Fitch Sees Ups and Downs for State Housing Finance Agencies in 2010

“Thernnear- to mid-term outlook for the broader housing sector continues to bernnegative, with the main driver the ongoing economic pressure onrnhomeowners,” according to Fitch Ratings' 2009 Review and 2010 Outlook ofrnState Housing Finance Agencies.  The ratingrnservice said it was cautious ahead of fiscal 2010 results which are expected tornshow further profitability issues at the housing finance agency (HFA level)rnthat will demonstrate overall declines in the fiscal health of issuers.

Therncontinuing housing crisis has three major components;

1. Declines in home prices
2. Negative borrower equity
3. Continuing declines in loan performance leading to higher foreclosure rates. 

Fitchrnsaid that most state housing finance agencies (SHFAs) have historicallybuilt uprnsurpluses as their bond programs seasoned. rnThe question is how long those reserves will allow them to sustainrncontinued losses while maintaining current ratings.  Fitch said itbelieves that the SHFAs canrnweather continued profitability issues in the short term but, if thehousingrncrisis is protracted, many will face rating downgrades.

Thernreport said that, in spite of what it viewed as a challenging year for SHFAs,rnFitch downgraded only one SHFA bond program during 2009 and did not downgradernany GO ratings.  It expects that thernagencies will continue to minimize risk and generate liquidity throughrnsecuritization and through originating more FHA insured loans than in thernpast. 

Goingrnforward, the performance of the SHFAs in 2010 will depend on the recovery ofrnthe housing market.  Mortgagerndelinquencies will probably not peak before mid-year and home prices do notrnappear likely to rebound in the near term. rnFitch expects that the discontinuation of the Federal Reserve purchasernof MBS will lead to an increase in mortgage rates but feels it is uncertainrnwhether those rate moves will stabilize the market or cause it to declinernfurther and lead to more foreclosures and increased housing inventories.

Fitch,rnhowever, sees some factors that favor SHFA programs.  The housing agencies have demonstrated many creativernstrategies toward first time home buyers who are currently shut out of thernconventional market.  These have beenrntied to down payment assistance or to the use of other SHFA funds to subsidizernmortgage rates.  This creativity, alongrnwith anticipated higher interest rates, should make the SHFA loan product morernattractive, especially as conventional lenders tighten underwriting standardsrnand because most SHFA participants can buy a home without selling another inrnthe current buyers market.

Loan delinquenciesrnwill probably continue to increase through this year until employment improvesrnbut Fitch expects that SHFA loans will continue to outperform those in thernconventional market because of more conservative underwriting standards andrnless risky loan products.  Oncernemployment improves, all loan performance should as well.  Fitch noted that some SHFA single-familyrnprograms may see changes in delinquency statistics as some portfolios shiftrnfrom whole loans to MBS, changing their overall composition.

In latern2009, the U.S. Treasury unveiled an HFA initiative which included the New IssuernBond Program (NIBP) and Temporary Credit and Liquidity Facility Program (TCLP).rn  Under NIBP, bonds that were issued inrn2009 were placed in escrow and will be rolled out this year.  It is expected that the SHFAs will delayrnrollouts as far into 2010 as possible to maximize profitability.  Most are currently using short term borrowingrnto fund loans with their long-term take-out financing already priced throughrnNIBP. 

Fitchrnsaid that participants report a weak market for housing bonds with longrnmaturities and that many regular buyers have exited the market so pricing ofrnbond financing is challenging.

Many ofrnthe variable-rate demand bonds (VRDOs) issued by SHFAs are backed by liquidityrnfacilities which expire this year which will put some under pressure tornrenegotiate or find new providers. rnHowever, many were able to participate in the Temporary Credit andrnLiquidity Facility Program which provided them an option for lower prices andrnmore flexibility.  This, however, is notrna long-term solution.  Some SHFAs arernfinding easy renewals because of long standing relationships with banks outsidernof liquidity facilities.

Fitchrnsaid that the market for new VRDOs is at a standstill.  While the amount of variable-rate debt forrnthe 34 SHFAs reporting increased from 22.3 percent in 2008 to 27.3 percent inrnfiscal 2009, this was due to a decrease in all debt more than a rise in the variable-raterncategory.  Fitch expects the percentagernof variable-rate debt to decrease through this year and in the medium term.

Inrnfiscal 2009, 34 SHFAs reported that total assets decreased 1 percent from 2008rnwhile debt decreased 1.5 percent.  Thisrnis a stark contrast to previous years when both assets and debt grew by nearrndouble-digits.  SHFA performance duringrn2009 was adequate but some indicators and margins weakened.  The SHFAs had a median net interest spreadrn(NIS) of 19.9 percent in 2009 compared to 22.5 percent in 2008 for the samernissuers.  31 of the 34 agencies reportingrnnoted a decrease and this was the second straight year that the median NISrndeclined.  Fitch warned that if thisrncontinues it would expect an increase in negative rating actions.

Decreasesrnin interest income along with flat or higher expenses led to decreases inrnoperating revenues to 6.7 percent in 2009 from 10.9 percent a year earlier.  Still, the median adjusted debt-to-equityrnratio decreased to 5.1x in 2009 from 6.1x in 2008 for the same 34 SHFAs.  This is the lowest since Fitch began trackingrnthis data and is well below the median of the 10 year averages of 6.4x.

Fitchrnanticipates that the SHFAs will spend much of 2010 seeking to make their loanrnproducts more attractive, looking for buyers for any long-bond financing; searchingrnfor affordable liquidity providers, and seeking appropriate investment vehiclesrnto place funds from downgraded provider instruments to minimize negativernarbitrage issues.

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