State Housing Finance Agencies Deal With Higher Delinquency and Foreclosure Rates

Moody's InvestorsrnService said last week that U.S. State Housing Finance Agency (HFA) single-family whole loan programs continued to experiencernsignificant increases in both delinquencies and foreclosure rates duringrn2009.  However, the service said theyrnremained  well below the default rates that Moodys has incorporated into its ratingrnprocess.

Loans in foreclosurernin particular grew at a rapid pace with the weighted average percentage risingrnto 1.87 percent as of the end of the year. rnThis is 75 basis points higher than the average on December 31, 2008.  The 90+ day delinquency rate was 2.92 percentrncompared to 2.0 percent one year earlier while the 60+ date rate was 1.97rnpercent, up from 1.61 percent. 

The totalrndelinquency rate in 2009 was 6.76 percent while 4.79 percent of loans arernconsidered seriously delinquent.  A yearrnearlier the respective rates were 4.73 percent and 3.12 percent.  It is generally considered an anomaly when a 90+rnday delinquency rate registers higher than the 60+ day rate.  However, Moody's notes that this situation hasrnnow been present in the portfolios for two straight years.

The ratings service saidrnthat it expects the deterioration of many single family loan portfolios torncontinue persist for the next 12 to 18 months. Based on discussions with HGArnmanagement teams, Moody's believes that the continued high distress rates arernthe result of economic factors including unemployment and underemployment, and decliningrnhome prices which are driving some homeowners to voluntarily default on theirrnmortgages.  The high 90 day rate is alsornthe result of the number of loans in the process of loan modification whichrnremain in the 90 day bucket for prolonged periods of time.

Of the 35 programsrnincluded in the survey, 34 experienced a rise in total delinquencies andrnforeclosures in 2009; a South Dakota program was the sole exception.  Three quarters of programs had a foreclosurernrate above 1 percent compared to less than half one year earlier.

HFA loans are,rnhowever, performing better than either FHA or other loan types in theirrnrespective states.  HFA loans are mostrncomparable to those guaranteed by FHA because the borrowers generally havernsimilar income characteristics and purchase similarly priced homes.  However, in most cases, HFA's loans are outperformingrnFHA loans in their states because of the Housing Finance Agencies activerninvolvement in the management of their loan portfolio.  At the end of 2009 the HFA loans were, asrnnoted, running a seriously delinquent rate of 4.79 while the FHA rate was justrnunder 6.77 percent.

The Moody report saidrnthat continued declines in property values could increase HFA's loan losses andrnadversely affect some ratings, particularly in states where property valuerndeclines and foreclosure rates are most severe. rn29 of 30 states with a Moody's-rated whole-loan program have seen a declinernin home prices and two agencies reside in California and Michigan which haverneach experienced a greater than 20 percent decline in home prices (39 percentrnand 24 percent respectively) while ten have seen between a 10 and 20 percentrnprice decline.

HFA portfolios remain predominatelyrnfilled with 30-year fixed rate loans, which comprise, on average, 89 percent ofrnHFA loans.  Moody's offered otherrncomments on the composition of the portfolios:

• Approximately 45.6 percent of the portfolios, onrnaverage, were insured by government-sponsored mortgage insurance providers suchrnas FHA or VA and 26 percent were insured by private mortgage insurancerncompanies (PM), 7.3 percent were covered by the HFA insurance fund, 18.7rnpercent (generally low LTV loans) were uninsured and 2.5 percent werernmortgage-backed securities.

• Portfolios typically contain a diverse group ofrnvintages. As of December 31, 42.9 percentrnof loans were originated in 2005 or earlier.

• In response to the Treasury's New Issue Bond Program,rnmany HFAs opened new bond indentures and will be issuing under them for much ofrn2010. In these cases, therncharacteristics within the loans pools that support existing indentures such asrnloan type, insurance type, and vintage, will remain relatively static throughrnthe year.

• As the credit quality of many PMI providers hasrndeclined, many HFAs report that they are shifting to government insurance orrnwrapping their new loans with Ginnie Mae, or GSE guarantees. Over time, Moodys said, this shift shouldrnbegin to strengthen HFA programs which did not open new NIBP indentures.

Moody's said the higher loan losses it expects based on itsrnprojections that the portfolios will continue to deteriorate over the next 12rnto 18 months have been incorporated into its analysis of loss assumptions.  They are assuming higher levels of default inrnloan loss calculations for many HFAs based on the historical performance ofrnFHA-insured loans in each agency's state. rnThe weakened performance of FHA-insured loans in 2009 has resulted inrnhigher default probability assumptions for most states.

In states where they exist, the service is also factoringrnin unusually high foreclosure rates, a large proportion of interest only loans,rnsevere home price depreciation, or high unemployment and may further adjustrnupward the assumed probability of default. rnThe revised loan loss calculations generally assume the probability ofrndefault ranges as follows:

The assumed probability of default may rise above therntop end of the range if the characteristics or performance of the loanrnportfolio suggest greater vulnerability than historical performance wouldrnimply.

Moody's said it also compared each HFA's asset-to-debtrnratio with its calculated loan losses to determine if the programsrnovercollateralization is sufficient to cover these losses and maintain arnprogram asset-to-debt ratio consistent with the current rating.  Because the projected loan loss calculationsrnhave increased, the report says, some HFAs may face difficulty in meeting therntargeted benchmark levels and their bond ratings could suffer accordingly.

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