A FEW years back Joe Malone, now the Massachusetts state treasurer, was the Republican challenger for Edward Kennedy's Senate seat. Not surprisingly, he lost; but clearly this is a man who's not afraid to stick his neck out. Mr. Malone is out front again, this time on behalf of an issue that Senator Kennedy undoubtedly supports - low- and moderate-income housing.
Malone broke new ground this week when he agreed to commit $50 million in public pension money over three years to fund mortgages for affordable multifamily housing development in Massachusetts. The commitment is an innovative yet safe use for retirement funds of teachers and state employees. It should serve as a model for other states that have similarly acute needs for moderately priced rental housing.
The Massachusetts commitment to the Local Initiatives Managed Assets Corporation is the first investment of public pension funds in LIMAC, the New York-based organization that provides a secondary market for affordable-housing mortgages. For builders and renovators of apartments in neighborhoods that many mortgage lenders shun, the step helps tap into the large pools of capital held in trust for state- and local-government workers across the country. And the Massachusetts plan channels funds to affordabl e housing without jeopardizing workers' nest eggs.
If "secondary mortgage market" sounds less exciting than the latest medal results from Barcelona, that's because you haven't searched futilely for an apartment you can afford on a modest paycheck or fixed income; or you aren't a builder who can't get a loan to rehab a dilapidated apartment building in a minority neighborhood; or a banker who would like to make the loan if it just weren't so risky.
Real estate lenders rarely hold mortgages in their portfolios. To acquire capital for further lending, they sell the mortgages in the secondary market, mainly to two government-sponsored agencies, the Federal Home Loan Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage Association ("Fannie Mae"). But the federal agencies are prohibited from investing heavily in mortgages on multifamily residences. LIMAC was created with private funds to provide a secondary market for mortgages on mult ifamily properties.
In cooperation with Freddie Mac, LIMAC buys such mortgages from the originating lenders and bundles them into mortgage-backed securities that can be sold to large institutional investors like insurance companies and pension funds. The investors - which, thanks to Malone, now include a public pension as well as private ones - receive the equivalent of AAA-rated Freddie Mac bonds with a competitive interest rate, and the federal entity assumes most of the risk of loss.
Massachusetts' LIMAC investment will go to developing affordable housing in the state, creating jobs as well as apartments.
There is a pent-up demand for affordable housing across America. Massachusetts has pioneered one way for states to help finance such housing without further cost to taxpayers and without piling on new bureaucracies.