LOS ANGELES -- Last week's issuance of $104.2 million of home mortgage revenue bonds by the California Housing Finance Agency included $20.6 million to fund a pilot program to provide below-market adjustable-rate mortgage loans for first-time home buyers.

"To our knowledge, this is the first time that a state housing agency has made the decision to launch an adjustable-rate mortgage program," said Suzanne S. Nofz, senior vice president for Lehman Brothers. Lehman was senior manager on the negotiated deal, which was sold in two series last Thursday.

The $20.6 million of Series D obligations were structured as select auction variable-rate securities. The interest rate on the obligations, initially set at 3.75%, will be readjusted at auction every six months beginning Feb. 1.

Because the 3.75% coupon will be readjusted at six-month intervals, the state housing finance agency "felt comfortable originating adjustable-rate mortgage loans which in today's market have an initial rate of 6.50%," Nofz said.

Series E, consisting of $83.6 million, will be used to originate 30-year fixed-rate mortgage loans. This portion of the offering had yields that ranged from 4.40% in 1996 to 6.70% in 2025, following a repricing, Nofz said.

"We were two to three times oversubscribed, and we were able to reprice [the 2025 term bond! to a 6.70%," which was originally offered as 6.75%, she said. "The issue was very well received by the market."

"Depending on the demand and success of this pilot program, [the California Housing Finance Agency! may make additional ARMs funds available," according to a bulletin published by the agency.

Initially, the adjustable-rate mortgages will be available only to low-to-moderate first-time home buyers in 19 of the state's 58 counties -- so-called high-cost area counties, mostly in coastal areas, the bulletin said.

Housing agency officials believe that to make the agency competitive, they have to offer mortgage rates that are at least 1% below conventional mortgage rates, Nofz said. "They have been doing that on their fixed-rate program all year," she said.

But agency officials realized that if they could offer an interest rate that is 1% below the conventional adjustable-rate mortgage, that would provide enough savings to allow first-time home buyers "in a high-cost area like Los Angeles or San Francisco" to qualify, Nofz said.

"In high-cost areas, [the housing agency's] fixed-rate loans are going out at 7.375% and their adjustable-rate mortgages are being offered at an initial rate of 6.50%," Nofz said. "It is not a windfall, but it is close to 1% more in savings, and that may make the difference in achieving affordability in those high-cost areas."

Home owner loans will be insured by the Federal Housing Administration, the California Housing Loan Insurance Fund, or other eligible mortgage insurers. Interest rates on the loans may rise 5% over their life, to a maximum of 11.50%, with a 1% maximum annual adjustment.

The California Housing Finance Agency has about $2.2 billion in bonds outstanding under the Home Mortgage Revenue Bond indenture, rated Aa by Moody's Investors Service and AA-minus by Standard & Poor's Corp. Standard & Poor's upgraded the program's indenture from A-plus last Tuesday.

The Housing Finance Agency is an independent financing authority of the state.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.