2007 vintage alt-A mortgages, which increased to 5.5%, from 3.5%, and to 9%, from 3.5%, respectively.

Standard & Poor's also increased the loss assumptions for collateralized debt obligations.

In the report, Standard & Poor's said the loss assumptions will be "no less than, and perhaps higher than, the ultimate loss levels experienced." The assumptions calculated by the bond insurance team were higher than those of its structured finance divisions, in an effort to pose a high stress level to each company.

"Certainly there has been a lot of discussion that these loss assumptions have been shifting over time, and part of that relates to the fact that there has been mortgage market deterioration," said Standard & Poor's managing director Howard Mischel. "What we are trying to do is get out ahead and try to figure out how far this is going to move and try to set up goal posts that were fixed to the ground."

In moving MBIA back to a negative outlook, Standard & Poor's cited the bond insurer's recent success in raising $2.6 billion and the support of the company's franchise that the capital raising indicated. The rating agency also cited possible reinsurance transactions as contributing to the company's upgrade from negative watch.

"Clearly from MBIA's case stepping back from a credit watch is like stepping back away from the edge of a cliff," Mischel said. "That's an important development, I think."

Yesterday, MBIA Inc. announced that it would eliminate the quarterly dividend paid to stockholders. The move would save the company an additional $174 million, MBIA said in a release.

In its earlier release, Standard & Poor's kept the company on negative outlook because of questions regarding the company's corporate structure, franchise value, and the possibility of "disadvantaging" a group of policy holders, namely the investment banks that bought credit protection on the structured products.

Fitch Ratings released a report yesterday that looked at these policy holders, the counterparties in insurance policies on the structured finance side of the business, and found that in most cases, losses related to these transactions will not result in ratings downgrades.

"In the event of moderate guarantor downgrades, losses taken by financial institutions should be well contained," Fitch said in the release. "However, any substantial downgrades [to the financial guarantors], particularly to below investment grade, would result in significant losses, not to mention potentially costly knock on effects."

Of the banks that Fitch looked at, Citigroup Inc. - reported to be a member of the group looking for a solution for Ambac - has a notional exposure on total hedges related to "super senior" asset-backed security CDOs insured by Ambac of $5.5 billion, and an additional $1.4 billion in notional value to subprime trading assets tied to Ambac.

This group may be left out in the case where MBIA, or any of the other bond insurers, elects to split itself into two distinct units. Such a scenario would separate the municipal bond insurer from a structured finance insurer.

FGIC has already announced its intention to split itself in a similar manner, and reports say Ambac may also consider such a move.

Last Tuesday, Ambac spokeswoman Vandana Sharma said that Ambac was evaluating its various lines of business to determine the company's strategy going forward. She also declined to confirm any of the recent reports related to an Ambac bailout plan that could be imminent.

(c) 2008 The Bond Buyer and SourceMedia, Inc. All Rights Reserved.
http://www.bondbuyer.com/ http://www.sourcemedia.com

Subprime Assistance
Posted on Thursday, January 03, 2008
Source: Bond Buyer
By Peter Schroeder

The Bush administration's proposal for Congress to increase the private-activity bond volume cap and allow state and local housing finance agencies to issue tax-exempt bonds for subprime mortgage refinancings has spawned legislative proposals that are bigger and broader.

Housing advocates are applauding the legislative initiatives, which would provide more of an increase in the private-activity bond cap for HFAs and affect multifamily and single-family housing bonds used for both refinancing and first-time homebuyers. They had been concerned the administration's narrower plan - which was only targeted to the single-family housing sector - might not be effective because there has been a lack of demand for similar taxable bond programs, and HFAs are restricted as to who they can help.

In a series of interviews about what to expect in the coming year, housing finance officials said they hope the focus on the subprime mortgage crisis and the proposed legislative fixes makes homebuyers and homeowners more aware of HFA programs and how they can provide assistance.

