Why Loan Losses Have Declined for State HFA Single-Family Bond Programs

WASHINGTON – A large drop in foreclosures through the first half of this year means lower loan losses for state housing finance agencies' bond programs, according to a report by Moody's Investors Service.

State HFA single-family delinquencies, which include foreclosures as well as late payments on loans, fell 6% and registered the lowest mid-year level since 2009. Analysts said the drop indicates continued recovery for HFA whole-loan programs, Moody's said in the report, released Friday.

The improvement was primarily attributed to foreclosures falling below 2%, which was also the lowest level in the past seven years. Foreclosures decreased 16% from 2015 levels, driving the decline in delinquencies, analysts added.

"We expect continued declines over the next 12-18 months, although at a slower rate, with sustained improvement in the general housing market," analysts said in the report. "The foreclosure decline, which was more than double the 2015 level, indicates HFAs' successful administration of loss mitigation programs."

A projected rise in home prices will reduce losses on foreclosed properties and enhance HFAs' financial positions, analysts said. The rising prices will motivate mortgagors behind in their payments to pursue short sales with lenders, leading to fewer foreclosures, they said in the report, which covers Moody's-rated single family housing programs.

Moody's also attributed loan loss reduction and boosted loan performance to a reduction in delinquencies in judicial states as well as a rise in the proportion of loans backed by federal mortgage insurance and mortgage-backed securities in HFA portfolios.

The difference in the "seriously" delinquent rate continues to be considerably higher for judicial and non-judicial states, as judicial states require court proceedings for a foreclosure.

But the gap narrowed to 190 basis points through the first half of 2016, a figure that was as high as 220 basis points in 2015.

"The gap is closing in part due to fewer loans entering` the foreclosure process and a slight improvement in the backlog of the required court proceedings," analysts wrote in the report.

As of June 30, 55% of HFA loan portfolios either carried government mortgage insurance or were securitized with mortgage-backed securities, a 6% increase from 2010. Both provide protection during a foreclosure.

From 2010-2016, loans enhanced with private mortgage insurance declined to 17% from 25%, which Moody's said reduced the risk of non-payment or partial payments by lower-rated providers.

As of June 30, states had $32.1 billion in single family whole loan bonds outstanding. Connecticut, at $2.7 billion, had the greatest amount of outstanding bonds.

Bonds issued to finance single family programs for HFAs may be secured by either whole loans (the actual single family mortgage loans themselves) or loans which have been securitized into mortgage-backed securities guaranteed by Ginnie Mae, Fannie Mae, or Freddie Mac, according to Moody's assistant vice president Eileen Hawes, an author of the report.

Moody's said it surveyed the 31 issues of single-family whole-loan programs to obtain delinquency and foreclosure data as of June 30. The rating agency rates single-family housing debt of 44 HFAs that administer whole-loan programs.

 

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