Moody's Investors Service continues to have a negative outlook on the state housing finance agency (HFA) sector as the housing market improves but many of the drivers of HFA credit quality do not.
Economic conditions such as high unemployment continue to challenge low and moderate income homeowners and renters that are the HFA's natural customers, while low interest rates continue to diminish returns on HFA investments, says the rating agency in a new report. Low conventional mortgage rates also persist, eroding the advantages of HFA-issued, tax-exempt bonds.
"While the fundamental supply and demand conditions in the US housing market have improved, HFA credit drivers are more tied to various indicators in the broader US economy and capital markets, especially unemployment and interest rates," says Rachael McDonald, Moody's vice president and senior analyst and lead author of "Outlook for US State Housing Finance Agencies for 2013 Remains Negative."
"We expect these economic headwinds will continue to drive near-term challenges for HFAs," says McDonald.
Most HFAs are well-positioned to take advantage should the economic recovery pick up, says Moody's. HFAs have generally maintained stable financial performance during the sluggish post-crisis economy. They have also made operational changes that will serve them well should stronger economic growth take a firm hold.
Beyond high unemployment and low interest rates, current low home prices -- compared to when most HFA loans were originated -- also continue to challenge HFAs. Approximately 47% of HFA single family whole loan portfolios were originated between 2006 and 2008, when home prices in the US were at their peak.
Additional drivers of the negative outlook are the weakening credit quality of counterparties, the high liquidity fees for variable rate debt, and the cloud of uncertainty hanging over government policy.
"Changes to the business model or elimination of Fannie Mae and Freddie Mac, or changes to the role of the Federal Housing Administration (FHA) could impact the ability of many HFAs to originate and package loans," says McDonald. "There is also uncertainty around the fate of some federal subsidy programs that are utilized by the HFAs as well as the municipal bond tax exemption. It is unclear when the direction of these policy issues will be resolved."
