U.S. municipal housing bond ratings are anticipated to stabilize with the assistance of federal programs and a low-interest-rate environment as the economy continues to improve, according to Standard & Poor's.
The report indicated that the 30-year fixed mortgage rate will average 4.6% and potentially rise eight base points to 5.4%. Compared to previous years, such rates would tend to cap the issuance of mortgage revenue bonds.
"The economy is stronger and the environment for the municipal housing market is more predictable than a year ago," said Lawrence R. Witte, an analyst at Standard & Poor's said in an interview.
Offering a broader outlook on the municipal housing market, the report is an expansion of Standard & Poor's December 2013 analysis on housing and residential mortgage finance that touched on banks, Fannie Mae and Freddie Mac, municipal housing, homebuilders, mortgage insurers, mortgage servicers and mortgage originators sectors.
Housing Finance Agency single-family indentures have continued to hold ratings of at least AA, even as the housing market slumped after the Great Recession. The indentures have sustained a feasible loan delinquency rate, and have paid off some variable-rate debt through higher equity and reserves, according to the report, keeping HFA performance strong.
As a whole a record 83% of HFAs have had issuer credit ratings of AA-minus or better, compared to 75% before the real estate market took a nosedive. Also at a historic high are equity-to-asset ratios. Nonperforming asset ratios are also making headway and net income is on the rise, the report said.
The federal government shutdown and budget cuts have had a stifling effect on HFAs resulting in lower investment returns, and market mortgage rates that are too low for HFAs to function within an MRB model, S&P said. The model only works if a lower interest is paid on the bonds sold in the market than the interest charged on the loans. Federally backed programs will be more secure than federal appropriations for issuers and U.S. armed forces housing will beat out the affordable multifamily market with higher credit due to the government's appropriation consistency to cover housing costs, S&P said. Commitments to other sectors by the federal government remain uncertain.
"Last year we had sequestration that cut public housing budgets, there was a government shutdown that caused the U.S. Department of Housing and Urban Development to operate with a skeleton crew for two weeks, and Congress came close to breaching the fiscal cliff," said Witte.
Funding for the HUD fell 12% from 2008 to 2012. With the omnibus bill in place housing choice vouchers will receive $19.2 billion and project-based vouchers will get $9.9 billion.
Sectors with less federal backing will face more market forces, S&P said.
S&P said it probably won't change ratings on 85% of housing bonds. It may raise ratings on 5% of bonds, and lower ratings on 10%.
