The Georgia Housing and Finance Authority will offer housing bonds next week carrying several early redemption features and a planned amortization class tranche. The AAA-rated bonds are coming as glimmers of stress affect the municipal housing bond sector.
The authority plans to price $251.9 million of bonds as $234 million of tax-exempt single-family mortgage bonds 2025 series C and $17.9 million of taxable single-family mortgage bonds 2025 series D, with retail orders Monday and final pricing for institutions on Tuesday.
The Series C bonds have a $42 million planned amortization class tranche, designed to provide an alternate mechanism to assure payback timing in the context of the Series C and D bonds, which have at least five provisions for optional or mandatory early redemption.
Municipal housing bonds frequently pay back early and PACs are designed to overcome investors' concern about that. Assuming a wide range of "prepaid speed assumptions," the PAC tranche will have an average life of five years. If an optional redemption for the rest of the bonds is exercised in June 2033, then they would have an average life of 4.9 years.
The prepaid speed assumptions describe the rate at which borrowers pay back their mortgage loans.
The Georgia Housing and Finance Authority hasn't offered a PAC tranche for several years, said Ryan Evans, Georgia Department of Community Affairs director of external affairs.
"Redemption from unexpected proceeds generally occur (i) in a declining residential mortgage loan interest rate environment when, after the issuance of bonds and the setting of the interest rate or the permitted range of interest rates on the mortgage loans, mortgage interest rates fall to a level such that market rate loans are more attractive than mortgage loans made available from proceeds of the authority's bonds, or (ii) in certain limited instances of market or business interruption, residential mortgage loans are unable to be originated in a timely manner," the bonds' preliminary official statement states.
Morgan Stanley is the senior manager and Raymond James is the co-senior manager. BofA Securities, JP Morgan, RBC Capital Markets and Wells Fargo Securities are the co-managers.
Nearly all the money from the bonds will be used to finance newly originated single-family home mortgage loans as whole loans or pooled into program securities.
The Series C bonds will have two maturities each year from 2030 to 2037 and term maturities 2040, 2045, 2050, 2055, and a final allowed PAC maturity in 2055. The PAC tranche will have an average life of five years, assuming the Series C aren't optionally called. The Series D bonds will have a maturity in December and 10 more maturities from 2026 to 2030.
The bonds carry a variety of special early redemption provisions explained in the investor presentation and the POS.
The Georgia Department of Community Affairs highlighted the bonds' inclusion of the PAC bond, which the Georgia Housing and Finance Authority hasn't issued in several years.
"The PAC is structured at 50% SIFMA [prepayment model] and is structured with a five-year average life from 50% SIFMA to 700% SIFMA," Evans said.
The authority was founded in 1991 to provide public financing and financial assistance for affordable housing for people with low or moderate income.
"Even though the United States' rating is no longer AAA by any rating agency, the fact that 98% of the [underlying] loans have some kind of federal insurance, the bulk of which from the Federal Housing Administration, still provides strong comfort for the authority to recoup any loses," said Howard Cure, Evercore Wealth Management director of municipal bond research.
If the FHA, the U.S. Department of Veterans Affairs and/or the U.S. Department of Agriculture Rural Development were to make changes to their guarantees, the changes would negatively impact the bonds and others from state housing agencies but this doesn't appear to be in the works, Cure said.
Cure said the fact that 97% of the loans were single family whole loans, 3% single family subordinate loans and none of them multifamily loans is an advantage because multifamily loans tend to be riskier, he said.
Interest rates have gone up in the last two years and that makes state housing loan program loans more competitive than bank loans, which puts the housing programs in a stronger position, Cure said.
The Georgia Housing and Finance Authority's portfolios are "seasoned" with weighted FICO credit scores over 700 and no interest rate swaps.
Georgia's population is growing and housing affordability is an issue — factors that should contribute to demand for the authority's offerings, Cure said. "The State of Georgia is rated Aaa/AAA/AAA and views the authority as providing an essential government function and could possibly help in boosting collateralization if needed," Cure said.
S&P Global Ratings highlighted five factors to explain its AAA rating and stable outlook for the bonds. The single-family mortgage bond program has a legal framework that links key transaction parties' duties with proper execution of the program. The legal risks are also mitigated.
Second, the agency has a neutral assessment of the bond program's management and operational risk.
Third, the bonds have overcollaterization and cash flows capable of handling S&P's loss assumptions in all cash-flow stress scenarios, with a minimum projected asset-to-liability parity of 104.8%.
Fourth, the program has liquid reserves sufficient to cover "short-term disruptions in asset cash flows."
Fifth, the program has market position characteristics like the national housing market.
As a caution, S&P said the program's overcollateralization, measured by net parity after losses, is "very low" compared with that of peers, and "relatively close to being unable to cover credit loss assumptions at the current overcollateralization level."
S&P said it considered the program's environmental, social, and governmental factors to be neutral.
"Foreclosure rates of the [Georgia Housing and Finance] Authority since 2018 have been historically less than the foreclosure rates for Georgia reported in the Mortgage Bankers' Association's quarterly National Delinquency Survey," Evans said.
Meanwhile there appear to be glimmers of concerns about the housing market more generally.
Due to federal policies during the COVID-19 pandemic delinquent and seriously delinquent mortgage loan rates declined in 2020 and 2021. Since 2021 they have increased steadily, according to Fitch Ratings and the Federal Reserve, and are now roughly equal to the 2019 levels.
Similarly, the rates of delinquent and seriously delinquent home equity line of credit loans have also largely returned to the 2018 levels after falling during the pandemic.
Fitch's examination of non-prime residential mortgage-backed securities issued after the Great Recession show that 30 plus day delinquencies increased to 6.3% as of December from 4.6% in December 2023 and 2.3% in 2019. Prime RMBS issued after the Great Recession also experienced a 30 plus day delinquency rate increase to 0.9% in December 2024 from 0.7% in December 2023.
"Fitch expects RMBS loan performance to deteriorate slightly throughout 2025 as the effects of elevated interest rates pass through the economy and stretched affordability continues to challenge borrowers," Fitch said in early April.
In March Moody's Ratings said changes in federal policies would likely have a negative impact on the affordable housing sector, with a medium severity. Among the concerns it raised were the Trump-administration's proposed freezes to programs vital to affordable housing.
Moody's highlighted
In January S&P raised several concerns for the public finance housing sector including rising utility, labor and insurance coverage costs. Federal revisions to the low-income housing tax credit program, federal appropriations, tariffs, and tighter border security could raise costs for housing construction.
For next week's bonds, Kutak Rock is bond counsel and Troutman Pepper Locke is underwriters' counsel. U.S. Bank Trust Co. N.A. is the bond trustee.