When the White House early last month weighed in on the ongoing subprime crisis with a series of recommendations from Treasury Secretary Henry Paulson, the proposed interest rate freeze for struggling homeowners grabbed most of the headlines. However, members of the housing finance community were much more interested in his call for Congress to allow HFAs to issue tax-exempt bonds for subprime mortgage refinancings. Currently only tax-exempt bonds can be used to help first-time homebuyers.

Housing advocates initially were concerned about whether the plan would include an expansion of the private-activity bond volume cap, warning the proposed new tool could not be used to its potential if HFAs did not receive additional capacity to issue the debt.

The volume cap - which is based on state population and was established by the federal government to limit the amount of tax-exempt bonds that can be issued to benefit private entities - has restricted some states from issuing more debt. The Bond Buyer's 2006 private-activity bond survey found that cap restrictions made 11 states unable to fund all of their requests, up from three states the previous year.

"We feel it's very important that the legislation [to allow tax-exempt bonds for refinancing] be coupled with additional bond cap and if the HFAs get additional bond cap, I think they will feel that the additional authority gives them flexibility and a new tool," said Garth Rieman, director of policy and government affairs at the National Council of State Housing Agencies. The NCSHA's board has made the cap expansion one of its top legislative priorities, he said.

Treasury officials late last year told lawmakers they want the cap to be increased by about $15 billion over three years, sources said.

But just before Congress recessed for the holidays, three Senate Finance Committee members proposed bills that would go farther than the administration's plan.

Sens. John Kerry, D-Mass., and Gordon Smith, R-Ore., introduced a bill that would give HFAs all $15 billion of the expanded cap proposed by the administration up front in the first year, and allow extra funds to be carried over into future years. In addition, the bill would allow bonds under the new cap to be issued, not just for refinancings, but also for first-time homebuyers.

Sen. Charles Schumer, D-N.Y., announced he plans to introduce legislation this year that will provide a larger increase to the volume cap, as well as make some of that increase permanent. Under Schumer's proposal, HFAs would receive $10 billion in each of the next two years, which could go toward new single- and multifamily mortgages, as well as refinancings. After that, the bill would increase the cap by $3 billion every year permanently, but would limit its usage to just new mortgages.

Barbara Thompson, executive director of the NCSHA, praised the legislative initiatives, saying the senators "clearly understand that a housing bond cap increase is necessary not only to address the subprime crisis, but also to respond to states' persistent and ever-growing affordable housing needs."

Housing advocates had worried about the effectiveness of the administration's narrow proposal and had said legislation would be much more viable if it expanded the volume cap increase and the use of the new bonds that could be issued.

LOCAL PROGRAMS
But HFAs that have tried to establish taxable bond programs to help those hurt by subprime mortgages say they have run into some obstacles that may need to be addressed, regardless of whether taxable or tax-exempt bonds are used in the programs.

The Ohio Housing Finance Agency was poised in April to become the first state HFA to issue taxable municipal bonds to help existing homeowners refinance variable-rate loans into fixed-rate mortgages so that they could avoid foreclosures. Several states were paying close attention, as they were considering comparable programs of their own.

The agency was authorized by its board to issue up to $100 million of taxable bonds. But so far, the OHFA has yet to issue any bonds.

"Unfortunately, the program really hasn't reached the heights that we had expected or hoped for, and therefore the economics haven't been there yet where we feel it's appropriate to issue the bonds," said Bob Connell, the OHFA's director of debt management.

He said the agency has helped nearly 40 Ohio homeowners avoid interest rate resets on their mortgages through refinancings, but has done so through its general fund because it has not found enough qualified homeowners to justify issuing debt.

The problem is not one of demand, Connell said, but a matter of finding borrowers in need of help that are still eligible for the aid.

"We knew we weren't going to be able to help everybody," he said. "What we have since learned is that while the number of homeowners who have approached our lenders is [what] we would have expected, unfortunately many of them have passed the point of where we could be of some help. They are either in foreclosure, or they're in default about to go into foreclosure. The moving van is at the door, the sheriff is on the steps."

HFAs have restrictions about who they can lend money to, and generally they cannot help homeowners who have missed payments on their mortgages, according to Connell and others.

