3.3.8 Single-Family Mortgage Revenue Bonds
Public agencies issue single family mortgage revenue bonds to assist home ownership. Local agency single family mortgage revenue bonds are issued by cities, counties, and JPAs under California Health and Safety Code Section 52000 et seq. Bond proceeds are used to make mortgage loans to first time home buyers who satisfy income requirements (generally family income of up of 100% of area median income for one and two person families and 115% of area median income for families of three or more) for the purchase of homes that satisfy purchase limit requirements (generally 90% of the “average area purchase price”). In federally designated targeted areas there is no first time home buyer requirement and income and purchase price limits are higher.
Bond financed mortgage loans are either pledged to secure the bonds or are used to create Ginnie Mae, Fannie Mae, and/or Freddie Mac mortgage backed securities that are pledged to secure the bonds. The public agency may also collect participation fees from lenders, servicers, and developers. Because the bonds bear interest at tax exempt rates, the interest rate paid by participating home buyers can be below rates available in the conventional market. As an alternative, a portion of the bonds can be sold at a premium with the premium used to provide down payment assistance.
The timing of the receipt of revenue from a pool of mortgage loans is unpredictable because homeowners may prepay home mortgage loans at any time and generally must prepay a mortgage loan if they sell the home. Single family mortgage bonds must be structured and have redemption features that allow an adequate matching of revenues and debt service under a variety of loan prepayment scenarios. Because bond credit requires a “spread” between the interest rates payable on the bonds and the interest rate on the bond financed loans and program effectiveness requires a spread between the interest rate on the bond financed loans and “market” rates, single family mortgage revenue bonds are uncommon in low interest rate environments.