Elements of Housing Bonds

Comprehensive vocabulary flashcards covering the elements, terminology, tax issues, and marketing structures of housing bonds based on Morgan Stanley lecture notes.

Bond

Written evidence of a legally binding agreement between a borrower (the issuer) and a lender (the bondholder), where the issuer pays a stated rate of interest and returns the principal at maturity.

Municipal Bond

Bonds issued by state and local governmental entities to finance operating and capital costs, generally exempt from federal taxation and often state taxes for residents.

Housing Bond

Municipal bonds issued to finance multi-family housing for low/moderate income families, single-family mortgages for first-time buyers, or regional redevelopment and rehabilitation.

Private Activity Bonds

A classification under the 1986 Internal Revenue Code for housing bonds where $10\%$ or more of the proceeds finance property used by a private entity and secured by its property or payments.

Economic Prepayments

Mortgage prepayments that occur when interest rates are declining and homeowners choose to refinance their mortgages.

Non-economic Prepayments

Mortgage prepayments resulting from events such as the sale of a home, death, or divorce, which occur regardless of the interest rate environment.

Call Risk

The risk to an investor that bonds will be redeemed at par before their final stated maturity due to mortgage prepayments, typically occurring when interest rates are declining.

Arbitrage Spread (Single Family)

The tax law restriction that prevents a housing issuer from establishing a mortgage yield higher than $1.125\%$ above the bond yield for a single-family program.

Arbitrage Spread (Multi-Family)

The tax law restriction that prohibits issuers from setting project mortgage rates more than $1.50\%$ above the bond yield for multi-family programs.

Low Income Housing Tax Credits

Federal programs ($4\%$ for tax-exempt debt and $9\%$ for taxable debt) that allow owners to syndicate tax credits to private investors in exchange for equity and income restrictions.

Residential Rental Project

A building or structure with functionally related facilities (kitchen, sleeping area, toilet) available to the general public that is not used on a transient basis.

The 20/50 Rule

A federal requirement for multi-family programs where at least $20\%$ of units must be occupied by tenants with incomes of $50\%$ or less of the area median income.

The 40/60 Rule

A federal requirement for multi-family programs where at least $40\%$ of units must be occupied by tenants with incomes of $60\%$ or less of the area median income.

Qualified Project Period

The period for which units must be set aside for low/moderate income tenants, generally the longer of $15$ years from $50\%$ occupancy, the date debt is extinguished, or when Section 8 assistance ends.

Volume Cap

A legal allocation of a State's capacity required for Mortgage Revenue Bonds that are not refunding bonds to be issued.

Targeted Areas

Census tracts in which $70\%$ of families have an annual income of $80\%$ or less of the statewide median income.

First-Time Homebuyer Requirement

A tax requirement specifying the mortgagor must have had no present ownership interest in their principal residence during the three-year period prior to the mortgage execution.

Recapture Tax

A tax paid to the federal government by a mortgagor if a residence is sold within $9$ years of closing, intended to recover the federal subsidy provided by the financing.

Serial Bonds

Bonds of an issue that mature in successive years without interruption, usually every six months, typically comprising the first $8-12$ years of principal amortization.

Term Bonds

Bonds that come due in a single maturity at intervals greater than one year from the previous maturity, often requiring periodic payments into a sinking fund.

Current Interest Bonds (CIBs)

The most common type of housing bonds where interest is paid every six months until the bond matures or is retired early.

Capital Appreciation Bonds (CABs)

Zero coupon bonds where periodic interest is deferred until maturity or redemption, at which point the payment consists of principal and compounded interest.

Future Income Growth Securities (FIGS)

Zero coupon bonds where interest is deferred until the Conversion Date, after which the bond pays current interest on its accreted value.

Super Sinker

The first maturity in a bond issue called from single-family mortgage prepayments, typically having an average life of $3$ to $5$ years despite a longer stated maturity.

Planned Amortization Class (PAC) Bonds

Bonds that receive dedicated prepayments for accelerated calling, but stop being called above a certain prepayment level to provide a stable average life.

Lock Out Bonds

Bonds that an agency is prohibited from calling from prepayments, except for federal tax reasons, for a specified period ranging from $5-10$ years.

Original Issue Discount Bonds (OIDs)

Bonds sold at a price less than $100\%$ of their initial stated face value, used primarily as a marketing device for institutional investors.

Premium Bonds

Bonds sold at a price higher than $100\%$ of their initial face value, used to generate additional proceeds and reduce upfront issuer contributions.

Convertible Option Bonds (COBs)

Bonds marketed for an initial short-term period ($9-18$ months) that can be converted and remarketed as long-term fixed-rate serial and term bonds.

Variable Rate Bonds

Bonds with long stated maturities and interest rates that adjust periodically, usually weekly, often tracking the SIFMA Index.

Current Refunding

The refinancing of an outstanding bond issue where the old bonds are refunded within $90$ days of their maturity or redemption.

Advance Refunding

Refunding an outstanding bond issue more than $90$ days prior to the first call date; note that housing bonds cannot be advance refunded on a tax-exempt basis.

Remarketing

A formal re-underwriting of a bond where the form or structure is changed, commonly used to transition variable rate debt to fixed rate debt.

Syndicate

A group of municipal dealers formed to share the risks of underwriting a new issue, obtain capital, and ensure broad distribution to the investing public.

Selling Group

Brokers and dealers allowed to acquire underwritten securities for resale but who do not share in underwriting profits or assume liability for unsold bonds.

In State Retail

A typical order priority for housing issues that encourages retail orders within the state, especially useful in volatile markets.

Group Net

A priority order where bonds are sold at net price, and the total takedown benefits all managers or syndicate members.

Net Designated

A priority order where bonds are sold at net price and the investor designates the total takedown to specific underwriters.