The Maryland Department of Housing and Community Development experienced similar struggles in introducing its taxable bond refinancing program. Up to $100 million was authorized for the program, but thus far only about $7 million has been allocated.

Clarence Snuggs, deputy secretary of theHCD, said his state as well as others are having trouble getting to people soon enough to help them.

"A lot of people, when they did call us and other HFAs, were just too far gone. There's not a whole lot you can do when you wait that long," he said.

The wide variety of homeowner problems makes it difficult for a single program to offer widespread support, according to Snuggs.

"The solution to this is not a single solution," he said. "The folks that are challenged are in an array of situations that need to be dealt with, and most of that's on a case-by-case basis."

The Colorado Housing and Finance Authority also had trouble finding qualified homeowners in need of refinancings when it introduced a program in January to use taxable bonds to fund both new mortgages and refinancings.

"Quite honestly, right out of the box when we first did it, the bulk of the reservations were acquisition loans" for people buying new homes, said Karen Harkin, the CHFA's director of home finance.

State HFA officials said they would welcome the ability to issue tax-exempt debt, but their largest obstacle remains getting to borrowers before they become delinquent on their mortgages.

While being able to issue tax-exempt debt for refinancing would help provide more affordable rates, Connell said, making people aware of the situation in time to seek help is a more significant priority right now.

"Yes, we'd love to have the ability to issue tax-exempt bonds to fund refinancings ... but that's not 100% of the answer," he said.

Connell said he hopes the attention given nationwide to the subprime housing crisis will make Ohio homeowners eligible for HFA aid more proactive in seeking it before serious problems arise.

"Hopefully, [homeowners] are at a point where it's not too late and they'll sit down, look at their mortgage, look at when the next reset date is, and take the appropriate steps to avoid finding themselves in an economic position that they can't handle," he said.

Snuggs said that next year will bring even more challenges as additional Maryland homebuyers face rate resets and begin to struggle with their loans.

"We're just getting ready to go into the storm." he said. "That 2005 to 2006 vintage [of subprime mortgages] is particularly nasty from what we can tell - [as rates from those mortgages reset in 2008], that's really where the tough stuff's going to happen."

FINDING A BALANCE
Another challenge facing HFAs this year is determining how far to extend their reach to troubled homeowners while still maintaining their credit ratings. One of the main reasons the agencies have largely avoided the problems found elsewhere in the housing market is because their strict guidelines for eligibility prohibit them from getting involved with risky loans. But with so many borrowers nationwide struggling to keep their homes, many are looking to some form of aid from the state HFAs.

"It's been a while since agencies really made any significant changes in their lending programs," said Wendy Dolber, an analyst with Standard & Poor's. "They should be fine, but they do have some new issues to deal with that weren't there in previous years."

Some HFAs are considering modifying their requirements to reach as many people as possible.

"There are a number of people who have delinquencies that need a product that would allow them to reach further," Snuggs said. "We're looking at other options to both expand our existing product and work with our local lenders to create some additional products."

Harkin said the Colorado HFA's refinancing program became more successful with some slight modifications made in the fall that allowed them to offer aid to slightly riskier borrowers. The authority still requires borrowers to meet a minimum credit score, but is now accepting borrowers who previously refinanced their mortgages and received some cash back.

"We were pretty stuck until we could get those improvements made," she said. "Now we're starting to see about a million, million and a half, in new refinancing reservations a week."

The Colorado HFA's refinancing program has allocated half of its authorized $50 million.

But even as agencies work to reach out to more borrowers, rating analysts say protecting the credit rating should still be their number one priority.

"[HFAs] always test the waters first, they always make sure that they know how it's going to affect their ratings and what kind of reserves are going to be needed," Dolber said. She said she does not expect HFAs to put their credit rating in danger at the expense of offering more aid.

Charles Giordano, a director at Fitch Ratings, agreed. "The outlook for the HFA sector should be very positive again [this year], and part of it has to do with the fact that there's not a lot of money out there for anybody with compromised credit," he said.

