The outlook for the state housing finance agency (HFA) sector remains negative as stresses from the US economy and housing market remain despite improved metrics in some areas, according to a mid-year sector outlook update from Moody's Investors Service.
The update added that HFAs are financially sound.
"Credit stress for HFAs continues to be felt due to low conventional mortgage rates, which have made it difficult for them to issue bonds at low enough rates to finance competitive mortgage loans," said Moody's VP-Senior Analyst Rachael McDonald, author of the report, "Sector Outlook for US State Housing Finance Agencies Remains Negative."
Other factors cited by the rating agency include high unemployment, which contributes to high rates of loan delinquencies and foreclosures, deterioration of counterparty credit quality, which weakens the credit profile of the bond programs, and high liquidity fees for variable rate debt, pressuring profitability. Low interest rates on investments also depress profitability for both new and existing bond programs as well as for the HFA's general funds.
"While economic conditions will remain at stressful levels in the near-to-medium term, stabilization in some metrics, including declines in unemployment and stabilization of home prices, have recently emerged," said McDonald. "In addition, over the last few years, many HFAs have developed new management strategies that, combined with a stronger economy, may help move the sector to more solid ground."
These strategies, reports Moody's, include the sale of mortgage-backed securities (MBS) into the secondary market to provide new revenue streams for HFAs, and new variable rate products such as floating rate notes in order to replace variable rate demand obligations. Standby purchase agreements can eliminate remarketing risk, and replacement or cancelation of contracts with downgraded counterparties will help support the credit profile of bond programs.
"The financial strength in the sector results from the overcollateralization of HFAs and their programs," said McDonald. "While we expect some continued downgrades or negative outlooks over the next 12 to 18 months, the majority of HFAs will continue to exhibit strengths that support their high median issuer rating of A1."
McDonald said HFAs most vulnerable to rating downgrades and outlook changes include those with high levels of variable rate debt, counterparty exposure from providers of guaranteed investment contracts, primary mortgage insurance, liquidity contracts and swap contracts, and those that depend heavily on investment income.