Pennsylvania Housing Finance Agency's cut to AA-minus by AA from Standard & Poor's traces to more foreclosures and delinquencies, less profitability than its peers and a weakened economic base, according to the rating company.

"We did not see improvement in profitability to the point where we would like to see, "credit analyst Stephanie Morgan said in an interview Tuesday. "When we reviewed their recent fiscal numbers, we determined that the agency was more in line with the AA-minus level."

Standard & Poor's, which announced the downgrade Monday night, placed the agency on negative outlook two years ago.

S&P also lowered its respective ratings on the agency's single-family risk retention program and all debt supported by the agency's general obligation pledge by one notch to AA-minus and AA-minus/A-1 from AA and AA/A-1. In addition, it revised its outlook on all issues to stable from negative.

AA-minus is its fourth-highest rating.

The agency's main single-family bond resolution, under which 96% of the single-family loan debt is issued, is still rated AA-plus, with a negative outlook. The GO pledge, while not straightforward, serves as a support for the single-family resolution.

"Pennsylvania housing single-family bonds are still strongly rated and still an excellent credit despite the headwinds S&P cites," said Tom Kozlik, a director at Janney Capital Markets in Philadelphia. "Management at the agency is top-notch and will make adjustments, if needed."

Brian Hudson has been the agency's executive director since 1975. Its board of trustees consists of 14 members, six of whom the governor appoints. The Harrisburg-based agency has a staff of 260 and regional offices in Pittsburgh and Norristown.

"This rating change is part of the aftermath of the mortgage crisis which PHFA has weathered very well. The agency continues to improve its performance and strategically look for opportunities to do so," Hudson said in a statement.

The agency had $4.1 billion of outstanding debt as of June 30, 2012, down about 10% from fiscal 2011. S&P cited scheduled debt payments and bond redemptions from prepayments exceeding new bond issuances. Risks and expense related to the swap-dependency of its bond issues reflect in the agency's cash flows, S&P added.

"Pennsylvania has positioned itself better so there's not as much counterparty exposure, but there is still some exposure," said Mikiyon Alexander, who co-authored the report with Morgan.

"HFAs have a mission-based goal to provide affordable housing," he said. "Across the country the different HFAs are competing in a challenging market and low interest rate environment."

Nonperforming assets, defined as loans delinquent for more than 60 days plus foreclosures, rose to $200 million in 2012, from $144 million in 2011. As a result, the ratio of non-performing assets to loans increased to nearly 4.5% in fiscal 2012, from 3% in 2011.

"The Standard and Poor's downgrade is really in comparison to the peers of the Pennsylvania Housing Finance Agency. Standing on its own merit, the agency has taken some of the necessary steps toward financial strength," said David Fiozenza, Villanova School of Business professor and former chief financial officer of Radnor Township, Pa.

"The agency is going in the right direction," he said. "However, economic conditions in the commonwealth continue to slow their continued financial strength. The lower rating, only one notch, still shows sustainability for this agency at AA-minus."

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