A STEADY 2008?
Even with the subprime mortgage crisis, state and local HFAs are poised to have another strong year in 2008, driven by new homeowners turning to the agencies instead of private lenders for help with their first mortgage, and also by current mortgage holders looking for some HFA assistance.

There has been a dramatic upswing in total bond issuance by state and local HFAs in the last two years, led by increasingly large amounts of single-family housing bonds. They issued $27.4 billion of bonds last year, $23.2 billion of which were single-family housing bonds. In 2006, $28.5 billion of bonds were issued, but only $22.5 billion were for single-family housing, according to Thomson Financial.

On the state side, HFAs issued about 10 times more debt for single-family than multifamily housing - $20.7 billion to $2.44 billion. Local agencies, which operate on a smaller scale, issued $2.5 billion for single-family needs, while multifamily needs received $1.8 billion of debt.

"I would expect next year to be as strong as if not stronger than this year," Dolber said.

Favorable spreads between taxable and tax-exempt debt has made mortgage bonds more attractive, and that attraction should extend into this year, according to the Standard & Poor's analyst. "As long as spreads are working in their favor, we could expect volume to increase, to be at least as strong as in 2007," she said.

Housing market analysts said the demand for single-family mortgages provided by HFAs remains very high. The problems facing private lenders has driven growing numbers of first-time homebuyers to look at HFAs for aid, they said. The agencies are seeing this "flight to quality" because their extensive documentation requirements and diligent vetting process have allowed them to largely avoid the problems that have hit the private market.

"HFAs will see a lot of demand from borrowers that might have borrowed from some subprime lenders in the past, but either those lenders aren't going to be around or potential homeowners are going to continue this kind of migration to solid quality lenders, which includes the HFAs," said NCSHA's Rieman.

However, analysts anticipate that multifamily housing bonds will be on the rise this year, as more people are looking into renting property and avoiding the housing market for now.

"We expect to see more issuance from public housing authorities," Dolber said.

Giordano agreed, saying foreclosures are increasing rental demands, resulting in the need for more multifamily housing.

"More and more foreclosures means more and more need for rentals," he said.

Adding to the multifamily housing demand are potential homebuyers delaying their entry into the volatile market.

"I think that the rental market is strengthening as homeowners are delaying purchases," Rieman said.

Further adding to the shift to multifamily housing is the fact that many HFAs are reaching their limit as to how much debt they can issue for single-family loans.

"I think the demand for first-time homebuyers for single-family mortgages that state housing finance agencies issue should be at least as strong, if not stronger, than last year," Giordano said. "The challenges, though, are the amount of bond cap the states have, which once again will probably not be sufficient for the demand."

"There's only so much that they can grow," said Moody's Investors Service analyst Florence Zeman.

(c) 2008 The Bond Buyer and SourceMedia, Inc. All Rights Reserved.
http://www.bondbuyer.com/ http://www.sourcemedia.com

Groups Call For Easing Restrictions
Posted on Tuesday, January 22, 2008
Source: Bond Buyer
By Humberto Sanchez

Municipal market groups are pushing the Bush administration and Congress to include proposals that would ease restrictions on bonds in the economic stimulus package currently being developed.

Many of the proposals would provide aid to the housing sector, which is reeling from record defaults in subprime loans, but others focus on bank-deductible and industrial development bonds.

The calls for easing muni bond restrictions came as President Bush on Friday threw his support behind drafting a bipartisan stimulus package.

"After careful consideration, and after discussions with members of Congress, I have concluded that additional action is needed," he said at a press conference. "To keep our economy growing and creating jobs, Congress and the administration need to work to enact an economic growth package as soon as possible."

Bush said the package must be no more than 1% of gross domestic product, which would amount to between $140 billion and $150 billion, and should include tax incentives for businesses and income tax relief to spur both business and consumer spending.

