Moody's Raises HFA Outlook to Stable

U.S. State Housing Finance Agencies weathered the storm of the financial crisis and are now getting a boost from creative bond structuring and rising home prices, Moody's Investors Service said, raising the sector's outlook to stable from negative.

HFAs have diversified their business models to address loan financing challenges, lowered borrowing costs, are experiencing better asset positions and will benefit from the stabilization of counterparty credit and median home prices, Moody's said in a report Monday.

"HFAs are nimble, they're flexible, and they've weathered what was a pretty difficult storm," Cory Hoeppner, a managing director at RBC Capital Markets' housing finance group, said in an interview. "Eventually when the fed starts tapering - regardless of market sentiment - the HFAs will come roaring back with a broader and more robust program than what they can do today."

At the onset of the financial crisis in 2008, HFA's traditional business model of issuing tax-exempt mortgage revenue bonds to finance loans stumbled. With yields on MRBs higher, HFAs were unable to offer competitive mortgage loans with rates accessible by low- to middle-income and first-time homebuyers. HFAs stayed active in the affordable housing market by developing new loan financing strategies including pass-through bonds and sales to government-sponsored entities.

"Going forward these strategies can be interchanged with MRBs to achieve the highest volume of loan originations and the best financial outcome," Moody's said.

Pass-through bond structures generate lower cost of funds than traditional MBS because they attract  buyers who normally purchase in Agency MBS market, which offers mortgage-backed securities issued by government entities like Fannie Mae, Moody's said. Selling MBS in the secondary market or directly to government-sponsored entities can earn HFAs up-front transaction fees and is a strategy to be used in any interest or mortgage rate environment, according to Moody's.

"Right now, looking ahead, most of our clients are looking at some combination of loan sales and bond sales going forward," Hoeppner said. RBC is senior manager of 17 HFA accounts.

The structures have proven to be alternatives to the traditional tax-exempt MRBs, which are more suited to a large spread between the tax-exempt MRB borrowing rate and the conventional lender's taxable borrowing rate. HFAs are also employing methods to maintain liquidity, Moody's said.

"HFAs have utilized alternative bond structures to help facilitate the replacement of expiring liquidity contracts for variable rate demand bonds," the report said. "These structures include floating-rate notes, direct bank purchases, and index floaters."

HFA balance sheets grew in 2011 and 2012 and are likely to continue growing over the next 12 to 18 months, according to the report. Asset-to-debt ratios remained steady around 1.2, despite relatively high levels of delinquencies that are likely to continue, Moody's said. The credit quality of counterparties like the U.S. banking sector and U.S. mortgage insurer sector, whose outlooks were revised to stable from negative and to positive from negative, respectively, will aid HFA credit profiles, the report said.

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