HFAs' Performance Is Strong And Stable

The 2018 U.S. housing finance agency (HFA) medians highlight continued balance sheet growth across the sector. Our rated universe of state HFA programs continues to show stability in 2019 and overall high ratings, buoyed by demand for affordable housing and mortgages, low interest rates, relatively low unemployment, increasing wages, and the overall strong domestic economy. This year, our report card combines single- and multifamily indentures to produce a more holistic analysis that collectively captures all of our rated HFA entities.

As management teams continue to seek the best execution for single-family loan origination, fiscal 2018 witnessed an increased number of agencies adding mortgage-backed securities (MBS) to balance sheets. The vast majority of single-family program ratings remain stable at 'AA+' but two upgrades highlight the transition of hybrid indentures becoming a majority MBS resolution. Our ratings fall within a four-notch range: 'AAA' to 'AA-', although the lowest ratings appear only twice from the same issuer (Utah Housing Corporation), which has multiple debt classes. Colorado Housing and Finance Agency likewise has multiple debt classes, pushing our total single-family universe to 53 ratings.

Chart 1

S&P Global Ratings rates 17 multifamily programs for 15 entities (Colorado Housing and Finance Authority issues two classes of multifamily debt, and New Jersey Housing and Mortgage Finance Agency maintains two multifamily resolutions). Ratings consist of a slightly wider spread between the highest and lowest than the single-family range, between 'AAA' and 'A+' (five notches). We continue to see HFAs generally demonstrate strong management and oversight of their multifamily programs, including close monitoring of project performance, which we view as a strength in our analysis.

Chart 2

HFA multifamily programs consist of a range of loan types, including those for Section 8-subsidized properties, loans with credit enhancement (from sources such as the Federal Housing Administration (FHA), Fannie Mae, and Freddie Mac), and loans without credit enhancement. In addition, many of the multifamily properties financed through these loans benefit from the Low Income Housing Tax Credit (LIHTC) program, and the oversight of multiple parties involved in the properties' financing.

Chart 3

Backdrop Of An Economic Expansion…But For How Long?

Throughout 2019, the U.S has continued into what's become the longest period of economic expansion, which began midyear 2009. The recovery has led to considerable job growth, a rising employment rate, a recovering labor force participation rate, rising real wages, and falling poverty. In addition, the economy has shown few signs of overheating (which typically include increases in unit labor costs, accelerating inflation, growing current account deficit, or rapid rise in asset prices).

S&P Global Ratings sees the ongoing international trade dispute between the U.S. and China as the largest threat to the economy. We also see evidence that the fiscal stimulus passed in late 2017 has run its course, and that global economic growth is forecasted to be the weakest since the Great Recession. Finally, while the nation's households continue to demonstrate economic health (for now), corporations may begin to shed jobs over the near- to medium-term, the next step following collective slowing investment.

Given these developments, in our opinion there is a 30% to 35% risk of a recession within the next 12 months--more than doubling from a year ago. Further, we project GDP growth to slow to 2.3% overall in 2019, and 1.7% in 2020, a 20 and 10 bps decline, respectively. For more on general economic research, see "Will Trade Be The Fumble That Ends The U.S.'s Record Run?," published Sept 27, 2019 on RatingsDirect.

At the same time, we are tracking potential changes surrounding the federal government's support for affordable housing, such as potential government sponsored entities (GSE) reform, housing subsidy cuts, and housing tax credit reform. As we note in "U.S. Public Finance Report Card: Housing Finance Agencies Are On Solid Foundations Amid Shaky Federal Landscape," published Oct. 18, 2019,

HFAs have generally built solid foundations post-recession, and we believe they are more prepared than they were a decade ago for changes being considered at the federal level.

Affordability: The Basic Question To Meet A Basic Need

While the continued economic expansion has created positive conditions for homebuyers and renters, the persistent downside is housing affordability. As noted in "An Influx Of Capital Is Set For West Coast Housing Affordability Challenges," published July 29, 2019, housing price increases far outpaced income growth as the U.S. recovered from the Great Recession. Per capita personal income rose 20% to $53,700 from 2013 to 2018. Over the same period, the median asking rent increased 31% to $964 and median asking sales prices for single-family homes rose 46% to $208,000 nationally. Though they may be reaching their peak, housing price increases have particularly challenged first-time and low-income homebuyers, the groups generally served by HFAs. Housing affordability has proven to be a widespread national challenge; 17 states had 2018 median incomes below 25% of their respective median home prices.

The 75 million-large millennial generation that is entering home-buying age has already had typical adulthood milestones delayed due to the decade-plus, long-ago Great Recession. In fact, households headed by 25-34 year-olds exhibit record-low homeownership rates, a figure that has trended down since the mid-2000s, according to the Joint Center for Housing Studies at Harvard.

Earlier this year, Freddie Mac contracted with Harris Insights & Analytics to conduct an online survey to poll more than 4,000 U.S. adults on their perceptions about housing in general and key issues in today's market. The survey found that student loan payments and child care costs have led some renters and homeowners to choose cheaper/smaller homes, choose lower cost areas to live, move in with family or friends, or postpone buying a home. Further, 88% of low-income renters and 72% of middle-income renters view down payments and closing costs as primary obstacles to homeownership; 80% of millennials perceive not having enough money for a down payment or for closing costs as an obstacle to homeownership.

