Legislature(2009 - 2010)BELTZ 105 (TSBldg)
02/04/2010 09:00 AM Senate STATE AFFAIRS
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* first hearing in first committee of referral
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SB 217-GUARANTEED REVENUE BONDS FOR VETERANS 9:14:06 AM CHAIR MENARD stated that SB 217 would be the next order of business to come before the committee. DAN FAUSKE, CEO, Alaska Housing Finance Corporation (AHFC,) said Alaska is one of five states authorized to issue veteran's mortgage bonds. These bonds are the only type that must be guaranteed by the state of Alaska, meaning the state would stand behind the bonds if any problems arose. These bonds must also be approved by the voters. The last vote, in 2002, passed by 70 or 72 percent and resulted in a $500 million authorization, of which $95 million is remaining. The veteran's mortgage bonds are some of AHFC's highest performing bonds; one of the indentures has a delinquency rate of 1.2 percent which is the lowest in the United States. He pointed out that Alaska has the highest per capita rate of veterans in the US. The bonds are federally tax exempt meaning about 100 basis points difference or 1 percent of interest. As of December, the veterans bonds were trading at about three-eighths of a point of interest below the conventional market. Bonds issued to date total $2.6 billion and bonds outstanding equal $338 million and loans. All indentures included, delinquency is at 3.11 percent, which is very good. The veterans bonds have been very popular and very well performing and AHFC needs the legislature's permission to ask for voter approval, via the general election ballot in November, of an additional $600 million of state guaranteed bonds to be issued by AHFC for the purchase of mortgage loans made to qualifying veterans. 9:17:32 AM JOE DUBLER, CFO and Finance Director, AHFC, pointed out that SB 217 authorizes AHFC to go to the voters to obtain authorization; it does not authorize AHFC to issue the bonds. SENATOR MEYER asked if this would go into the general election or the primary. MR. FAUSKE replied the issue would go into the general election. SENATOR PASKVAN asked if AHFC had done any analysis or had any problems with upside-down mortgages, particularly with the veterans program. MR. FAUSKE said AHFC intentionally stayed out of mortgage-backed securities, zero interest loans and adjustable rate arms. Alaska did not experience a lot of spec buying and currently ranks 50th or 49th in delinquencies. The state has seen a slight increase in delinquencies and foreclosures but nothing causing great alarm. He said he has seen a slowdown in the industry during the last 14 months during the national financial crisis and attributed this to the federal government's bolstering of Fannie Mae and Freddy Mac, making money available for 1 and 2 percent which inhibited AHFC from entering the market. AHFC has seen a recovery and has been back in the market with one issuance several months ago of $160 million, and now has an agreement on a new issue bond program with Fannie Mae guaranteeing AHFC $193 million. 9:20:03 AM MR. FAUSKE said the market in Alaska is very healthy; sales values have stayed level. He explained that some other states experienced worse financial crises followed by unemployment. The people that use these veterans bonds are employed and are in the military or retired with a pension. The delinquency and foreclosure rates are below national and statewide averages. MR. DUBLER said that analyzing an existing loan is difficult because the current market value for every property in their portfolio would have to be determined and compared with the loan balance. Instead, AHFC keeps an eye on trends in the economy. He explained that the Alaskan economy has not seen a rapid decline in property values, which led to most of the lower 48 problems. He said AHFC doesn't allow people to take a second out on a mortgage loan where AHFC has the first, which would dilute it and cause problems. 