WASHINGTON -- The Department of Housing and Urban Development on Sept. 23 will begin auctioning off nearly $12 billion of federally insured 40-year multifamily housing loans to private investors, a HUD official said yesterday.

Until last year, lenders holding the mortgages -- many of which were financed with tax-exempt bonds -- were expected to start exercising put options and turn the loans back to HUD. Legislation passed in 1990, however, allows HUD to sell the loans to the private sector, so that the department can keep the loans off its books.

The Sept. 23 kickoff for the loan sales is actually two to three months later than the department had planned. HUD expects to release a brochure detailing the auction process by early September, the official said.

The department will accept telephone bids on Sept. 23 for the first group of loans and announce the next day which bids it has accepted. The HUD official did not say how many loans would be sold in the first auction.

For the municipal market, one of the main benefits of the loan sales will be to provide some comfort to holders of about $1 billion of tax-exempt multifamily housing bonds that financed some of the loans.

Those bonds, which were insured by the Municipal Bond Investors Assurance Corp., carry maturities that coincide with the timing of the put option. MBIA has already taken pains to insure there is little risk associated with the loan repayments, officials there have said. But they have acknowledged that the loan sales may offer a slightly less risky way to pay off the bonds than would have been the case with the put option.

Tax-exempt bonds may also figure into the loan sales in another way. State housing finance agencies have been studying the idea of buying some of the loans using bond proceeds, though it is still unclear when any agency will make a bid according to Jim Logue, director of program and policy development for the National Council of State Housing Agencies.

The loans to be auctioned were originated between the late 1960s and 1983 under Section 221 of the housing code to provide low-income multifamily housing units. During those years HUD added a provision to the code allowing lenders to turn back or put the loans to HUD after 20 years, because the department was having difficulty encouraging lenders to offer loans with 40-year maturities. The loans carry interest rates between 3% and 7.5%.

Under the old law, in return for surrendering a Section 221 loan to HUD, a lender would receive debentures at a rate near the current rate on Treasuries and in an amount equal to the unpaid principal and interest on the loan. As the 20th anniversary for many of the loans approached last year, HUD became concerned about the expense of taking back the loans.

Last year Congress passed legislation allowing the department to sell the loans through auctions, in which investors will bid on what interest rate it would take to accept the loan at par. Once the auction is completed the lender receives an amount equal to the unpaid balance plus interest that accrued during the acution process. In addition, HUD will make monthly subsidy payments to the winning bidder to make up the difference between the loan rate and the rate bid by the investor.

The MBIA-insured tax-exempt bond deals done to finance some of the mortgage loans were structured so the bonds would mature around the same time the lender would exercise his put option. At the end of 20 years, a balloon payment is due on the bonds which under the old law the trustee would have financed by selling the debentures received from HUD.

Under the auction process, the requirement that the department make the lender whole by paying off the loan in full with some accrued interest is an improvement because it eliminates the small risk associated with selling the debentures in the open market, MBIA officials have said.

State housing agencies, meanwhile, are not ready to bid on the loans because of "the complexities involved in trying to structure a deal," Mr. Logue said. The Massachusetts Housing Finance Agency appears to be the agency most interested in trying to purchase some of the loans, he added.

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.