Municipal housing bond ratings remain stable for now, but face uncertainties from pace of the economic recovery and possible legislative changes, Standard & Poor's said in a report released Thursday.

"We expect the coming 12 months to continue the trends of 2012: stable ratings with similar numbers of upgrades and downgrades for most program types, but more pressure on certain securities, such as unenhanced multifamily transactions, that have been more volatile historically," the rating agency said.

"The challenge for municipal issuers will be to balance the demand for their bonds with the loans that they can finance," it said.

The report noted that the slow economic recovery and low interest rates have compressed the difference between the typically higher rates on loans and the rates on tax-exempt bonds to slim margins that often render bond-financed mortgage financing infeasible.

"An uptick in mortgage rates would be a welcome scenario for municipal issuers," Standard & Poor's said. "Yet questions remain regarding the framework of municipal housing, including the tax treatment of bonds and loans, as well as how government-sponsored enterprises, such as Fannie Mae and Freddie Mac, will participate in the market."

In addition, members of Congress are considering whether to maintain the exclusion for tax-exempt bond interest and the deduction for mortgage interest as well as funding levels for federal housing programs.

Municipal housing default and vacancy rates have remained low enough to support high and medium investment grade ratings in the A+ to AAA range, the report said. The biggest factor in downgrades has been the fiscal status of the federal government, which resulted in a downgrade from Standard & Poor's, and shrinking appropriations, it added.

While the economic environment for muni housing as improved slightly, the rating agency said, "We expect historically low interest rates to remain an impediment to the public agencies that develop affordable housing, especially single-family units."

As a result, housing finance agencies will have to continue to mix bond-financed loans with other origination techniques, such as issuing bonds backed by pass-through securities that pay debt service every month, selling loans directly to Fannie Mae and Freddie Mac, and packaging loans into mortgage-backed securities for sale in the "to be announced" market.

"Rating actions on issuer credit ratings for HFAs will be less frequent in 2013 than in recent years," Standard & Poor's said. "In fact, as of the date of this publication, one full year has passed without a rating change to an [issuer credit rating] with the last being our upgrade on Nebraska Investment Finance Authority to AA from AA- in May 2012. We changed two other HFA [ratings] in 2012, for a total of three, one fewer than in 2011."

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