Even before Bush made his speech, the Securities Industry and Financial Markets Association sent a letter to Treasury Secretary Henry M. Paulson Jr. urging that the tax law be amended to temporarily allow state and local governments to issue tax-exempt mortgage revenue bonds to refinance existing subprime loans. Currently, MRBs can only be used to aid first-time homebuyers. The group also called for an increase in the tax-exempt private-activity bond volume cap for MRBs, so that states will have additional capacity to meet their housing finance needs. PABs are debt instruments issued by state and local governments where the bond proceeds are used to benefit a private entity. States are limited in the number of such bonds they can issue by a formula that is based on their population figures.

"As the [Bush] administration and Congress explore options to jump start the economy and especially the housing sector, SIFMA is suggesting changes to the mortgage revenue bond program, which will enhance the flexibility and capacity of state and local governments," Scott DeFife, senior managing director of government affairs at SIFMA, said in a release Friday that summarized the letter. "Tax-exempt qualified mortgage revenue bonds are an important tool to finance low-cost mortgage loans for low- and moderate-income families. We look forward to working with Congress and the administration on these and other mortgage issues."

The group also suggested temporarily exempting housing bonds from the alternative minimum tax, which it said would make the bonds more attractive to investors and reduce the cost of MRB-financed mortgages by as much as half of a percentage point.

In addition, SIFMA recommended the repeal of the so-called 10-year rule. The rule forces housing agencies to use mortgage prepayments that come in more than 10 years after mortgage revenue bonds are issued to retire the debt - a requirement that effectively prevents the payments from being recycled into new mortgages.

While details of the stimulus package are still being determined, housing advocates were disappointed that Bush did not specifically call for aid to the sector to be included in plan.

"It's make a lot of sense to include it in this package," said Barbara Thompson, executive director of the National Council of State Housing Agencies. "We are disappointed obviously that the administration seems to be suggesting that while that's still important, they feel like it needs to wait for another opportunity."

"The time is now, people need help now," she said. "We don't understand, why wait on this? It makes a lot of sense, let's do it now. It takes time to do tax legislation and who knows how long it will be until we get a second bite of this apple."

Other industry groups focused on different aspects of the muni bond section of the tax code.

The Independent Community Bankers of America recommended increasing the number of state and local issuers that could issue bank-deductible bonds. These are public purpose or 501(c)(3) bonds for which banks can deduct 80% of the carrying costs. Under the current tax law, such bonds can only be issued by states and localities that issue $10 million or less of debt annually. ICBA wants the annual limit increased to $30 million.

"It would get local economic projects done much more quickly and more cheaply," said Paul Merski, ICBA's chief economist and director of tax policy. The current $10 million limit forces issuers with larger projects to develop them over several years so they can qualify for bank-deductible bonds, he said.

The Council of Development Finance Agencies suggested changing the definition of manufacturing to allow issuance of industrial development bonds to finance high tech, biotech and "innovation economy manufacturers."

"The inclusion of CDFA's IDB legislation in the economic stimulus package is exactly the right message for Congress to send to our nation's communities," said CDFA chief executive Toby Rittner. "This measure will allow bond issuers to more readily assist small to medium size manufacturers through IDB issuances for new investment. These investments would create jobs and build industry, which will in turn stimulate the economy nationwide."

The National Association of Health and Educational Facilities Finance Authorities said the tax code should be changed to permit financial institutions to determine their interest expense deduction without regard to tax-exempt bonds issued to provide certain small loans for heath care or educational purposes. Former Rep. Bobby Jindal, R-La., introduced similar legislation last year. Jindal is now governor of Louisiana.

The National Association of Local Housing Finance Agencies, has been talking to lawmakers about injecting $5 billion into the Department of Housing and Urban Development's community development block grant program. CDBG provides grants to state and local governments to help fund economic development projects.

Lawmakers are also floating proposal for the stimulus, including Rep. Thomas M. Reynolds, R-N.Y., who has recommended including one year of AMT relief in the package.

The AMT, which applies to interest earned on private-activity bonds, as well as some governmental and 501(c)(3) bonds, is designed to target high-income households, which are eligible for so many tax breaks that they pay little or no taxes. However, the AMT is not indexed to inflation, so more taxpayers become subject to it each year. AMT relief was in effect for the 2007 tax year, but is set to expire after that.