Single-Family Program Trends

As of fourth quarter 2018, 84% of first-time homebuyers accepted some form of downpayment assistance (DPA) from an HFA that we rate, up 13 percentage points from 71% in Q4 2017. As discussed in our commentary "Bridging The Affordability Gap: U.S. Housing Finance Agencies Find Balance-Sheet Growth While Aiding First-Time Homebuyers," published July 31, 2018, DPA from HFAs has helped to bridge the affordability gap for first-time homebuyers. Although DPA products and their funding source vary greatly among HFAs, they are spurring total HFA loan production and contributing to making HFAs the lender of choice for first-time homebuyers. We view this as a credit strength for the agencies' growing balance sheets.

According to Refinitiv, between 2010 and 2018, total single-family housing bond issuance outpaced multifamily housing bond issuance in each year except 2014 when there were fewer single-family refundings than in the two previous years, and 2017 when multifamily new money reached a 10-year peak. As of October 2019, single-family housing bond issuance par amount already exceeds $11 billion and will set a new 10-year peak by year-end, while multifamily bond issuance may continue its decline, with a total par amount thus far of $7.7 billion (see chart 4). HFAs have historically relied on mortgage revenue bonds to finance single-family mortgage loans to first-time homebuyers in their respective state, as well as multifamily loans to an array of borrowers offering affordable rental options.

Chart 4

Unsurprisingly as a result of the economy, single-family whole loan delinquencies have trended sharply down from their post-recession levels. The exception are issuers in two judicial foreclosure states: New Jersey and Florida. New Jersey's single-family resolution has a whole loan delinquency rate exceeding 11%, which is the highest share across our rated universe. Florida Housing and Finance Corp's program has just under 11% delinquencies, although the program has a very low relative share of whole loans to MBS, with the former representing less than 10% of assets, meaning that the portfolio's overall potential for losses is much smaller than an 11% delinquency rate may indicate.

As HFAs move to increase their percentage of MBS assets, the whole loan delinquency rates represent a shrinking portion of the asset base. If the whole loan delinquency rates were applied to the sum of loan and MBS assets, the resulting delinquency rates indicated below in Chart 5 would be considerably lower. In fact, for 2018, median delinquencies using this approach would be 2.49% vs the 4.3% indicated in the chart below.

Chart 5

Debt service coverage levels, our key assessment of program strength, improved to 1.23x from 1.22x. S&P Global Ratings also considers the strength of single-family programs on the amount by which assets exceed liabilities. All of our rated single-family programs have asset to liability (i.e., parity) ratios that exceed 100%. While the District of Columbia's 1988 resolution's (one of three for DCHFA) parity level exceeds 1,000%, that is a significant outlier representing the peak parity ratio. The remaining 48 resolutions range from 104% (both New Mexico Mortgage Finance Authority and Georgia Housing Finance Authority) to 246% (DCHFA's 1996 resolution).

Chart 6

Multifamily Program Trends

Generally, HFA multifamily programs maintain strong and stable ratings in an environment of high demand for affordable rental options. Loan performance is a key factor in our rating analysis, and can contribute to upside or downside outlook scenarios. Multiple issuers demonstrate no serious delinquencies within their portfolio (defined as exceeding 60 days or in foreclosure), while the peak rate is within New Jersey's 2005 resolution--at 6.2%. Loans' cash flow appears to maintain strength as well, as the programs' debt service coverage ratios were at a median of 1.5x, which we interpret as well-equipped to meet debt service obligations. Further, we continue to view operating performance among the rated programs as strong, with properties that reflect a median vacancy rate of 3.6%.

Beyond loan performance and vacancies, we use parity ratios to evaluate the overall strength of any particular resolution, similar to those of single-family programs. While this is only one data point leading to an eventual rating on a resolution or particular issuance, it importantly speaks to the longer-term resilience for an issuer to weather economic downturns – and more specifically any resulting loan losses. We calculate credit enhancement levels for each rating level, expressed as a percentage of the outstanding loan principal balance, to identify the amount of excess cash flows, subordination, overcollateralization, reserves, or other credit support necessary for the HFA to cover projected loan losses.

The median parity ratio for the multifamily programs we rate is 125% as of our last rating reviews, in line with recent years. The total loan balances in these rated programs increased 6% year-over-year to $16.8 billion as of Dec. 31, 2018, despite varying multifamily program strategies. Program assets remain sufficient to absorb potential loan losses at the corresponding rating levels, with median losses across the programs of 13.6% in our last reviews. Our higher rating levels require multifamily programs to meet higher credit enhancement levels.

Chart 7

We adjust the programs' opening parity by our projected losses to derive an adjusted parity ratio. On an adjusted basis, there is about a 100 percentage-point differential between the lowest parity ratio (104% for Massachusetts Housing Finance Agency) and the highest (208% for Colorado's Class I bonds).

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Related Research

U.S. Public Finance Report Card: Housing Finance Agencies Are On Solid Foundations Amid Shaky Federal Landscape, Oct. 18, 2019