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March 31, 2021

Smith's Research & Gradings

Grant Whitaker Set to Retire

Grant Whitaker Set to Retire

Grant Whitaker, President and CEO of the Utah Housing Corporation (UHC) will retire in April, after more than 40 years. He began his work in the affordable housing finance sector at the Salt Lake County Housing Authority before joining UHC. He was charged with putting together a financing program for home repairs. They had money from CDBG (Community Development Block Grants) to make loans to individuals. He set up servicing that closed loans. He added, "I learned a lot on little transactions."

He started work at Utah Housing Finance Agency (as it was known then) in March of 1979. His first job was to put together Utah Housing Finance Agency's Section 8 program. Back then, each state received an award of Section 8 contracts. The State HFAs took applications from developers and then awarded a portion of the Section 8 subsidy as the contract authority. In his early position, Mr. Whitaker put a program together for Section 8 applications that were used for affordable housing. "The financing mechanism was pretty much in place when I arrived here," he said, "That's what I did and I found it was interesting."

Smith's Research & Gradings asked him to reflect back on the changes he's seen over the last years. He confessed to not doing a lot of thinking about the history of affordable housing. "But, I thought about it this morning before our interview," Mr. Whitaker said. "It was different back then. To begin, we didn't have tax credits. And we were issuing bonds for single family mortgages in a different fashion. We were limited in the amount of bonds we could issue. I think every State was limited to $200 million a year. Well, in Utah, that was not a real problem. But for the big states it was real crimp in what they could do. That annual limit stayed in place until I think it was the 1986 tax bill, which merged together single family, multifamily and student loans and manufacturing (pollution control/industrial development) into private activity bonds. Additionally, the '86 Tax Act limited each state to the greater of $150 million or a formula based on your population. Of course, $150 mln. was much better for us than using Utah's meager population. So we went from having virtually no restrictions on the amount of bonds (i.e. $200 million) down to sharing $150 million with student loans and manufacturing and all these other things. It illustrates how those federal laws created significant damage to our ability to really serve the number of people that needed affordable home mortgages."

He added, "You know, it was very disappointing for many years. It wasn't until 2000 when Senator Hatch from Utah introduced the bill that enabled State Housing Finance Agencies to increase the amount of single-family bonds or private activity bonds to a level that took us back to previous periods. Utah's private activity bond cap is now probably about $350 million. Today it's much more doable than it was during that period when we actually had to totally stop a couple of times. We had no ability to issue private activity bonds for single family housing. Fortunately the State HFAs were able to issue a whole bunch of bonds in advance of the Tax Act. We issued bonds and then converted to taxable. Eventually we converted the bonds back to tax exempt. We were only out of business for about a year."

Smith's Research & Gradings said, "This is a theme we want you to explore a little bit more with us. You've always found a way to survive. What allowed you to be so resilient and reliable in terms of being able to provide your service to the community? What are the motivating factors for you?

Mr. Whitaker said without hesitation or mental reservation, "I think its mission orientation. It's something that I've worked on with my staff and compliment them all the time about their focus on the mission. We talk about it a lot. They focus on it. They think about it. It's so much fun to send out an email to a staff member to just congratulate them on, say, their third anniversary of working at Utah Housing and to get a response back saying: 'I love working here. I love our mission.'  I get that constantly from our staff, so it goes all throughout our staff. They really get what we do. We're not out for profit or patting ourselves on the back. We don't have big efforts to try to make sure that we're in the newspaper at all times, or television stations and all of the social media. We probably should do more of it. After I'm gone, somebody will figure out how to do a better job of it   But, the mission orientation has really worked well at Utah Housing. And I sense that is not an uncommon thing among other state housing agencies as well."

Smith's Research & Gradings said, "Let's go back and continue to talk about Utah HC after the Hatch Act was passed."

Mr. Whitaker found that UHC just was not able to issue enough tax-exempt bonds to satisfy the demand for the affordable housing product. He began issuing some taxable bonds. UHC broke transactions into three different tranches to make them as economical as possible. He always sought to gain just a little bit of either the amount of bonds issued or to reduce the interest rate on the tax exempt transactions. Utah Housing blended the interest rates together in order to get the mortgage rate to Utah home buyers as low as possible, which made the UHC always competitive.

During that period, UHC would decide it needed to issue more taxable bonds than just a little 5% or 10% tranche. "So we ended up entering into the world of derivatives," Mr. Whitaker said, "by issuing swaps." He recalled using variable rate swaps and the swaps work flawlessly. The swaps worked very well for years.  Unfortunately the Great Recession came along. It was interesting that UHC had one swap counterparty, but it ended up with a lot of liquidity provided by eight different banks. The banks were US banks and they were banks from Europe. And the banks were backing UHC on the swap so that if ever the weekly auction put back to the VRNs back to UHC, it would have eight major banks to take them in.

"We had nearly a billion dollars worth of of swaps outstanding at one point. And there is no way we could acquire or take back in a billion dollars worth of swaps in our little State. We didn't have the kind of deep pockets to be able to do that. So that's why we needed liquidity and we were always careful to make sure that we spread that out so that we were not concentrated with any of one of the banks. Nevertheless, virtually every one of the major banks went into the toilet. [LAUGH] And for a short-period we actually got some (not all) of those bonds placed back to us. Even though we only had to take them in for a couple of weeks, the housing bonds were considered bank bonds and that created some additional difficulties. Just a whole series of events took place back in around 2008 and 2007 made it a really interesting period. We kind of jumped all around trying to meet that mission to try to help as many first time homebuyers as possible."

