States put their home financing operations in the deep freeze

The credit crunch has claimed another group of victims: housing-finance agencies operated by state governments that cater to first-time homeowners.... Now, at a time when housing-finance agencies’ services are needed more than ever, most states have sharply curtailed their housing-finance operations. A handful of states, including California, Texas and Wisconsin, have suspended their mortgage-lending programs altogether.

The California Housing Finance Agency, the nation’s largest state finance agency, suspended its lending program due in part to problems related to variable-rate debt. The agency relied on the cheap debt to help it meet a challenge to make $1 billion in mortgages annually. ‘We could expand the program’ while reducing loan rates, says Bruce Gilbertson, finance director for the CalHFA. ‘Quite honestly, it worked very, very well for a long time.’ But variable-rate debt has effectively hamstrung the agency. That is because the intermediaries that CalHFA relied on to resell the bonds to investors and that guaranteed they would be buyers of last resort for the bonds were downgraded by credit-ratings firms. That scared off investors and left state agencies with higher servicing costs for those bonds. Variable-rate debt poses the greatest immediate risk to agencies like CalHFA because higher rates they pay on the debt could drain funds. The agency won’t make loans until it resolves those problems, and state officials hope the federal government will step in as a buyer.

The Pooled Money Investment Board (PMIB) voted on December 17, 2008 to defer all bond expenditures from the Pooled Money Investment Account (PMIA) until the State’s budget shortfall is resolved. This freezes any disbursements from the PMIA. As a result of the freeze, CalHFA was forced to discontinue several programs. CalHFA will suspend purchases of 30-Year Fixed Rate Mortgages until we receive an update and clarification from the PMIB. CalHFA will also temporarily discontinue the Extra Credit Teacher Home Purchase Program (ECTP), California Homebuyer’s Downpayment Assistance Program (CHDAP) and School Facility Fee Down Payment Assistance Program (SFF). Please note that the 100%-financed Community Stabilization Home Loan Program (CSHLP) and SMART Program will continue to accept loans through the usual channels. Down payment assistance from non-CalHFA sources will continue to be accepted.