Overview of the NIBP (New Issue Bond Program)

The New Issue Bond Program (NIBP) is a federal program designed to provide temporary financing to state and local housing finance agencies throughout the United States. The program was implemented February 18, 2009 as part of the Obama administration's Homeowners Affordability and Stability Plan, a federal effort to combat the effects of the collapse of the housing bubble. The NIBP provides funds that allow housing finance agencies to issue new mortgage revenue bonds. The agencies can then sell those bonds and use the resulting funds to create mortgages. As mentioned earlier, the funding is temporary: unless the program is renewed, it will terminate at the end of 2010.

Background to the New Issue Bond Program

Housing finance agencies are state and local government agencies that fund affordable housing programs for low-income residents. Among other things, they offer mortgages for first-time home buyers. Those mortgages are funded using profits generated from the sale of bonds that the house financing agencies issue each year.

When the housing bubble collapsed, mortgage lenders tightened their requirements, which made it harder for first-time home buyers to obtain mortgages. This was especially true for working-class home buyers. As a result, more and more first-time buyers turned to housing finance agencies. However, the housing finance agencies did not have enough funds to keep up with demand. As a result, home sales dropped off even further than they already had, and the housing market continued to flounder.

In February 18, 2009, the Obama administration set out to reinvigorate the housing market by launching the Homeowner Affordability and Stability Plan. Among other things, the plan included the New Issue Bond Program. This program gave housing finance agencies funding to issue more bonds than what they could afford to issue in the current housing market conditions. The profits generated from the sale of the bonds would then be used to provide affordable mortgages for first-time home buyers, as well as to allow responsible homeowners at risk of default to refinance on their existing mortgages.

How the New Issue Bond Program Works

All state and local housing finance agencies can apply for the NIBP. Each agency must develop a plan that describes how they will use those funds. Their plans must comply with the rules set by the Federal Housing Administration. The available funding is capped based on the federal limits set under the Housing and Economic Recovery Act of 2008. The agencies have the right to borrow below those limits, but if they agree to borrow less, they will not be able to borrow any more for the rest of the year.

Once the housing finance agencies receive the funds, they can start issuing bonds. However, the profits they earn from selling the bonds will be held in escrow until they sell at least 40 percent of the bonds to private market buyers. After that threshold is achieved, they can start using the funds to create affordable mortgages.

Housing finances agencies can issue bonds to finance one mortgage or to finance several mortgages at once. However, bonds for the latter are capped at the federal level. In both cases, the bonds must be approved and guaranteed by Fannie Mae, Freddie Mac or the Federal Housing Administration.

The interest rates are set based on the interest rates of securities issued by the U.S. Treasury. While the proceeds from the sales of the bonds are held in escrow, the bonds' interest rates must be equal to the interest rates of short-term U.S. Treasury Bills. Those rates will remain in place for 30 days after the funds are used to finance mortgages. After that point, the rates increase or decrease to match the interest rates for 10-year U.S. Treasury Notes.