9:22:41 AM SENATOR PASKVAN said he understood that they were not doing an individual market analysis of a home. SENATOR FRENCH asked if they loan 90 percent of the value of the house, not 100 percent. MR. DUBLER said it depends on the type of loan. For a conventional loan it would be 80 percent. If a person has Veteran's Affairs (VA) insurance, AHFC will go up to the VA insurance limit of 95 percent. AHFC can go up to 97 percent on Federal Housing Association (FHA) loans that have loan guarantees that mitigate any loss AHFC could have on that property. MR. FAUSKE said the only loan that AHFC offers at 100 percent is the Teacher Housing loan which has proven to be successful at recruiting and retaining teachers. SENATOR FRENCH confirmed that in 2002 AHFC started out with $500 million worth of bonds and has issued $400 million worth of bonds. He asked how the bonds are parsed out in accordance with the value of a home. MR. DUBLER replied that if a person comes in to borrow money, AHFC purchases that money from a bank, holds it in their portfolio until enough is accrued to fund into a bond deal. When AHFC runs out of bond funds, they would sell another bond and get, for example, another $50 million and peck away at it until it is all gone, then return to the market for another $50 million. 9:24:42 AM SENATOR FRENCH asked if $500 million would be loaned for 500 $1 million dollar homes. MR. DUBLER responded that is correct. SENATOR FRENCH said a layman's understanding of this program might be that the legislature gives AHFC the authority to issue bonds and as the loans are made, the bonds are pledged or sold and are slowly wrapped up or tied up in homes that veterans are living in. MR. DUBLER said that is correct. MR. FAUSKE said AHFC will not go out the day after gaining voter approval and issue $600 million worth of bonds. AHFC is capped on an annual basis, but would get the authorization to move freely within that market for the next four to six years and then seek approval again, through the legislature and voters, to continue the program. Depending on volume and activity within the loan portfolio, AHFC will determine when to sell and how much to sell. 9:26:22 AM SENATOR FRENCH said it seems AHFC has been careful and judicial about issuing the bonds. He asked what happens to the debt and how it comes back to the state of Alaska if a person defaults on a loan and walks away from a house he or she owes $200,000 on. MR. DUBLER replied that if a loan goes bad, the State would only be responsible if all the corporation's reserves and the other assets in the indenture were gone. He explained that once the property is foreclosed, AHFC owns it, puts it back on the market and sells it. AHFC would then go against VA, FHA or the Private Mortgage Insurance (PMI) provider for any incurred losses. He reported that in the late 1980's and early 1990's, AHFC had over 5,000 Real Estate Owned (REO) properties. To slow mortgage decline, AHFC did not dump them back on the market but rather held onto some properties which helped the market recover. That is one of advantage of the corporation foreclosing as opposed to a bank. 9:28:30 AM SENATOR PASKVAN asked if acquired equity is available for additional loans as a revolving loan fund. MR. DUBLER said that is correct; it is called recycling and AHFC does a lot of recycling in their programs. For example, a person has borrowed money from AHFC and then moves, that person pays off that loan and AHFC takes those proceeds and loans it out to the next person. Because there is a cost associated with selling bonds, this saves the corporation money. SENATOR PASKVAN asked if the amount of cumulative loans is $3.1 million. MR. DUBLER replied "not necessarily" because bonds that AHFC has refunded are also included in the $2.6 million. For example, if a $50 million bond deal is outstanding at 8 percent and current rates drop to 6 percent, AHFC will pay those bonds off and reissue at 6 percent to save additional money. SENATOR PASKVAN asked what current cumulative monies are in the market for veterans and for the program. MR.DUBLER said $341 million in mortgage loans are currently outstanding in the veterans program, in all of the indentures. Currently $338 million in bonds, of the $2.6 billion, are outstanding. MR. FAUSKE stated that AHFC has issued $2.6 billion in veterans bonds since 1982. 9:31:11 AM SENATOR PASKVAN said if a veteran gets a loan, buys a home, sells it 10 years later, AHFC gets the money back... He said he thinks he understands the process. MR. FAUSKE said the money could then be recycled for another qualifying veteran. Mr. Fauske said AHFC cannot transfer the money around and use it for other things; the money is specifically for bond indentures for veterans. The money will reside within qualifying veterans. SENATOR MEYER asked if the loans are transferrable to someone outside the family and if the family members assume the loan if the borrower dies. MR. DUBLER said the loans are qualifying assumable loans. A secondary party would be able to assume the loan, including descendents, only if the person was a veteran