In response to the range of negative pressures on housing finance, Fitch Ratings said in a report yesterday that it will begin assigning specific rating outlooks to various credits within the state housing finance sector, after giving the sector a negative outlook in general.
The outlooks that Fitch plans to assign for the first time to state housing finance authorities' general obligation ratings, other bond program ratings, and guarantee fund ratings are expected to be mostly stable but some may be negative, analysts said.
The decision to begin providing outlooks for individual credits instead of only for the sector stems partly from challenges facing housing debt issuers, including capital market volatility, restricted market access, and constricted credit, according to Fitch.
"With all these outside pressures, they're still stable credits and if they're not, we're letting investors know," said tax-exempt housing analyst Charles Giordano.
Fitch gave the overall tax-exempt housing sector a negative outlook for 2009 because of several factors.
Rising unemployment and foreclosure rates combined with declining property values, and accelerating delinquency in the conventional mortgage market have stressed state HFA portfolios, leading to a "strong likelihood" that their portfolios "will start to see greater deterioration as the duration of the current recession lengthens," the report said.
Single-family housing bond programs that have a large percentage of loans backed by private mortgage insurance, for example, could face downgrades or negative outlooks, depending on their own abilities to mitigate potential losses, Fitch said. Counterparty downgrades, including those assigned to standby bond purchase agreement providers, will have an effect on outlooks and ratings as well.
"To the extent that the issuers have more variable-rate debt outstanding, they'll be more susceptible to the SBPA counterparty downgrades," said Maura McGuigan, a Fitch analyst who worked on the report.
The "unprecedented" challenges posed by worsening housing loan performance and various counterparty risks prompted the negative outlook and the forthcoming individual program outlooks.
State HFAs have had difficulty coming to market with tax-exempt debt recently, however, and have been asking for federal liquidity assistance.
The Senate yesterday considered a bill introduced by Sen. Christopher J. Dodd, D-Conn., chairman of the Banking, Housing, and Urban Affairs Committee, that would urge the Treasury secretary to purchase mortgage revenue bonds issued by state HFAs and local governments and agencies.
"You have a situation where tax-exempt bonds from AA, AAA-[rated] credits are at a higher interest rate than taxables," said John K. Craford, executive vice president of the Connecticut Housing Finance Authority.
The federal governments needs "to do something to support the state housing authorities, or we're not going to be able to do anything to help with the recovery," Craford said, calling federal intervention in housing markets "asymmetrical" with regard to assistance to state and local agencies.
For now, federal assistance for state HFAs is not being factored into Fitch's ratings, analysts said.
However, a number of factors such as the introduction of relatively popular Build America Bonds into the muni market "should start to stabilize [tax-exempt housing credits]," Giordano said. "But we don't have any crystal ball."