MMA analyst Matt Fabian

LOS ANGELES — By biding its time, the California Housing Finance Agency was able to manage the challenges caused by the financial downturn and bounce back from the resulting rating downgrades, according to Municipal Market Advisors.

"CalHFA's recent rating upgrades from S&P — and the fact that Moody's is not reviewing the issuer's credit ratings again for downgrade — demonstrate that sometimes it is possible to 'buy time' and not succumb to just 'kicking the can down the road,'" MMA analysts Matt Fabian, Lisa Washburn, and Bob Donahue wrote in a report released Tuesday.

Standard & Poor's downgraded the agency's issuer credit rating to A from AA-minus in April 2010 after the housing downturn led to a significant decline in CalHFA's profitability and fund balance. The credit rating agency downgraded the rating again in May 2011 to BBB from A, citing a risky loan portfolio and the continued weak California housing market.

In December, the agency upgraded CalHFA's home mortgage revenue bonds to A-minus from BBB, citing its trend of increasing profitability and asset coverage, sufficient assets and revenues to absorb projected loan losses, and declines in delinquency and foreclosure rates as a result of improving California real estate market conditions.

The agency was able to leverage the temporary relief that federal programs offered to implement strategies that would improve its financial position over the long run, MMA analysts said.

"Unlike Puerto Rico that has designs on borrowing again which may only 'address the symptoms and not the disease,' CalHFA — with temporary assistance and funds from the U.S. Treasury — benefited from time and tools that enabled it to steadily address many of the problems that plagued its bond programs in the wake of the financial crisis," analysts said.

Federal support provided to state housing finance agencies included programs such as the New Issue Bond Program, under which government-sponsored enterprises purchased 60% of state housing agency bonds at below market rates, and temporary credit and liquidity programs, which helped stabilize variable rate demand portfolios by providing replacement credit and liquidity support from Fannie Mae and Freddie Mac.

The federal government also provided funds to certain states that either faced steep home price declines or very high unemployment, to help homeowners avoid foreclosure.

Such federal programs provided the agency with a much needed bridge that enabled it to address what was in its control and also benefit from economic and other improvements, analysts said. These included an improving housing market, reduction in California's unemployment rate, and accelerating economic growth.

"CalHFA worked diligently through the financial crisis to manage our agency's balance sheet," CalHFA's executive director Claudia Cappio said following the rating action from Standard & Poor's. "This upgrade is a culmination of work that has occurred behind the scenes for many years by our team at CalHFA."

MMA analysts noted that CalHFA still faces potential risks, including California's economy, the state's housing market, and the agency's requirement to replace the federal program's liquidity facilities on its VRDBs by the end of 2015 or convert them to another structure.

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