Smith's Research & Gradings noted, "It's interesting you bring up the Great Recession calamity. State HFAs and affordable housing bonds faced competition from the subprime mortgage companies."

Mr. Whitaker said, "We never did do anything to compete with sub-primes from the standpoint of loosening up our credit underwriting or anything. Instead we offered downpayment assistance. We've been doing downpayment assistance probably for about 25 years. So, the late 90s is when we began doing it. Initially we got some money from I think, the Federal Home Loan Banks. We issued them as grants and then we went to a different type of loan and and ultimately ended up about where we are now, where we issue 30-year fixed rate, second mortgage for the down payment assistance. The loans are amortizing, right along with the first mortgage. The interest rate on the second mortgage is 2% higher than the first mortgage rate. And our first mortgage can float on an hourly basis — literally depends on how the markets are moving. But we keep it at 2% over, which makes it really easy for the lenders. If the first mortgage is, say, four and seven-eighths, then the second mortgage rate is six and seventh-eighths. A first mortgage rate of two and three-quarters has a second mortgage rate of four and three-quarters. This formula just makes it very simple and it's worked out very well for us.

"In the last four or five years, we've been averaging about a billion dollars of first mortgages, and almost every one of them takes the down payment assistance, which is up to about 6% of the first mortgage amounts. We actually end up doing in the neighborhood of $50 million to $60 million of second mortgages each year, which we fund from profits. And when those pay off, we're able to use that cash as well. So it's worked out well for us."

Smith's Research & Gradings said, "We just looked at UHC's portfolio from a geographic perspective and it seems much of your portfolio is in Salt Lake City…"

Mr. Whitaker added, "Salt Lake County has 17 cities within it. Utah has a crazy and inefficient system, but new cities are created with some regularity. I lived in the co-operated part of Salt Lake County for 30 some years. And about 3 years ago, this area went through an election process (to form a city). The first-time, voters turned it down, and the second time people approved it. I now live in the city of Mill Creek, which is the third largest city in Salt Lake County. A population of 1.3 million lives in Salt Lake County, while Salt Lake City itself has a population under 300,000. But all these other communities are in Salt Lake County so we end up having about 40% of the population of the State of Utah in Salt Lake County. And if you were to look at a map of Utah, you would see there's a range of mountains called the Wasatch mountains. And most of the population falls along the west side of the Wasatch mountains. In that area, from the very northern end to the southern end, it's about 90 miles long and on average is about 15 miles wide because of the Great Salt Lake and Utah Lake and other issues like the Great Salt Lake desert. About 78% of the population in Utah resides in that area along that Wasatch front where the population is running out of land. I'm seeing a lot of things going up that we didn't have before, like a lot of apartment communities. We're financing a lot of them for lower income people and tax credits that we have available to us and so forth. But it's so interesting to go through communities that were previously little bungalow houses and so forth. Now if you drive down a street, there are 12-story apartments on each side. It's a canyon through little areas that were never like that in the past. It's different, it's way different than it was."

Smith's Research & Gradings said, "Are there any people that you've worked with that you think have made contributions to State Housing Finance in general, but more especially to you and UHC?

Mr. Whitaker said, "Well somebody that I have to think about is Brian Hudson from the Pennsylvania Housing Agency. When I was first appointed as president of Utah Housing, and I attended the first NCSHA event for executive directors, Brian saw me and he came over and introduced himself and we sat down together and had dinner together with all the group. He really made me feel welcome. Brian is just a wonderful human being. He retired about a year ahead of me. There are a whole lot of other good people out there. People who have done some innovative things. For example, Massachusetts Housing Agency under Tom Gleason, former executive director, (who became a very good friend of mine) does something that maybe only one or two others that do: operate a mortgage insurance arm. That's something that if a State's population is big enough to spread out the risk, others might take a look into doing. Of course, one will want to be careful only to do it for the State HFA's own portfolio, at least initially.

"We've done servicing since the mid 90s. There are still quite a number of HFAs that don't service their own portfolios. And there's a handful of big servicers out there for the rest of them. But it is interesting to make good friends and business partners over the years. I've worked with Randy Hynote of Stifel since the mid 80s. He's always been somebody who's come up with ideas that work for Utah Housing. They don't always work for everybody else, but we're doing tax-exempt mortgage backed securities now, that's how we issue our tax-exempt transactions. So we're a big Ginnie Mae issuer and it just blends right in with what we do. And sometimes they don't work because the markets have changed. You put out mortgages, you get them back in, and and you're ready to play some with Ginnie Mae, and the markets have changed, and sometimes they just don't work. But we hedge everything on our own. And so we've got a system that if they were unable to close on or settle on a TEMS issue, we're able to put it right back into the Ginnie Mae we've already hedged on there. So we never miss a beat in that aspect — our risk is very low in all of that. We hedge everything virtually every day so that we're never hanging out there at all. And all of that's worked very well. Another person who's retired from Ballard Sparker is Fred Olsen. Fred was our bond counsel for many years, and his son has taken over the reins with that. In fact, I just got email from Fred over the weekend. He said, when are you retiring? Let's go play some golf. So we're gonna try and do that, but I look forward to a little time off for pleasure. [LAUGHTER]

Smith's Research & Gradings concluded, "Well, I think on behalf of everybody in the housing market and the affordable housing finance community, I would like to wish you nothing but sublime happiness in your retirement. And we also would encourage you to stay in contact: we do still need your good counsel and your experience. Your commitment to the sector has helped everyone, not just in Utah but across the entire country, and for that I want to say thank you. And I would also say that at this stage, I'd like to conclude our interview and say thank you again, and we'll be in touch."

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