Housing Finance Agencies are enjoying their highest ratings ever and aren’t facing immediate downgrades even as loan delinquencies rise.
HFA loan delinquency rose to 7.06% in the second quarter, widening the gap between HFAs’ single-family whole loan mortgages and comparable prime state loans to 1.8 percentage points, Standard & Poor’s Rating Services said. It’s the second-largest difference between the portfolio types the ratings service has recorded.
“The stable loan performance, strong loan insurance, and robust reserve of U.S. HFA portfolios lead us to believe that the increase in delinquencies will not affect our ratings on HFA bonds unless other factors are also in play,” Lawrence Witte, a credit analyst at S&P, said in a Monday report.
At the onset of the financial crisis, HFAs adapted their business model to account for rising yields on mortgage revenue bonds. The credit quality of the loan agencies has since improved, with 21 of 24 HFAs that S&P rates boasting scores of AA-minus or higher, S&P said in October. Moody’s Investors Service last month said the HFA sector would gain when the Federal Reserve begins to taper its economic stimulus, which is expected to cause interest rates to rise.
Housing finance agencies rely on the yield spread between their bond offerings and rates available through traditional lenders to provide affordable mortgages to typically low- to moderate-income and first-time homebuyers.
Delinquency rate of loans in HFA bond programs, at 7.06%, was higher than in the second quarter of 2012, but down from 7.26% in the first quarter, S&P said in its report. Delinquency in prime state loans declined to 5.26%, widening the percentage-point gap between the two to 1.8%, from 1.76% in the first quarter.
“Despite this difference in loan performance, HFA loans continue to perform well within our stress assumptions embedded in cash flows.” S&P said in its report. “We anticipate that HFA loan delinquencies will remain within a range they can manage.”
The foreclosure rate for HFA loans was 2.6%, S&P said, lower than the year before but higher than the 2.1% for state prime loans.
The rising delinquency rates reflects a decline in the number of loans added by HFAs to their bond programs throughout the economic downturn, S&P said. HFAs are also selling loans directly to investors without issuing bonds, and are opting to purchase loans under the New Issue Bond Program. Few programs are originating new loans, S&P said.