Mortgage insurance can open doors for private lenders.
A mortgage insurance program enables private lenders to utilize their existing products and marketing networks to finance multi-family projects in emerging markets, makes it easier for investors to purchase the resulting loans and increases the flow of loan capital into areas the state chooses to target. It is an efficient use of public resources to leverage private sector financing, and complements the state's current housing and smart growth efforts.
Similar programs have proven effective in other states. In New York, the State of New York Mortgage Agency (SONYMA) has run a multi-family housing insurance program since 1981, leveraging nearly $3.3 billion in private financing. Underwriting is based on SONYMA guidelines and utilized by a broad array of lenders for both market-rate deals in targeted areas and in conjunction with state and local subsidies.
Appropriate fees and insurance premiums ensure that SONYMA can more than cover the operating cost of the program without making the loans excessively expensive. Mortgages are 100 percent insured when purchased by the state's public pension funds as an investor, providing access to a huge amount of investment capital for this type of lending.
A mortgage insurance program insures the permanent debt on multi-family rental properties. The state provider sets underwriting guidelines, and, in exchange for providing the credit enhancement, harnesses the presence and effectiveness of banks across the state that are seeking lending opportunities at a scale the public sector can't possibly replicate. In particular, private lenders' experience with smaller borrowers equips them to reach less sophisticated developers with consumer-friendly products, extending the credit enhancement deep into the market, certainly beyond the relatively small circle of larger for-profit and not-for-profit developers that routinely conduct business with the state's housing agencies.
New Jersey has a great banking sector that is eager to play a larger role redeveloping urban areas. Lenders will be willing to pay for a credit enhancement that eases their entry into those markets. The enhancement would be effective in part because the public sector would be assuming risk, but also because the banks would be confident that insured loans could be easily sold to investors. Many of the transactions banks already complete in these markets have acceptable levels of risk, but because of their size, location or borrower profile end up staying on the bank's balance sheet, dramatically limiting loan volume.
Mortgage insurance could be particularly effective in New Jersey's current housing market, in which consumers, lenders and developers, constrained by prices and growth limitations in the suburbs, are grappling with the realities of redeveloping urban areas. One of those realities is property ownership fragmented among numerous small owners, an environment in which mortgage insurance can be instrumental to private lenders financing numerous small transactions. This type of development is typically more efficient, more organic, and more equitable than large-scale redevelopment plans that rely on deep subsidies and the threat of eminent domain to assemble large tracts of land. It is also consistent with the state's smart growth policy goals. An insurance program would complement the state's current housing programs. New Jersey runs effective affordable housing development programs through its Department of Community Affairs (DCA) and Housing and Mortgage Finance Agency (HMFA), generally combining state and local subsidies with HMFA debt. These programs have a proven record of producing affordable units in various markets, but they haven't yet engaged the capacity of private sector lenders to seek out and support new developers and development opportunities.
The broad response to HMFA's CHOICE program, one state program that does give banks a role in marketing and underwriting, demonstrates how private lenders can bridge the gap between state housing resources and entrepreneurial small developers across the state.
Mortgage insurance is a tool that HMFA could use to greatly extend its current impact, retaining control of underwriting standards while leveraging existing private sector capacity to seek out lending opportunities and close loans. HMFA bond reserves are potential sources of start-up capital for a mortgage insurance fund.
The market in New Jersey will continue to grapple with ways to develop housing in urban areas. As effective as the state's housing agencies have been in producing subsidized housing, they haven't yet tapped the potential of private lenders and developers to produce unsubsidized housing in affordable urban markets. The ongoing rebirth of New Jersey's cities as viable housing markets is an opportunity to open that door to the private sector with a mortgage insurance program.
BY ROBERT RIGGS, VICE PRESIDENT,
THE COMMUNITY PRESERVATION CORP.
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|Title Annotation:||INSIDERS OUTLOOK|
|Comment:||Mortgage insurance can open doors for private lenders.(INSIDERS OUTLOOK)|
|Publication:||Real Estate Weekly|
|Date:||Jun 13, 2007|
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