U.S. state housing finance agency (HFA) issuer credit ratings (ICRs) remained stable from 2019 to 2020, with no movement in ratings since our previous report card ("Housing Finance Agencies Are On Solid Foundations Amid Shaky Federal Landscape," Oct. 18, 2019). As of Oct. 26, 2020, S&P Global Ratings rates 23 state HFAs, one of which (4%) was in the 'AAA' category, 20 of which (87%) were in the 'AA' category, and two of which (9%) were in the 'A' category (see chart 1). We have not rated any HFAs below 'A-' since 2010. As reported previously, three HFAs were upgraded in 2019: California Housing Finance Agency, District of Columbia Housing Finance Agency, and Iowa Finance Authority, due to improvements in key financial ratios. The majority (20) of HFA ratings are in the 'AA' category, which has been the median rating of HFAs for over a decade. Between 2010 and 2019, the majority of rating movement took place in the 'A' category, with ratings slowly migrating closer to the median (see table 2).

Chart 1

Lessons learned from the Great Recession encouraged proactive program and risk management, which we view as a strength. By increasing liquidity, growing profitability, and removing risk, HFAs regained financial strength and built resiliency over the 10-year period from 2010 through 2019; this has been particularly critical during the past 10 months of 2020, in the throes of the COVID-19 pandemic. While we continue to hold a negative sector view for U.S. public finance housing, outlooks have been stable in 2019 and 2020 year-to-date, for all 23 state HFAs that we rate.

(For the purposes of this report card, we have excluded Massachusetts Housing Partnership and rated HFA mortgage insurance funds, such as New York City Residential Mortgage Insurance Corporation. Additionally, in 2017, the number of rated state HFAs decreased by one to 23, with the withdrawal of New Mexico Mortgage Finance Authority's ICR.)

Chart 2

2019 Ratios Continue Mostly Positive Trend

For the sixth consecutive year, HFAs posted growth in equity and assets in 2019, with mixed performance in key HFA ICR ratios--equity, profitability, asset quality, and liquidity. While not all HFA ICRs have been reviewed to include fiscal 2019, this report card includes fiscal 2019 information for 22 out of the 23 HFAs that we rate. Note that the financial analysis for some HFAs may have been updated and average metrics may differ from our last report card.

Record-breaking equity and assets

Average HFA equity was $904.9 million in 2019, compared with $846.6 million in 2018, a 6.9% increase. Likewise, the average HFA asset base increased by 7.4% to $3.5 billion, compared to $3.3 billion in 2018. The average total equity/total assets ratio held stable at 30.4% in 2019, in line with 2018 (30.1%) and 2017 (30.6%), with very slight fluctuations. In our view, these slight fluctuations are not a credit concern given the stability of the ratio compared to the high growth in assets in the past few years. In fact, much of the historical improvement in this ratio, doubling from 2010 through 2017, was due to the reduction in assets across HFAs. Not until 2018 did HFAs begin adding to their post-recession asset bases.

Chart 3

Improving profitability trends

A similar trend occurred in 2019 with respect to profitability, as return on assets (ROA) recovered to 1.6% after declining slightly to 1.4% in 2018. The average HFA ROA ratio has generally increased year-over-year since 2010, more than doubling since 2014. This ratio demonstrates the effectiveness of an HFA's assets to generate income, in our view. While we acknowledge that much of the improvement in ROA over the decade was due to reductions in HFA asset bases, influencing factors also include diversification of income and high one-time premiums from the sale of assets in the secondary to-be-announced market.

Chart 4

Net interest margin (NIM) measures the difference between interest income and interest expense, relative to interest-earning assets, and indicates the profitability of an HFA's core lending activity. In 2019, the average HFA NIM reached an all-time high, at 1.8%, growing from a relatively stable 1.6% range from 2017 through 2018. This growth in 2019 is a reflection of HFAs' primary income source of on-balance sheet lending. We believe record-level NIM in 2019 is also an indicator of diversified funding sources for HFAs, and the broader use of taxable financing at very low interest rate spreads when compared to tax-exempt financing.

Chart 5

Better-than-ever asset quality

The average loan balance on HFA balance sheets grew to $2.1 billion in 2019 from $2.0 billion in 2018. For most rated HFAs, this loan balance includes a mix of single-family and multifamily loans. Despite the recent growth in on-balance sheet loans, the non-performing assets ratio (the percentage of loans and real estate owned (REO) that are more than 60 days delinquent and in foreclosure) declined to a 10-year low in 2019 at 1.6%. However, preliminary reports show a possible uptick in 2020 due to the COVID-19 pandemic and resulting federal relief programs. This compares with a ratio of 4.2% in 2010 (see chart 9). As mentioned in our "U.S. Public Finance Report Card: The Not-So-Secret Sauce In State Housing Finance Agency Programs' Stability," published Oct. 15, 2020, on RatingsDirect: "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." This strategic shift that HFAs have taken toward MBS and government insurance or guarantees is an important factor in evaluating HFAs' capital adequacy and coverage for potential losses. Generally, as the whole loan portions of HFA portfolios have declined, so too have their delinquencies relative to total assets, while a focus on MBS assets leads the growth in loan programs.

