State housing authority bonds -- how safe are they?

[Mr._Graybeard]

I surf the secondary municipal bond market and notice that state housing authority bonds are relatively cheap. I see them out there for both multifamily housing and single-family mortgages. They often carry high S&P and Moody's ratings. I've bought a couple (I try not to load up too much on any one type of bond).

I remember Dad passing along his skepticism of muni housing bonds, but in the wake of the Great Mortgage Bubble, I believe that mortgage lenders have become a lot more careful across the board. Still, Dad's words ring in my ears. Anybody else want to weigh in?

 

[2B]

I surf the secondary municipal bond market and notice that state housing authority bonds are relatively cheap. I see them out there for both multifamily housing and single-family mortgages. They often carry high S&P and Moody's ratings. I've bought a couple (I try not to load up too much on any one type of bond).

I remember Dad passing along his skepticism of muni housing bonds, but in the wake of the Great Mortgage Bubble, I believe that mortgage lenders have become a lot more careful across the board. Still, Dad's words ring in my ears. Anybody else want to weigh in?

I would look at the city/state that backs the bond and how they are backed. Some municipals have pretty good ratings but the underlying credit quality may be shakey. Remember that a credit rating is usually pretty good until they actually are getting ready to default.

Are they revenue bonds that pay you out of their rent receipts or is it the "full faith and credit" of the city or state?

I would not touch municpals at this point. I don't think any city or state has done a very good job at controlling their future obligations or adequately funding their future liabilities. I include Texas in that group. Imagine what my opinion is of California or Illinois.

 

[phil1ben]

Very difficult to speak generally but I buy individual muni bonds for my own account and have been doing so for 20 years. I like the idea that I get my principal back at maturity regardless of rates and I like the ability to ladder and diversify my bond portfolio across issuers, credit ratings and maturity dates. Nowadays anyone can find a reason not to buy a muni bond or a stock for that matter. If you: (i) do the research, (ii) (in my opinion) don't go out beyond 15-17 years, and (iii) don't let any one bond become over weighted in your portfolio (I do not allow any one muni bond to represent more than 2% of my fixed income portfolio--and most are in the .5%-1.5% range); then go ahead.

I have been buying muni bonds heavily in the last 5 years---at a time when the naysayers said not to do so because interest rates "are about to rise sharply". The result is that most of my muni bond portfolio pays between 4-5.5% tax free (except for state income tax for out of state bonds). I always want to be the guy entering the store when the crowd is leaving. I bought California GOL Bonds and Illinois GOL Bonds at the very moment the naysayers said they would default--Nonsense. A State cannot constitutionally file for bankruptcy. Other municipal subdivisions can.

Having said that, I have not bought a bond in the last 4 weeks because of the low returns and have decided to wait. I am not willing to tie money up for 10 years with a 2.1% return. On the dip two weeks ago I bought more stocks but I continue to look for muni bonds. Still staying away from Puerto Rico. Good Luck to you. PS: I still work but spend about 20 minutes per day reviewing my muni bond portfolio and searching for bonds. All of the above is just my opinion.

 

[Mr._Graybeard]

Thanks for the response. These are revenue bonds, mostly underwriting single-family mortgages but also some multifamily affordable housing developments. All the ones I'm interested in are state-issued.

Phil1ben, we're on the same page. I acquired quite a few munis during the sell-off in 2013 and am collecting about a 3% federal tax-free return. I haven't gone out beyond a 2024 maturity.

Like you I've found the pickings to be quite a bit slimmer in recent weeks but I've had a couple of bonds called this fall. So I have some cash to deploy.

I try to research borrowers carefully, scanning news reports of their financial condition. It's pretty clear that Chicago is under water, but outlying counties (McHenry, Will) are in pretty good shape. Of course Puerto Rico is speculative (I won't go there), but how many muni bond funds are holding their paper, and how many shareholders know that?

I've limited my housing bond exposure so far to Wisconsin, where I reside, and Virginia, where the housing market is pretty robust. And my exposure to this type of bond will most likely remain pretty limited.

 

[Texas Proud]

I used to be a trustee for a good number of these issues....

A suggestion... find out which ones you like and find out which bank is the trustee... give them a call and ask for the person who is in charge of that issue... they can tell you how good or bad the issue is...


The biggest problem with these is that your bond can be called at any time... I had some which allowed bonds to be called every month with excess cash (when people paid off or refinanced their mortgage)... so premiums are at risk on these...


On all of the bonds that I managed, ALL were cash flow positive and would pay off all outstanding debt... and these were issued back in the S&L default days... Also, a good number of them had insurance backing the higher level debt...

Bottom line, they can be very good... as long as they are not called on you...

 

[Mr._Graybeard]

Excellent info, Texas Proud. Thank you. I will definitely take your advice on contacting the trustees.

The housing bonds I'm looking at usually are callable only after a specific date. The Virginia bond I have, for instance, is continuously callable after 7/1/2016. Actually, I'm anticipating that most of my munis and state bonds will be called before maturity.