"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.