Rising interest rates would be a boon to housing finance agencies as they look to bounce back from a slump brought on by the 2008 financial crisis, Standard & Poor’s said in a report.
More than 80% of HFAs said they would benefit from higher rates, according to an S&P survey of 32 issuers. The study suggests historically low interest rates that have gripped the market since the onset of the Great Recession hinder bond issuance and profitability, the Sept. 3 S&P report said. Low rates may also hurt issuer credit ratings.
“We’re trying to highlight the unique position that HFAs have in regard to interest rates,” Lawrence Witte, a director at S&P, said in an interview. “Generally people are saying even with where mortgage rates are right now, the housing sector is having difficulty. But lower rates do not benefit everyone equally. Now that we’re starting to see rates creep up a little bit, the HFA sector thinks that could help them.”
Housing finance agencies rely on the yield spread between their bond offerings and rates available through traditional lenders to provide affordable mortgages to typically low- to moderate-income and first-time homebuyers.
The highest mortgage rates and yield on the 10-year U.S. Treasuries since 2003 are lower than the lowest rates of the previous 30 years, according to the report. The 30-year mortgage rate, around 4.4.%, has jumped from the 3.7% monthly average in 2012. S&P projects that rate will rise as high as 5.11% in 2014.
Persistent low rates held down by the Federal Reserve Bank’s quantitative easing program may also have an impact on HFA issuer credit ratings, the report suggests. S&P has lowered ratings on HFAs five times since 2000, compared with only ratings raises before then. Whether or not the downgrades, all of which pertained to HFAs that had significant variable-rate debt and interest rate swaps, are a result of interest rates is inconclusive, Witte said.
Issuers with exposure to swaps in which counterparties pay issuers a rate based on a short-term interest index may find their flexibility limited when refunding bonds or terminating swaps, the report said. Low rates trigger prepayment of loans and lower returns on investments. Higher rates could then be beneficial to credit, Witte said.
“If profitability increases, then their net income and change in equity increases, and therefore the equity-assets ratio increases,” Witte said. “That is critical to the rating process, as those are the reserves for any event that may occur.”
While 81% of the authorities surveyed said they would prefer higher rates, 19% of HFAs were neutral.
“If we had done the survey a few years ago, it would have been unanimous 'yes,’ but they have adapted to the new reality,” Witte said. “Some are now originating loans and packaging them into Ginnie Mae mortgage-backed securities at a premium. Now they’re saying, 'I could go back to higher rates, but my other lending platform is going to be less valuable.”
