According to a report issued by Moody's Investors Service on September 11, state HFAs are continuing to weather a difficult economic storm. While Moody's identifies factors that will continue to stress HFA credit in the near-to-medium term, the report details how HFAs have developed new strategies to combat difficult operating conditions. According to Moody's, the sector outlook for state HFAs remains negative, but most HFAs remain financially sound.
Mortgage rates have continued to drop to an all-time low, Moody's found, resulting in continued challenges for HFAs that finance mortgage lending through tax-exempt bonds. In recent years, low interest rates have prevented HFAs from issuing bonds at rates that allow the origination of competitive home loans. Moody's anticipates that interest rates will remain low for at least the next 12 to 18 months.
However, even when a number of HFA bond programs enter run-off, Moody's expects HFAs to maintain a stable quality of credit because of responsible management decisions by HFA financial teams. Moody's anticipates that a majority of both well-seasoned and newer HFA bond programs will maintain profitability despite the current low rate environment because of either having built sufficient net worth or having priced-in long periods of low interest rates into their baseline assumptions. If and when mortgage and bond rates are more favorable, Moody's expects a number of HFAs to resume lending through tax-exempt housing bonds.
Moody's identified a number of non-bond secondary market financing tools that HFAs are using effectively to continue affordable housing lending. The sale of whole loans to Fannie Mae and Freddie Mac, the sale of mortgage-backed securities, and use of the To Be Announced (TBA) market all present HFAs with an opportunity to expand their business models. Although building the infrastructure necessary to use the secondary market does carry some risks, a successful secondary market program can be a credit positive for HFAs, according to the report.
The report also cites continuing high unemployment as a cause of concern for HFAs. Moody's projects that the unemployment rate will remain above 7.5 percent through 2013, putting pressure on homeowners and increasing the likelihood of delinquencies and foreclosures. HFA program foreclosure rates reached an all-time high in at the end of 2011, and Moody's does not expect the foreclosure rate to decline while unemployment is also elevated. Many HFAs are still working through a backlog of foreclosures, Moody's says. If HFA lending programs do not have robust-enough asset-to-debt ratios to absorb the increased losses from foreclosures, Moody's indicates that credit downgrades may result. Moody's does see a slow decline in unemployment and a stabilization in home prices, however, indicating that HFAs may have weathered the worst of the foreclosure crisis.
Another credit risk identified by Moody's is the weakened credit profiles of many counterparties involved in HFA programs. Moody's has downgraded a number of banks' short-term and long-term ratings and assigned negative outlooks; HFA business associations with them may reflect negatively on HFAs' credit profiles. Mitigating factors, such as program overcollateralization and strong projected cash flows, have prevented HFA downgrades as a result of the counterparties' ratings so far. Moody's also said that a number of HFAs have replaced weakened counterparties or effectively terminated their relationships since the start of the financial crisis.