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Low interest rates leave Alaska Housing Finance Corp. high and dry

Pat Forgey

JUNEAU -- The Alaska Housing Finance Corp. is hurting, and what it needs to get better is for Alaskans to pay more for their mortgages.

The state-owned housing agency makes most of its money from its central business of borrowing money on Wall Street and lending it to Alaskans to buy homes. It also finances multifamily developments and public housing projects and carries out missions such as home weatherization funded by the Alaska Legislature.

In years past, that business model made a good living for the corporation, enough even to pay dividends back to the state. It also provided Alaskans with cheaper loans than they could get elsewhere.

But low interest rates of more recent years have devastated that model and hit AHFC with a double whammy. In some cases, buyers went elsewhere for their home loans, while at the same time existing borrowers refinanced into lower cost loans.

New loans, issued at lower interest rates, bring in far less revenue than older, higher interest loans.

The pool of mortgages from which AHFC earned money kept shrinking, falling by more than $1 billion from a 2008 high of almost $3.5 billion.

In an interview last year, AHFC Executive Director Bryan Butcher laid blame on the federal policy of holding down interest rates in an effort to help the U.S. pull out of recession and allowing federal mortgage lending enterprises Fannie Mae and Freddie Mac to offer extremely low rates to borrowers.

"It's pretty much priced AHFC right out of the market," he said.

And that's led to increasing losses during the last three years. In 2010, AHFC lost $10 million. In 2011 it lost $13 million, in 2012 it lost $30 million, and in 2013 it lost $17 million. 2014's numbers will be made available in September.

‘We’re hopeful that rates are going up’

At a corporation board of directors meeting in Wrangell this week, the board was told that there are some signs things are turning around. For the year, more mortgages were bought than were lost to refinancing.

But what AHFC really needs, said Chief Financial Officer Mike Strand, is higher interest rates.

"We're hopeful that rates are going up," he told the board.

While interest rates continued to decline, this year's decrease was very small, leading to optimism at AHFC.

"We're hoping that rates have bottomed out and there won't be as many refinances," Strand said.

AHFC is now in the awkward situation of wishing for an action that will make home ownership costs go up. That will improve its own finances, but the corporation's stated mission is to provide affordable housing for Alaskans.

The key to AHFC's financial success is the interest rate margin. That's the difference between what it costs for it to borrow from Wall Street and what it can earn from lending. As mortgage interest rates declined, the new loans the corporation purchased from banks and mortgage brokers were paying lower interest rates than the old ones that were being paid off or being refinanced.

Over the last few years, AHFC went from earning an average of 5.4 percent on its mortgage loans to earning only 4.9 percent. While AHFC also saw some decrease in borrowing costs, its interest rate spread declined overall.

As part of its plans to cope with the losses, AHFC has had to stop paying its annual dividend to the state treasury and trim operating costs, as well as shift responsibility to the state general fund for some programs it once funded out of its profits. It's also begun a new program to assist homebuyers with closing costs, but that has been slow in getting started.

Butcher told the board that another program, called "Loans to Sponsors," will have to be restructured as well.

That program gave local housing authorities and nonprofits small interest-free loans with which to lend to local residents. Now, those local sponsors will be charged 1.5 percent interest, he said.

Despite the program's success, Butcher told the board that AHFC can no longer afford to keep it as it was.

"It was established at a time when, financially, we were in a different place than we are today," he said.

More than just mortgages

AHFC and its former CEO Dan Fauske have long had a stellar reputation among Alaska legislators, who have looked to the corporation for more than just housing expertise.

Its financial skills were used to turn future tobacco settlement payments into immediate cash, a process called securitization that bailed the state out of a budget crunch. It was later tapped to begin work on a small-diameter natural gas pipeline, which has since been spun off as a separate entity with Fauske in charge.

It was also considered to take over responsibility for the troubled Knik Arm Crossing project before Gov. Parnell asked that duty instead be given to the state Department of Transportation and Public Facilities.

Still, few legislators appear knowledgeable or interested in AHFC itself, and recent years' oversight and budget reviews have been perfunctory or have not happened at all. Even key legislators considering AHFC-related legislation have said they were surprised to find out from press reports last year that the agency was losing money.

But one legislator familiar with the agency, Rep. Mike Hawker, R-Anchorage, said it deserves credit for something it didn't do.

"Alaska Housing never lowered its underwriting standards, while Fannie and Freddie lowered their underwriting standards and Lower 48 banks were originating bad loans," he said.

While it may have lost some loans by only lending to qualified buyers, that maintenance of lending standard "was huge for Alaska. We were insulated a bit from the Lower 48 real estate collapse," Hawker said.