Relates to the powers of the state of New York mortgage agency

Section 2 of the bill provides for an immediate effective date.

Existing law

Under current law, SONYMA does not have authority to buy its own bonds without them being cancelled.

Prior legislative history

None.

Statement in support

SONYMA offers various residential mortgage programs that offer low-interest rate 30 to 40 year mortgages to first time homebuyers in New York State. Traditionally, to fund its programs, SONYMA issues tax-exempt bonds in the capital markets. The bonds issued can be fixed or variable rate. By blending fixed and variable rate bonds, SONYMA is able to reduce its borrowing costs, which it then passes on to its borrowers. In addition, SONYMA bonds range in maturities, with daily and weekly maturities to maturities as long as 30 years.

In general, holders of variable rate bonds can tender these bonds to the issuer on a daily or weekly basis when the interest rate is reset. In normal markets, tendered bonds are then remarketed to a new buyer. However, if bonds cannot be remarketed, these bonds can be put back to a liquidity provider, who stands ready as a buyer of last resort. When variable rate bonds are put back to the liquidity provider, these bonds become "bank bonds," becoming subject to different interest rate benchmarks and amortization schedules.

The Agency was impacted by the disruptions that occurred during 2008, particularly due to the volatility in the short-term municipal bond market that began in earnest in September 2008. The impact was most significant in connection with the remarketing of the Agency's variable rate bonds. The market disruptions occurred after the well-publicized failures of certain money market funds to give investors less than a dollar-f9r-dollar return on their investments, and a string of unprecedented market failures, including downgrades of certain financial institutions that provide liquidity for short-term bonds, which prompted a "flight to quality" to U.S. Treasuries.

These events resulted in increased tenders by bondholders of variable rate bonds due to their overall concerns about the market and about the credit quality of certain financial institutions backing such bonds. As a result, particularly during the fall of 2008, a large number of failed variable rate bond remarketings occurred for all municipal issuers nationwide. SONYMA also, for the first time since it started issuing variable rate bonds in 2003 found itself with failed remarketings and bank bonds. The amount of SONYMA failed remarketings and, therefore, bank bonds, fluctuated from $180 million (on October 1st) to $60 million (at November 3rd). During this time, SONYMA was able to partially reduce its bank bond exposure by, among other things, placing the bank bonds (and thereby converting them once again into variable rate bonds) with other state public authorities, none of which were traditional SONYMA investors. Unfortunately, however, because of Section 2404(1) of the Public Authorities Law, SONYMA was not able to look to its own bonds as a possible investment.

If SONYMA were authorized to purchase its own bonds, SONYMA would be able to look at its mortgage insurance fund reserves as another possible resource to purchase its bonds that fail to be remarketed and thereby reduce its bank bond exposure.

In addition to providing SONYMA an additional tool in a failed remarketing scenario, the ability to purchase its own bonds using reserves of its mortgage insurance fund, without extinguishing such bonds, would make the mortgage insurance fund, a separate division of SONYMA, a possible new investor for SONYMA bonds. This would be particularly helpful with bonds with long maturities. Not only would an investment of SONYMA bonds by the mortgage insurance fund be consistent with the mortgage insurance fund's investment guidelines to invest in investment grade securities of state issuers, but it would provide a potentially new investor for SONYMA bonds with long maturities.

By effectively bringing a new investor for its long term securities, SONYMA would be further able to minimize the mismatch between the interest rate SONYMA is paid on its mortgages and the interest rate SONYMA needs to pay on its bonds. For example, historically, approximately 64% of each of SONYMA' s bond issuances includes bonds with over 20 year maturities. Yet, the exit of long term investors, particularly for traditional 20 and 30 year maturities, is of particular note in the market disruptions that occurred in 2008 and early 2009. By permitting the investment in SONYMA bonds - without causing their cancellatio SONYMA would be able to invest a portion of its MIF reserves in long-term investments consistent within its investment policies.

Budget implications

None.

Effective date

The act takes effect immediately.