WASHINGTON - The Federal National Mortgage Association is introducing a program designed to help state and local housing agencies take better advantage of declining interest rates and minimize negative arbitrage when they issue mortgage revenue bonds.

Under the program, dubbed MRB Express, the agencies would actually originate mortgage loans before issuing bonds. That would be accomplished by negotiating an interest rate on the bonds with Fannie Mae several months in advance of the bond sale. Once issued, the bonds would be privately placed with Fannie Mae.

Normally, housing agencies issue large blocks of long-term fixed-rate mortgage bonds, and then spend several months afterward working with banks to lend the proceeds.

"Reversing this will save hundreds of thousands of dollars in interest costs for the participating housing finance agencies, and ultimately, low-income first-time home buyers," said Jack Gallagher, Fannie Mae's vice president for public finance.

Agencies can benefit from selling smaller amounts of bonds more frequently to avoid the interest rate risks associated with doing that one $100 million or $150 million deal per year," Gallagher said.

Originating the mortgage loans before the bonds are sold also eliminates the need to temporarily reinvest the proceeds in lower yielding, shorter term investments, and thus allows the issuer to minimize negative arbitrage, Gallagher said.

Issuers normally avoid small, frequent bond issues because their issuance costs are higher. But in this case, because the bonds would be privately placed with Fannie Mae, issuers would avoid the normal sales commission charge, Gallagher said.

He also said he envisions housing agencies setting up master agreements with Fannie Mae as a way of further lowering issuance costs. once such an agreement is signed, "an agency will be able to negotiate any number of series agreements" which would specify the details specific to each series, he said.

So far, one housing agency, the Washington State Housing Finance Commission, has used the program. Fannie Mae said in a statement that it entered into an agreement with the commission this week that will allow lenders who work with the commission to offer mortgage loans at a 6.65% rate until Dec. 1, 1993.

The ability to issue bonds on Dec. I will not depend on renewal of the mortgage bond tax exemption, which expired June 30, 1992, Gallagher said. That is because the transaction that takes place on Dec. 1 will be a remarketing of convertible option bonds the commission had issued before the sunset date.

Gallagher acknowledged that the new program cannot be used for new issues until Congress renews the mortgage bond exemption. The House has passed legislation that would make the exemption permanent, while the Senate was expected to approve a bill last night that would renew the exemption through June 30, 1994.

John T. McEvoy, the executive director of the National Council of State Housing Agencies, called the Fannie Mae program a "welcome development" and said it would "eliminate the problem of issuing a bond and having the money around while interest rates are bouncing around."

McEvoy noted that the concept is not new, having been used already by at least two housing agencies.

The Georgia Housing and Finance Authority entered into an agreement recently with the Federal Home Loan Bank Board that mirrors the Fannie Mae concept, McEvoy said. And the Idaho Housing Agency issued commercial paper, used those proceeds to make loans, and then later issued bonds to pay off the commercial paper, he said.

"What Fannie Mae would bring to this is a nationwide marketing system," McEvoy said.

Local housing agencies would also welcome the Fannie Mae program as another option for lowering their interest rate on mortgage loans, said John C. Murphy, the executive director of the Association of Local Housing Finance Agencies.

Murphy said there may be some technical questions that would have to be answered before agencies could make wide use of the program. For example, the way a state distributes the private-activity bond volume cap may make it difficult in some cases for an issuer wanting to use the Fannie Mae program to obtain an allocation.

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