Investing in the High Yield Municipal Market: How to Profit from the Current Municipal Credit Crisis and Earn Attractive Tax-Exempt Interest Income

Housing Bonds

In a search for yield, the patient and discerning investor may wish to consider a smaller and often overlooked segment of the municipal bond market, housing bonds. In the broadest sense, housing bonds are tax-exempt bonds issued primarily by state and local housing finance agencies to provide funding for mortgage loans. These mortgage loans may be made to low- to moderate-income families and individuals who are first-time homebuyers or to developers who are building or renovating multifamily projects where there is some kind of rent or tenant income restriction. As a general guideline, housing costs that do not exceed 30 percent of a household’s gross income is considered affordable. These bonds are used either to promote single-family home ownership among moderate-income families or to increase the supply of affordable rental housing.

In the case of single-family bonds, bond proceeds are used to originate lower interest cost mortgages (compared to the conventional market) for first-time home buyers of moderate means in order to purchase single-family homes and further the public policy goal of homeownership. These bonds are commonly referred to as single-family mortgage revenue bonds, or SFMRBs. In the case of multifamily bonds, proceeds from the bonds are used to make loans that fund for the acquisition, construction, and renovation of a specified number of apartments at rents affordable to lower-income families and individuals. These bonds are usually referred ...