Transportation and infrastructure lawmakers have also recommended including funding in the stimulus plan for projects that can immediately begin construction, but it is unclear if they will be in the final package.

"We are having a bit of a discussion here as to what would constitute an effective stimulus package for the American economy," Rep. Peter DeFazio, D-Ore., chairman of the House Transportation and Infrastructure highways and transit subcommittee, said at a hearing last week. "Many of us on this committee believe investment in infrastructure would [be immediately economically beneficial]. [But] we are getting some pushback from those in our leadership who believe it couldn't happen soon enough."

Andrew Ackerman, Lynn Hume, and Peter Schroeder contributed to this story.

(c) 2008 The Bond Buyer and SourceMedia, Inc. All Rights Reserved.
http://www.bondbuyer.com/ http://www.sourcemedia.com

Credit Enforcement: Subprime Crisis Provides Impetus to FHLB Legislation Push
Posted on Wednesday, January 23, 2008
Source: Bond Buyer
By Andrew Ackerman

Advocates of legislation to allow the 12 Federal Home Loan Banks to provide credit enhancement to small tax-exempt bond issuers contend it has the best chance of passage in years because of the tumult municipal bond insurers are facing due to the subprime mortgage crisis.

While big financial guarantors historically have shied away from backing smaller borrowers, the financial losses they have suffered due to the subprime crisis has made them even less able to insure small issuers, they said.

"Given the turmoil in the private bond insurance market, it is more important than ever that [the banks] be allowed to provide this service to municipalities," said Rep. Sander Levin, D-Mich., the sponsor of legislation in the House said yesterday. "Our cities are on the front lines of the current economic slowdown and this legislation will help relieve some of the pressure on their already strained budgets."

The turmoil escalated Friday when Fitch Ratings lowered the insurer financial strength rating on Ambac Assurance Corp. to AA from AAA. In addition, Moody's Investors Service last week put its ratings on both Ambac and MBIA Insurance Corp. on watch for possible downgrade and Standard & Poor's put Ambac on negative watch.

Advocates of the legislation, which now has 40 co-sponsors in the House and 10 in the Senate, concede that it is unlikely Congress will pass it as a stand-alone measure, but are hoping that it will clear the House and Senate as part of a stimulus package federal lawmakers are expected to craft in the coming weeks.

"It could be very attractive as something that's part of the stimulus package," said Charles A. Samuels, an attorney here at Mintz Levin Cohn Ferris Glovsky and Popeo PC, who has worked to organize a coalition of state and local groups to support it.

Still, Levin said lawmakers are still looking for the "appropriate legislative vehicle" for the proposal.

As introduced into both chambers, the legislation would change the federal tax code and allow any of the 8,100 member lenders of the FHLB system to issue letters of credit, which could be used to insure small tax-exempt industrial development bond deals or transactions involving small nonprofit health care facilities, colleges, or universities, according to supporters. It would put the FHLB system on the same level as Fannie Mae and Freddie Mac, two other government-sponsored enterprises that are permitted to issue letters of credit in support of tax-exempt bonds, they said.

Sixteen national organizations support the proposal, among them the National Association of Counties and the National League of Cities, as well as an additional 75 state agencies and conduit issuers.

Meanwhile, the debt committee of the Government Finance Officers Association, the largest issuers group, is going to consider a policy statement supporting the bill at its winter meeting here this week, said Susan Gaffney, GFOA's federal liaison director. Members of the committee believe the proposal is important for small and midsize communities, she said.

If the GFOA's debt committee approves the statement this week, the group's executive board would vote on it in the spring, after which the group's membership would have to approve it at their annual meeting in June.

"A lot of my borrowers are unrated and could benefit tremendously from access to these letters of credit," said Robert Donovan, executive director of the Rhode Island Health and Educational Building Corp. "Small, in-state banks may not have been an active player in the bond market before, but if they're able to access the federal home loan banks' [triple-A] credit rating, it gives them an alternative to seek some enhancement for smaller deals."

Donovan said the deals would be snatched up by money market funds and mutual funds and, in some circumstances, perhaps even retail investors.

