Economic And Housing Market Overview

Contrary to the Great Recession of the not-to-distant past, the housing market appears to be a silver lining amid the severe economic hardships currently facing the country. Various indicators--sales of new and existing homes, pending sales, and building permits--all have shot up to levels last seen 13 or more years ago. At the same time, record-low interest rates and inventories, which have led to bidding wars, have played a key role in the housing market's recovery from earlier this year, even if such strengths prove somewhat temporary and against a backdrop of uneven economic recovery, according to our economic research. (See "The U.S. Economy Reboots, With Obstacles Ahead," published Sept. 24, 2020, on RatingsDirect.) At the same time, demand for affordable rental housing remains even greater than during the pre-COVID era. In meeting this demand for affordable housing, housing finance agencies (HFAs) have implemented strategies to uphold their strong creditworthiness and limit the consequences of these economic crises on their ability to meet their debt obligations.

These strategies are separate from, and in some cases despite, certain federal relief measures. The Coronavirus Aid, Relief, and Economic Security (CARES) Act included provisions that helped keep renters and homeowners in their residences through eviction and foreclosure moratoriums, which we believed in April could add stress to mortgage lenders and was a reason why we revised the outlook on the sector to negative, as we noted in "How The U.S. Municipal Housing Sector Is Bracing For COVID-19 Related Impact," published April 14, 2020. Since April, delinquencies and forbearances in HFA single-family and multifamily programs have generally increased, as expected, though no program ratings have changed as a result of this weaker loan performance. HFA resolutions entered 2020 with significantly more equity than in 2008; our analysis of their ability to withstand their highest historical single-family delinquency rate showed that all had sufficient equity to cover credit losses in the near-term, as measured by their asset-to-liability parity ratio.

Despite higher delinquencies and forbearances, demand for HFA loans remains high. Historic changes occurred between the first and second quarters of 2020 in both the single-family and multifamily housing markets. The homeownership rate increased to 67.9% from 65.3%, the largest spike of any quarter since the data became available through the U.S. Census Bureau in 1965 (see chart 1). The last time the homeownership rate was this high was in late 2008, during the housing bubble. Perhaps not surprisingly, June 2020 also marked the lowest 30-year fixed rate mortgage average in the U.S. since data became available in 1971, reaching 3.1% (this average rate has continued to decline to below 2.9% in September).

Demand for multifamily housing units experienced a comparable historic shift in the second quarter of 2020; the average rental vacancy rate in the U.S. decreased the most in any quarter since 1956. By June, the rental vacancy rate had declined to 5.7% from 6.6% earlier this year, the lowest rate since 1984, which highlights the momentous demand for affordable rental units, as chart 1 shows.

Chart 1

Looking ahead, our U.S. chief economist acknowledges that the currently strong housing market may face challenges. As noted in "U.S. Real-Time Data: The Economic Recovery Decelerates," published Oct. 8, 2020: "Although pent-up demand from the delayed spring buying season provides support, there is plenty of scope for a slowdown to a more sustainable pace in the coming months as virus-led roadblocks to labor market recovery persist."

Housing Bond Market Activity

According to Refinitiv, U.S. public finance housing bond issuance reached a peak of $26.8 billion in 2019, with year-over-year increases of 31% and 19% for single-family and multifamily issuance respectively (see chart 2). In keeping with recent trends, the par amount for single-family issuance continued to outpace multifamily issuance in 2019, and we expect the same from 2020. As of September, single-family par amounts totaled $9 billion while multifamily totaled about $7 billion; only slightly behind that same pace in 2019. Single-family issuance in Q2 2020 exceeded the Q2 periods in 2018 or 2019, totaling $3.5 billion, after a slowdown in issuance in March that was largely due to the widespread market disruption. Much of the activity during Q2 2020 can be traced to a handful of issuers in the Mid/South Atlantic and Midwest regions executing new-money transactions. With low interest rates and strong demand for affordable mortgages, we expect HFAs to continue accessing the capital market, particularly before Election Day, for refunding opportunities and new money financings.

Chart 2

While strong access to the capital market is a credit strength for HFAs overall, the key rating drivers behind HFA program stability involve portfolio performance and oversight.

