It’s hard to imagine how the European credit crisis that hit hard many of the banks there could have an effect on bondholders of a housing agency in the U.S. whose reason for being is to provide affordable loans for first time home buyers. But that’s what could play out for investors – likely Mom and Pop types – who hold some $3 billion of mortgage revenue bonds issued by the Ohio Housing Finance Agency.
The housing agency, and apparently many other municipalities, have invested some of their funds in guaranteed investment contracts issued by a company called Pallas Capital Corp. The Ohio agency has some $106 million tied up with the Pallas GICs. Some investors look to GICs as a means to extract a little extra yield. It’s not known what these particular securities were yielding.
Pallas sold GICs and then invested those proceeds in reverser repurchase agreements that were collateralized by a pool of structured finance and corporate assets, according to Moody’s Investors Service Inc. Moody’s recently downgraded the Pallas GICs because “the GICs are a direct pass-through rating of the reverser repo counterparty, DEPFA Bank. You know what’s coming next – DEPFA was recently downgraded on its ability to pay back short term loans.