A new municipal bond structure has significantly improved the efficiency of coupling FHA-insured construction loans with tax exempt bonds. Because federal law links 4% low income housing tax credits (“LIHTC”) to the award of municipal bond allocation (“bond cap”), FHA-insured transactions can now access 4% tax credits without assuming the high issuance and debt service costs of long-term fixed rate municipal bonds.

The lowest cost muni bond structures, in terms of interest rate and cost of issuance, have been floating rate transactions. These structures take advantage of today’s extremely low short-term interest rates and the fact that there is huge demand for municipal money market securities. The FHA enabling legislation doesn’t allow floating rate mortgage debt so historically FHA mortgage insurance has not been combined with the so-called “low floater” municipal bonds. Because 4% tax credits are tied to the award of bond cap, FHA deals were effectively boxed out of both the low floater municipal bond market and 4% tax credits.

This financial innovation termed “short bonds” couldn’t come at a better time. HUD has been pushing initiatives to preserve existing privately-owned and nonprofit affordable housing and promote new affordable housing development through the use of tax credits with favorable FHA mortgage insurance programs. With short bonds, developers can get the high leverage and permanent financing with FHA-insured transactions without incurring the high costs of a fixed rate bond structure. To learn more about how you can use short bonds and FHA mortgage insurance to finance your affordable housing project, please contact us.