The push to amend the federal tax code to allow bonds to be credit-enhanced by the banks comes after the Internal Revenue Service began auditing deals in which the banks had issued what it dubbed "illegal federal guarantees" on the bonds. Currently, only housing bonds can be backed by a federal guarantee and still retain their tax-exempt status.

Though the FHLB system does not have an estimate of the volume of bonds that could be enhanced by the banks, the Congressional Budget Office has estimated that $6 million would be diverted from federal coffers if the banks were allowed to provide letters of credit for tax-exempt deals.

Still, the argument that several localities have been historically shut out of capital markets has been rejected by the insurance industry, which argues that the market is already well-served by efficient private firms.

The Association of Financial Guaranty Insurers, an industry group, has said that the legislation would reduce the fiscal discipline that capital markets currently impose on issuers and would significantly limit the tax revenue currently paid to the federal, state and local governments. In addition, the group claims, the legislation would create a double government tax subsidy: the bonds would retain their tax-exempt status and would also be backed by a GSE.

Bob Mackin, AFGI's executive director, said yesterday that his group's position against the bill remains unchanged.

"It's bad tax policy," he said.

(c) 2008 The Bond Buyer and SourceMedia, Inc. All Rights Reserved.
http://www.bondbuyer.com/ http://www.sourcemedia.com

GFOA: Panel OKs P3, Attorney Selection Recommended Practices
Posted on Monday, January 28, 2008
Source: Bond Buyer
By Andrew Ackerman

The debt committee of the Government Finance Officers Association approved recommended practices on public-private partnerships and the selection of bond attorneys last week.

At its winter meeting here, the committee on governmental debt management also approved a public policy supporting legislation pending in both houses of Congress that would allow thrifts and credit unions associated with the Federal Home Loan Bank system to provide letters of credit for small tax-exempt economic development bond issues.

A public policy supporting pending federal legislation to prohibit the patenting of tax strategies, techniques, and technologies was approved by the committee as well. [See related story on page 6.]

The recommended practices must still be approved by the GFOA executive board, which next meets in the spring, while the public policies must be approved by the executive board and the group's full membership at their annual meeting in June.

The P3 recommended practice is mostly meant to help define the term, which has traditionally been associated with projects such as tax-increment financing transactions, but now encompasses more recent trends like the long-term leasing of tolling rights on highways by private entities.

"These transactions present a fundamentally different set of opportunities, risks and concerns for governmental participants than the traditional P3s do," the RP states.

The RP for P3s recommends that finance officers ensure that the government's participation in the partnership does not bring excessive and unbalanced risk to the public, and suggests that the government prepare a comprehensive list of potential issues that may effect it. The RP also calls for the government to have sufficient in-house and outside expertise to evaluate such issues to make sure that the partnership is beneficial to both the public and private partners.

The committee revised its existing RP on the selection of bond counsel. Among the noteworthy revisions is an added recommendation that elected officials not be part of the evaluation or selection teams states and localities form to appoint bond attorneys, in order to remove any appearance of conflicts of interest from political contributions "or other activities."

The RP, which was last updated in 1998, also recommends that bond counsel fees not be paid on a contingent basis to remove the potential incentive for bond counsel to render legal or tax opinions "that would result in the inappropriate issuance of bonds."
"However, this may be difficult given the financial constraints of many issuers," the RP added.

The Federal Home Loan Bank legislation supported by the debt committee currently has the backing of about 20 national groups, including the National League of Cities and the U.S. Conference of Mayors, as well as about 75 state agencies. If passed by Congress, it would allow any of the 8,100 member lenders of the FHLB system to issue letters of credit, which could be used to insure small tax-exempt industrial development bond deals or transactions involving small nonprofit health care facilities, colleges, or universities, according to its supporters.

The legislation would put the FHLB system on the same level as Fannie Mae and Freddie Mac, two other government-sponsored enterprises that are permitted to issue letters of credit in support of tax-exempt bonds. Currently, only housing bonds can be backed by a federal guarantee and still retain their tax-exempt status.

