"The near- to mid-term outlook for the broader housing sector continues to be negative, with the main driver the ongoing economic pressure on homeowners," according to Fitch Ratings' 2009 Review and 2010 Outlook of State Housing Finance Agencies. The rating service said it was cautious ahead of fiscal 2010 results which are expected to show further profitability issues at the housing finance agency (HFA level) that will demonstrate overall declines in the fiscal health of issuers.
The continuing housing crisis has three major components;
- Declines in home prices
- Negative borrower equity
- Continuing declines in loan performance leading to higher foreclosure rates.
Fitch said that most state housing finance agencies (SHFAs) have historically built up surpluses as their bond programs seasoned. The question is how long those reserves will allow them to sustain continued losses while maintaining current ratings. Fitch said it believes that the SHFAs can weather continued profitability issues in the short term but, if the housing crisis is protracted, many will face rating downgrades.
The report said that, in spite of what it viewed as a challenging year for SHFAs, Fitch downgraded only one SHFA bond program during 2009 and did not downgrade any GO ratings. It expects that the agencies will continue to minimize risk and generate liquidity through securitization and through originating more FHA insured loans than in the past.
Going forward, the performance of the SHFAs in 2010 will depend on the recovery of the housing market. Mortgage delinquencies will probably not peak before mid-year and home prices do not appear likely to rebound in the near term. Fitch expects that the discontinuation of the Federal Reserve purchase of MBS will lead to an increase in mortgage rates but feels it is uncertain whether those rate moves will stabilize the market or cause it to decline further and lead to more foreclosures and increased housing inventories.
Fitch, however, sees some factors that favor SHFA programs. The housing agencies have demonstrated many creative strategies toward first time home buyers who are currently shut out of the conventional market. These have been tied to down payment assistance or to the use of other SHFA funds to subsidize mortgage rates. This creativity, along with anticipated higher interest rates, should make the SHFA loan product more attractive, especially as conventional lenders tighten underwriting standards and because most SHFA participants can buy a home without selling another in the current buyers market.
Loan delinquencies will probably continue to increase through this year until employment improves but Fitch expects that SHFA loans will continue to outperform those in the conventional market because of more conservative underwriting standards and less risky loan products. Once employment improves, all loan performance should as well. Fitch noted that some SHFA single-family programs may see changes in delinquency statistics as some portfolios shift from whole loans to MBS, changing their overall composition.
In late 2009, the U.S. Treasury unveiled an HFA initiative which included the New Issue Bond Program (NIBP) and Temporary Credit and Liquidity Facility Program (TCLP). Under NIBP, bonds that were issued in 2009 were placed in escrow and will be rolled out this year. It is expected that the SHFAs will delay rollouts as far into 2010 as possible to maximize profitability. Most are currently using short term borrowing to fund loans with their long-term take-out financing already priced through NIBP.
Fitch said that participants report a weak market for housing bonds with long maturities and that many regular buyers have exited the market so pricing of bond financing is challenging.
Many of the variable-rate demand bonds (VRDOs) issued by SHFAs are backed by liquidity facilities which expire this year which will put some under pressure to renegotiate or find new providers. However, many were able to participate in the Temporary Credit and Liquidity Facility Program which provided them an option for lower prices and more flexibility. This, however, is not a long-term solution. Some SHFAs are finding easy renewals because of long standing relationships with banks outside of liquidity facilities.
Fitch said that the market for new VRDOs is at a standstill. While the amount of variable-rate debt for the 34 SHFAs reporting increased from 22.3 percent in 2008 to 27.3 percent in fiscal 2009, this was due to a decrease in all debt more than a rise in the variable-rate category. Fitch expects the percentage of variable-rate debt to decrease through this year and in the medium term.
In fiscal 2009, 34 SHFAs reported that total assets decreased 1 percent from 2008 while debt decreased 1.5 percent. This is a stark contrast to previous years when both assets and debt grew by near double-digits. SHFA performance during 2009 was adequate but some indicators and margins weakened. The SHFAs had a median net interest spread (NIS) of 19.9 percent in 2009 compared to 22.5 percent in 2008 for the same issuers. 31 of the 34 agencies reporting noted a decrease and this was the second straight year that the median NIS declined. Fitch warned that if this continues it would expect an increase in negative rating actions.
Decreases in interest income along with flat or higher expenses led to decreases in operating revenues to 6.7 percent in 2009 from 10.9 percent a year earlier. Still, the median adjusted debt-to-equity ratio decreased to 5.1x in 2009 from 6.1x in 2008 for the same 34 SHFAs. This is the lowest since Fitch began tracking this data and is well below the median of the 10 year averages of 6.4x.
Fitch anticipates that the SHFAs will spend much of 2010 seeking to make their loan products more attractive, looking for buyers for any long-bond financing; searching for affordable liquidity providers, and seeking appropriate investment vehicles to place funds from downgraded provider instruments to minimize negative arbitrage issues.