Chart 6

Liquidity strategies vary, but short-term investments remain steady

Diversification of HFA programs has improved liquidity ratios overall--measured by total loans to total assets and short-term investments to total assets. Total loans to total assets slightly decreased to 62.5% in 2019 from 63.8% in 2018. The flattening trend in this ratio is due to a combination of program diversification toward MBS and on-balance sheet issuance becoming attractive in recent years. Due to differences in HFA portfolio composition and overall strategy, this ratio has varied greatly across rating categories (see table 1) and does not solely inform our view of liquidity. Other factors such as the ratio of short-term investments to total assets and, generally, an HFA's internal and external liquidity sources and market access are also important.

Chart 7

The proportion of short-term investments to total assets declined slightly in 2019 to 15.6% compared to 16.8% in 2018, mainly as a result of fluctuations in investment income and increases in long-term assets. Since 2012, however, this ratio has ranged between 15-17%, indicating a relatively consistent level of short-term investments available to support short-term risks. We also evaluate an HFA's asset-to-liability management, investment portfolio, and liquidity policies relative to its short-term risks, and find these factors to be in-line with each HFA's current rating.

Chart 8

A Tale Of Two Recessions

Despite the resiliency and flexibility HFAs have built since the Great Recession, 2020 has posed greater challenges than expected, amid the ongoing COVID-19 pandemic. As we said in "U.S. Public Finance Housing Mid-Year Sector View: Uncertainty Lies Ahead," published Aug. 27, 2020, "the effect on the housing sector will lag and be dependent on the financial wealth and liquidity of housing organizations and the amount and duration of any federal or state support." Heading into the COVID-19 pandemic, the federal landscape was shaky, with multiple initiatives to downscale government support of housing programs. If the current challenges continue with no end in sight, HFAs may find themselves with strained balance sheets and tight liquidity in 2021.

History may not repeat itself, however, given a few striking differences between the economic challenges of 2020 and the Great Recession. These differences lie in the financial strength and risk profiles of rated HFAs--then and now--as well as in the housing market and municipal market, in general.

Among the provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in March 2020 were programs to aide homeowners and renters who may be impacted by the pandemic. Under the CARES Act, borrowers could request forbearance on government-insured or government-guaranteed mortgage loans, regardless of delinquency status. This shifted unprecedented strain onto mortgage servicers who were required to grant forbearance and advance mortgage payments. As noted in "How The U.S. Municipal Housing Sector Is Bracing For COVID-19 Related Impact," published April 14, 2020, "those HFAs that service loans could face additional stress to advance mortgage and escrow payments for the expected higher numbers of borrowers who will enter forbearance."

While certain aspects of the current crisis, such as elevated unemployment, are similar to the Great Recession, the housing market nationwide continues to be strong and HFA lending has not skipped a beat. Demand for affordable housing is greater than ever, as interest rates have hit record lows and supply is ever-so-scarce. Still, we expect the general economic recovery to be slow and uneven. According to our economic research, "The U.S. Economy Reboots, With Obstacles Ahead," published Sept. 24, 2020, "If Congress fails to agree on another package of aid to American households and businesses, the recovery could suffer from a cutback in consumer outlays--especially from the lowest-income families, who tend to spend a higher percentage of their incomes than wealthier individuals do." The report indicates our expectation of the "recovery to enter a slower growth phase heading into 2021, and we forecast the economy won't get back to its pre-pandemic levels (real GDP of fourth-quarter 2019) until late 2021, with an annual GDP growth rate for next year at 3.9% (was 5.2% in June)." The report also notes that the housing market has recovered with a vengeance from its spring 2020 slump, with all indicators at levels not seen in 13 or more years. We are now forecasting housing starts at 1.3 million a year through 2021 (see table 3).

Unlike during the Great Recession, market access is widely available and HFAs have taken advantage of the continued low interest rate environment. Refinitiv reports that U.S. public finance housing bond issuance peaked in 2019 at $26.8 billion in 2019; as of September 2020, housing issuance was only slightly behind last year's pace. Very different from the start of the Great Recession is the now-booming single-family issuance in 2020, with issuance in Q2 2020 surpassing the same periods in the prior two years. (See "U.S. Public Finance Report Card: The Not-So-Secret Sauce In State Housing Finance Agency Programs' Stability, Oct. 15, 2020, on RatingsDirect.)

