Senate Bill S3691

                                 BILL NUMBER:  S3691

 TITLE OF BILL :

An act to amend the public authorities law, in relation to the powers
of the state of New York mortgage agency


 PURPOSE OF THE BILL :

This bill would grant the State of New York Mortgage Agency ("SONYMA")
authority to purchase it,s bonds without causing an extinguishment
thereof.

 SUMMARY OF PROVISIONS :

Section 1 of the bill amends Public Authorities Law § 2404(10) to
remove the text included therein which provides that SONYMA bonds
purchased by SONYMA are deemed cancelled.

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.