NEW YORK - The outlook for state housing finance agencies (HFAs) remains negative in 2012 for the fourth straight year, says Moody's Investors Service in a new report on the fundamental credit conditions in the sector over the next 12 to 18 months.

"We anticipate that the external stresses from the US economy and housing market that have pressured the HFAs' financial performance over the past three years will continue," said Moody's Vice President -- Senior Analyst Rachael McDonald, author of the report.

HFAs under the most stress, according to Moody's, are those with high levels of variable rate debt, counterparty exposure from providers of guaranteed investment contracts, primary mortgage insurance, liquidity contracts, swap contracts, or dependence on investment income.

"It is important to note that, on balance, while tight operating conditions have already resulted in profitability declines for some HFAs and their single family programs, most HFAs have remained financially stable," said McDonald. "Some have had positive balance sheet growth since 2008."

The primary drivers for Moody's negative outlook that the rating agency expects to continue through at least mid-2013 include:

-- Low conventional mortgage rates, which have made it difficult for HFAs to issue bonds at low enough rates to finance competitive mortgage loans.

-- Low interest rates on investments, which depresses profitability for both new and existing bond programs as well as for the HFAs' general funds.

-- Deterioration of counterparty credit quality, which weakens the credit profile of the bond program.

-- High unemployment, which drives high rates of loan delinquencies and foreclosures.

-- High liquidity fees for variable rate debt, putting pressure on profitability.

-- New strategies for financing loan originations that may bring a new set of credit risks.

HFAs' financial strength results from overcollateralization of HFAs and their programs, the willingness and ability to infuse cash into single-family programs from the HFA general fund, and federal government support.

"In 2012, most HFAs and single family programs are likely to continue to outperform our stress tests due to their high levels of overcollateralization," said McDonald. "As a result, the majority of HFAs will continue to exhibit strengths that support the high median issuer rating of A1."

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