Single-family programs

The vast majority of single-family program ratings, about 62%, remain stable at 'AA+' but two upgrades highlight the transition of hybrid programs to a majority mortgage-backed securities (MBS). Our ratings fall within a four-notch range: 'AAA' to 'AA-'. The current rating distribution remains largely similar to what we've seen in past years (see chart 3).

Chart 3

Over the past year, we affirmed 92% of the single-family program ratings outstanding, partly due to the ability of programs to withstand our stress scenarios through overcollateralization or some other reserves (see chart 4). While limited, the rating changes over the past year have reflected stronger asset quality and overcollateralization at the program's prior ratings. In these examples, programs' assets have shifted more to MBS. The shift to MBS assets is a marked trend for HFA programs, reflecting a change in strategy and expected improvement in performance given the support from the federal government. The outlook change earlier this year was a revision to stable from positive that reflected general macroeconomic factors, including a sharp increase in unemployment, and provisions in the CARES Act allowing for forbearance terms that could pressure HFA resolutions more broadly.

Chart 4

In addition to a shift of some portfolios to MBS, we notice that more whole loans are carrying government insurance. Among rated single-family programs, a larger percentage of the outstanding balance was insured or guaranteed by the federal government in 2020 than during our reviews in 2017, while the percentage of uninsured loans modestly decreased (see chart 5). As loans become more seasoned and loan-to-value (LTV) ratios decline, we're likely to see a higher balance of uninsured loans. From a ratings perspective, we would generally view a portfolio with more insured loans and fewer loans uninsured (at an LTV above 80%) as a credit positive.

Chart 5

While a smaller percentage of resolutions overall, the ratings on private mortgage insurers (PMI) factor into the losses we assume for loan portfolios. The most common PMI providers, insuring about 41% of the loans with PMI, were rated 'BBB+' as of our last analysis, with a majority of PMI-insured loans with investment-grade rated providers (see chart 6). Resolutions with a high percentage of loans insured by nonrated PMI providers may require additional reserves and overcollateralization to sustain a higher loan loss assumption at their current rating.

Chart 6

All of our rated single-family programs have asset-to-liability parity ratios that exceed 100%. The median parity for these programs is about 123%, reflecting relative stability in recent years, though slightly stronger than the 119% in 2017. Programs with a majority of MBS, and with less frequent bond issues, tend to have higher parity ratios. We view a program's basis parity in the context of its asset quality, that is, its ability to absorb the risk associated with its loan portfolio through our calculated loan losses.

In general, whole loan delinquency rates have decreased in recent years, which would generally lead to lower projected loan losses in our analysis. However, data reported earlier this year shows a rise in the median delinquency rate among programs we rate (see chart 7). While we typically see more delinquencies (which we define as loans 60+ days delinquent or in foreclosure) among HFAs in judicial foreclosure states, a significant increase in certain nonjudicial foreclosure states drove their rate higher in 2020. The June 2020 data includes preliminary effects of the COVID-19 pandemic for mortgages financed by HFAs, which is a combination of government-insured, private-insured, and uninsured mortgages. For instance, FHA loans reached a record-high delinquency of 15.6% in the second quarter, according to the Mortgage Bankers Association. As noted in our recent "U.S. Public Finance Housing Mid-Year Sector View: Uncertainty Lies Ahead," published Aug. 27, 2020, HFA delinquencies "for the most part remain below levels of the Great Recession and anecdotal information suggests that a sizable percentage of homeowners who requested forbearance are paying their mortgage. For now, we believe HFA single-family resolutions . . . retain the strength to withstand elevated delinquencies for the remainder of the year."

Chart 7

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 in chart 7 could be lower.

Underpinning our analysis of single-family programs is HFAs' strong oversight and management of their portfolios. Management teams generally have several years of experience in their roles at their respective agencies, demonstrate strong oversight of servicing functions, and maintain debt profiles which are actively managed given their risk levels. Most finance teams regularly seek opportunities in the market to optimize their executions through hedged variable-rate bond issues and direct placements. Among those single-family portfolios with variable-rate debt outstanding (averaging 19% of bonds outstanding), an average of 68% was hedged through interest-rate swaps with a number of rated banks. We believe HFA single-family strategies remain prudent given the varying demands of their particular state and borrowers.

