NEW YORK - Sustained low interest rates will continue to erode U.S. state housing finance agencies' (HFAs) excess capital and put further downward credit pressure on the agencies, according to a report published Tuesday by Standard & Poor's Ratings Services.
The commentary, "How Low Can They Go? Sustained Low Interest Rates Are Straining U.S. State Housing Finance Agencies' Credit Quality," notes that absent alternative revenue sources, a continued period of low rates could lead to negative rating actions in certain circumstances.
Interest rates greatly affect how HFAs fare in the affordable lending market. In January, the Federal Reserve Board announced that it's likely to keep interest rates near zero through late 2014. Prolonged low interest rates have not only hindered HFAs' ability to compete in the mortgage market; they also have diminished their bottom line.
"We believe that prolonged low interest rates will continue to reduce HFAs' profitability and could lead to continued credit pressures," said Standard & Poor's credit analyst Valerie White. Agencies with creative diversification business strategies that include additional revenue sources other than income solely from their bond programs may be in a better position to mitigate the effects of interest rates on their bottom line in the long term.