Moody's Keeps Negative Outlook on Housing Finance Agency Sector for 2013

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Despite signs of improvement in the U.S. housing market, the state housing finance agency sector still faces credit risks caused by high unemployment levels, low mortgage rates, low home prices, and uncertainty in government policy, according to Moody’s Investors Service.

For these reasons, the ratings agency said Thursday it is keeping its negative outlook on the sector for the next 12 to 18 months, saying it expects that these headwinds will continue to drive near-term challenges for HFAs.

“While the fundamental supply and demand conditions in the U.S. housing market have improved, HFA credit drivers are more tied to various indicators in the broader U.S. economy and capital markets, especially unemployment and interest rates,” says Rachael McDonald, Moody’s vice president and senior analyst and lead author of the outlook report.

When unemployment levels are high the customers of HFAs — low and moderate income homeowners and renters — are particularly sensitive to the impacts, and as a result, rates of loan delinquencies and foreclosures for HFA portfolios increase.

Even if unemployment levels improve any time soon, Moody’s would expect a lag between declines in unemployment and improvements in HFA portfolio performance as HFAs work through a backlog of foreclosed loans.

The sector has also struggled with low interest rates that result in lower returns for general funds and lower profitability for new and existing bond programs. Also as a result from low interest rates, conventional mortgage rates have greatly lowered, which erodes the inherent interest rate advantage of tax-exempt bonds — the sector’s main financing tool.

“Based on the Federal Reserve’s decision to continue purchasing agency mortgage-backed securities in the near term, we anticipate that mortgage rates will also remain low during the outlook period,” the report said. “We expect HFAs will continue to struggle to issue bonds at rates low enough to finance competitive mortgage loans.”

Low home prices are another credit risk, as they drive potential losses upon foreclosure sales, Moody’s said. While prices have been trending upwards in some markets, they still remain well below their peak levels between 2006 and 2008 when approximately 47% of HFA single family whole loan portfolios were originated.

Despite the negative pressures the sector has faced, it has weathered the recession well, analysts said.

HFAs have maintained a stable median asset-to-debt ratio of approximately 1.2 throughout the recession and many have taken actions to help bolster their programs during the recession, such as breaking relationships with downgraded counterparties and developing new revenue streams.

“If the economic recovery continues along the expected timetable and the economy experiences lower unemployment, higher interest rates and higher conventional mortgage rates in 2014, HFAs will benefit, and the sector will be primed for stabilization thereafter,” the report said. “However, given that the economic recovery remains shaky and may proceed slowly in the near term, we believe that the negative outlook remains appropriate for the next 12 to 18 months.”

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