Multifamily programs

Similarly, much of the stability in ratings among HFA multifamily programs results from the active and sophisticated management of HFA staff. Multifamily asset management teams are generally strong, in our opinion, with experienced staff who actively monitor their portfolios and communicate with borrowers to help ensure consistent portfolio performance.

The range between the highest and lowest multifamily program ratings is similar to that of their single-family counterparts-- between 'AAA' and 'AA-' (see chart 8). Over the past year, there has been one upgrade, which reflected the program's significant overcollateralization and twin revenue streams securing the bonds— resolution assets and the agency's general obligation pledge.

Chart 8

Most of the multifamily program ratings involve our methodology based on the strength of the mortgage collateral (see table). We derive the rating on four multifamily programs from the HFA's general obligation pledge, and two programs based on the single-family methodology due to the balance of their single-family portfolios exceeding that of their multifamily portfolios.

HFA multifamily programs continue to demonstrate strong overcollateralization through a combination of mortgage loans and reserves. At each rating level, the programs demonstrate sufficient balance sheet coverage to absorb our calculated loan losses, with a median parity ratio of about 124%, in line with past years. The average total loan balance among rated multifamily portfolios was nearly $1.1 billion in 2020, 17% higher than the average in 2017 (see chart 9). While some HFAs have strategically slowed their multifamily loan financings, others, in particular some of the larger programs, continue to access the bond market to fund the growth of their portfolio of affordable housing projects. Some HFAs have also benefitted from state-level support to provide affordable rental options.

Chart 9

Our conversations indicate HFAs are taking steps to manage the current and potential effects of the COVID-19 pandemic and economic challenges in their multifamily portfolios. HFAs have communicated with borrowers and are exploring available tools to address emerging risks. In situations where HFAs grant borrowers payment relief or forbearance, we believe their multifamily portfolios have the financial strength, flexibility, and resources to perform at their current rating levels, and that they can withstand near-term disruptions of mortgage payments. As we said in "How Job Losses And Rent Moratoriums Might Affect HFA Multifamily Program Performance," published May 7, 2020, all programs include a debt service reserve fund at least equal to the subsequent year's debt service payments, and some include other pledged reserves and the ability to access funds (through their general fund or from their state) if necessary.

Among the emerging risks is tenants' ability to stay current on their rent through the economic downturn, and subsequent uneven recovery. Eviction moratoriums, while recognizing the importance of stable housing during the pandemic, have the potential to create financial pressure for multifamily owners. Tenants who fall behind on rent payments may have less flexibility to recover than homeowners who miss their mortgage payments. The latter group may be able to add missed principal payments to the end of their mortgage term in certain circumstances, a relief unlikely to be offered for renters. While the current eviction moratorium may allow renters who meet certain requirements to remain in their units temporarily, there could be a looming eviction crises once the moratorium expires on Dec. 31 and renters are still unable to make their rent payments. A report produced by Stout, Risius Ross LLC for the National Council of State Housing Agencies (NCSHA) published on Sept. 28, 2020, estimates roughly 10-14 million renter households were behind on their rent as of mid-September, and will owe approximately $25-$34 billion by January. The report notes that more than 8.4 million households could experience an eviction filing by January, while 42% of renters indicated they are spending their savings or emergency funds to make full or partial rent payments.

The U.S. Census Bureau's Household Pulse Survey for the week ending Sept. 28, 2020, shows 15% of renter households were behind on their rent payments, and 11% had no confidence in making the next month's rent, likely due to a loss of employment income. Among affordable housing properties, rent collection was below 80% for the second consecutive month, according to MRI Software's August 2020 Market Insights report. Beyond the direct effects on renters, projects within HFA portfolios may be forced to reduce certain operating expenses should they realize significant reductions in rent collections.

States' responses to the emerging risks in this sector have been notable. HFAs in 33 states have launched emergency rental assistance programs, particularly to provide financial relief for renters who experienced a loss of income resulting from COVID-19. Program features include payments for rent, rent arrearages, and late fees. According to the NCSHA, the average size for these emergency programs was about $44 million as of September, with total funding reaching $1.5 billion.