(c) 2008 The Bond Buyer and SourceMedia, Inc. All Rights Reserved.
http://www.bondbuyer.com/ http://www.sourcemedia.com

New Consortium to Bail Out Bond Insurer
Posted on Monday, February 04, 2008
Source: Bond Buyer
By Dakin Campbell

Against the backdrop of downgrades among the financial guarantors, a group of eight banks has formed a group to bail out one of the bond insurers, and people familiar with the matter say a second and perhaps third group of banks is looking at solutions for other monolines.

It's been reported that the consortium - made up of Citigroup Inc., UBS, Wachovia Corp., Barclays PLC, Royal Bank of Scotland Group PLC, Societe Generale, BNP Paribas, and Dresdner Bank AG - was looking to bail out Ambac Financial Group Inc., parent of ailing bond insurer Ambac Assurance Corp.

Ambac spokesman Peter Poillon did not comment on the plan.

Additional banks are likely looking to rescue separate ailing monolines, such as MBIA Insurance Corp., Financial Guaranty Insurance Co., and XL Capital Assurance Inc., sources said.

The first consortium has hired Greenhill & Co. to help steer the negotiations, which market sources say are in the "very" early stages.

Wholesale downgrades for the insurers would cause Wall Street banks to write down additional losses, based on the exposure they have to credit derivatives contracts and subprime mortgage-backed securities that the insurers guarantee.

Market sources said the group was formed because of common exposure to a certain monoline insurer, and that additional groups were most likely forming along similar lines.

Oppenheimer & Co. analyst Meredith Whitney said in a report last week she expects the banks' exposure to the monolines to cause additional write-downs of between $40 billion and $70 billion. Whitney said she believed the lion's share of the write-downs, or 45% of the total risk in the sector, is concentrated among Citigroup Inc., UBS, and Merrill Lynch & Co.

Merrill Lynch Chief Executive Officer John Thain said at a conference last week that his bank has a total of $6 billion in exposure to the monolines, including $1.9 billion it wrote off for the fourth quarter on securities wrapped by ACA Financial Guaranty Corp. He also said that solutions targeting individual companies are more likely, rather than an industry-wide solution.

The discussions and the formation of the initial bailout group come after New York State Insurance Superintendent Eric Dinallo sat down with Wall Street banks on Jan. 23. A spokesman for Dinallo said the department could not talk about recent developments.

"While we cannot discuss specifics, there are a number of developments relating to the bond insurers," Dinallo said in a statement. "We are continuing to communicate with all parties to help them reach firm deals as soon as possible."

Standard & Poor's last week downgraded FGIC to AA, while putting MBIA and XL Capital on credit watch with negative implications. Standard & Poor's has already placed Ambac on negative watch. Fitch Ratings in recent weeks has downgraded Ambac to AA, FGIC to AA, and XL to A. All three remain on negative watch.

Meanwhile, Moody's Investors Service held a conference call Friday morning to discuss the ongoing analysis of the rating of the bond insurers. Moody's analyst Ted Collins said during the call that "some existing firms are likely to lose their rating," based on the agency's ongoing evaluations.

On Jan. 30, Moody's amended its projected loss estimates for 2006 subprime mortgages, saying losses could now be in the range of 14% to 18% with further actions on other securities set to come. As the loss estimates are updated, Moody's will use them to examine the ratings of the bond insurers.

"Our estimate of capital needed to support the mortgage-related risk of some guarantors has risen significantly due to changing circumstances," Moody's said in a report Thursday evening.

Collins said during the call that the effect on the capital adequacy of the bond insurers will be "material." Moody's will consider the governance of the companies, their access to capital, the overall industry structure, past and future risk management, and the present business model when considering the bond insurer's rating.

Moodys' said it expects to conclude its ratings reviews by mid to late February. Findings will be announced for each company individually, as the relevant research is conducted.

(c) 2008 The Bond Buyer and SourceMedia, Inc. All Rights Reserved.
http://www.bondbuyer.com/ http://www.sourcemedia.com