SAN FRANCISCO - Public housing finance agencies - which issue municipal bonds to finance mortgages for first-time homebuyers and affordable housing projects - are facing the toughest environment in memory, but most have maintained their strong credit ratings, according to a Standard & Poor's report released yesterday.

"Housing finance agencies' conservative loan underwriting and appropriate financial management have helped them maintain their current issuer credit ratings despite the turbulent real estate and credit markets," analyst Lawrence Witte said in a report entitled "U.S. Public Finance Report Card: Actions on Housing Finance Agency Ratings in a Challenging Environment."

The relative stability of public HFAs contrasts with the turmoil that has wracked their private-sector counterparts since the U.S. housing market collapsed. Banks and mortgage finance companies have faced repeated downgrades and required billions of dollars in federal bailouts over the past year.

Standard & Poor's rates 24 HFAs. It has upgraded two this year, the Massachusetts Housing Finance Agency and the Iowa Finance Authority, and it has assigned positive outlooks to four others since the end of 2007. Only one HFA is rated below the single-A level, and three-quarters are rated at AA-minus or higher.

Still, Witte emphasized that the current environment is "challenging." Standard & Poor's has negative outlooks on three HFAs, including the biggest, the California Housing Finance Agency.

The agency earlier this week revised to negative from stable the outlook on the California HFA's AA-minus rated multifamily housing bonds, Series 2005C and 2005E. That brings the rating and outlook in line with the agency's issuer credit rating and GO rating.

Witte sees several major problems for HFAs, including reduced access to credit, lower rates on mortgages, increased counterparty risk, and the general decline in housing values.

HFAs like California's have been particularly hard hit by weakened access to the variable-rate market. CalHFA has had trouble finding letters of credit or standby bond purchase agreements to replace expiring agreements or to replace agreements with banks that have been downgraded.

Housing agencies have also been hit by other forms of counterparty risk, including downgrades to mortgage insurers and guaranteed investment contract providers.

That's on top of the basic weakness in the housing market. Witte said some HFAs are losing money on foreclosures, which is unusual for them.

Non-performing assets, the number of loans 60 days or more delinquent, fell to 2.35% in 2007 from 2.4%. While the data for 2008 is still arriving, he said only four of the 15 agencies that have reported so far had improvements in non-performing asset ratios.

Declining mortgage rates are squeezing margins and loan production, according to Witte.

"This is probably their most challenging time since I've been looking at them," he said.

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