qualified to get a loan under this program. MR. FAUSKE explained that if a veteran dies the family does not have to leave the house. SENATOR MEYER said he understood that if the borrower is alive and wants to sell to someone else, that person would have to be a veteran; if not, the loan is not assumable. MR. DUBLER replied that is correct. SENATOR MEYER said he saw a current rate of 4.25 for a 15 year conventional loan. He asked if AHFC's rates are about three- eighths below that, under 4 percent. MR. DUBLER said AHFC does not do a lot of 15 year loans, but the 30 year rate is 4.625 and typically the 15 year is three-eighths of a point below that at 4.25. SENATOR MEYER asked about the general activity for real estate in Alaska. 9:34:18 AM MR. FAUSKE said AHFC purchased 240 loans with a total principle balance of approximately $47 million in the first 10 months of 2009. AHFC's interest rates became more competitive in September, 2009 and in the last two months of 2009 AHFC purchased 189 loans for a total principle balance of $40 million. He noted these last two months of activity almost equaled the previous 10 months in 2009. Loan commitments for January 2010 equal $106 million already. AHFC's rates are below market in some areas and good activity should come in the coming year. He said Alaska's market is strong but has still experienced a slowing. Alaska got spoiled a couple of years ago; now the Alaska real estate market is sluggish and slower but is healthy. 9:37:03 AM SENATOR FRENCH pointed out that the sectional analysis does not have an author and seems to pertain to a different bill. He suggested that it be replaced before SB 217 goes to Senate Finance. MR. FAUSKE agreed that the sectional analysis is for a different bill. SENATOR FRENCH also noted that the fiscal note refers to a statewide public vote on $800 million in revenue bonds but should reflect SB 217 which is for $600 million. MR. FAUSKE said there was previous confusion between $800 million or $600 million; $600 million was put forward. SENATOR MEYER asked if the committee should amend or modify the fiscal note or just make note of it for the record and ensure a new fiscal note is made and passed up to finance. 9:39:05 AM BRYAN BUTCHER, Public Affairs Director, AHFC, said when AHFC was working with the Governor's office, the number was $800 million. Federal law caps AHFC at selling a maximum of $100 million worth of bonds a year, so the overall amount simply determines how often the program has to go back to the legislature and before the voters. He explained that the program is back before the voters this year because the program will run out of funds sometime in 2011. Everything AHFC had turned into the Governor's office was at $800 million and when the Governor's office released the bill to the Legislature it said $600 million. AHFC is fine with either amount and it is up to the Legislature. Instead of going back to the voters in 2016, $800 million would mean the program would not have to go back before the voters until 2018. SENATOR FRENCH said the decision is better left to the finance committee; the state affairs committee is endorsing the general concept. He just wanted to make sure everyone was aware of the anomaly. He did not propose an amendment. SENATOR PASKVAN pointed out that the fiscal note is not about distributing $600 million or $800 million; the fiscal note is for $150,000 to put it before voters. SENATOR MEYER said he did not think the $150,000 amount of the fiscal note would change whether the authorization is for $600 or $800 million. MR. BUTCHER said that is correct. The $150,000 is to make sure Alaskans understand what they are voting on. In 2002, $200,000 was spent on educating voters through mailers explaining that this is not spending $600 million but investing in veterans and mortgages. MR. DUBLER said AHFC has to be careful not to be seen as promoting SB 217, but has to provide information. 9:42:03 AM SENATOR MEYER expressed the opinion that it would be better to fix SB 217 before it leaves committee, but the question of $600 or $800 million is a decision for the finance committee. The state affairs committee should support the program at either amount. He felt it was important for the record to reflect that the analysis needed to be changed to reflect the amount that the finance committee comes up with. MR. BUTCHER said he would certainly do that. 9:43:00 AM SENATOR MEYER moved to report SB 217 from committee with individual recommendations and attached fiscal note(s). There being no objection, the motion carried.