In our view, HFA access to both internal and external credit and liquidity continues to be strong. Those HFAs that were able to fund liquidity needs internally in the past have substituted with external facilities. Internal liquidity could prove valuable over the next six to 12 months, at a minimum, depending on the HFA's business lines and portfolio composition. HFAs that service their own portfolios and those of other lenders, may require additional liquidity for loan advances if delinquencies or forbearance programs continue. While we are monitoring these credit concerns and performing stress scenarios in some cases, HFAs are generally in a stronger position in 2020 than they were a decade ago when the impact of the Great Recession was most prevalent. Below, we outline the key differences between HFAs, then and now.

Equity: then and now

The average equity-to-assets ratio in 2010 was 16.8% compared to 30.4% in 2019. The improvement in equity, as mentioned in previous report cards, was largely due to a general reduction in assets from 2010 through 2017. This period was marked by low interest rates, high prepayments and in some cases, loan portfolio write-downs and secondary market loan sales. The equity position of HFAs today is much stronger, and in recent years, is bolstered by interest-bearing assets on HFA balance sheets. Total equity plus reserves to total loans (58.4%) has doubled since 2010 (26.5%), demonstrating the ability of HFAs to cover significantly more loan losses if warranted.

Chart 9

Profitability: then and now

In 2010, HFAs were hardest hit in profitability. Some HFAs experienced multi-year net losses due to the reduction in loan interest and investment income during the Great Recession, coupled with higher loan losses and other increased expenses related to other challenges during that time (e.g. limited liquidity and market access, and counterparty downgrades.) Average ROA in 2010 was reported at just 0.3% as a result, significantly below 2019 at 1.6%.

Average NIM was reported at 1.0% in 2010, while 2019 reported significantly higher at 1.8%. Facing historically low interest rates during the current crisis, HFAs have adjusted their business models to diversify revenue sources and benefitted from very strong market access for both tax-exempt and taxable execution.

Chart 10

Asset quality: then and now

As the Great Recession manifested primarily as a housing crisis, NPAs were at historic highs in 2010, averaging at 4.0% of total loans and REO, but significantly higher for some HFAs in particular. This average ratio declined by more than half over the past decade to 1.6% in 2019. We partly attribute the decline in the average ratio to the smaller average loan balance within HFA portfolios, but recognize the stronger quality of loans in portfolios originated over the last 10 years as a main credit driver. The typical post-recession HFA loan portfolio is largely characterized by government insurance or guarantees and private mortgage insurance providers that hold higher ratings than in 2010. Additionally, the loan loss reserves to total loans ratio increased to 4.3% in 2019 from 4.0% in 2010.

Certainly, the past seven months of 2020 have proven to be a test of asset quality and reserves in HFA programs. While not all HFA portfolios have been affected by the pandemic the way they were during the Great Recession, delinquencies have risen to Great-Recession levels in some states. The highest delinquency and foreclosure rate of a rated HFA program in the past 10 years was 25%. Disclosure reports and informal HFA surveys indicate that, while delinquencies are elevated and forbearance programs widely available, some borrowers who have requested forbearance are still paying their mortgages. We expect that the improved financial strength, as indicated by 2019 ratios, will allow HFAs "to withstand elevated delinquencies for the remainder of the year." (See "U.S. Public Finance Housing Mid-Year Sector View: Uncertainty Lies Ahead," published Aug. 27, 2020.)

Chart 11

Liquidity: then and now

Loans comprised a higher percentage of total assets in 2010 (70.1%) than in 2019 (62.5%), with a similar contrast among short-term investments at 21.9% and 15.6%, respectively. The decline in the percentage of loans to assets indicates a more liquid asset base, particularly if those other assets are available for short-term needs. HFAs have increased long-term investments by purchasing MBS and other investments that we consider to be liquid. Indeed, liquidity remains an important tool in the current crisis. In contrast with 2010, external liquidity is widely available at a relatively low cost to HFAs, and HFAs are equipped with a more robust toolbox today. We continue to monitor HFA liquidity, especially for HFAs that service their and other lenders' loans, as the COVID-19 pandemic and any related forbearance programs continue.

Chart 12

Management: 20/20 Hindsight

In our view, management continues to be one of the biggest drivers of HFA rating stability. It is clear that HFA management has in some ways prepared for this crisis since the Great Recession, and is not likely to make the same mistakes this time. Adept at long-term financial planning, HFA management teams have prioritized equity preservation and built intrinsic liquidity for when they need it most; that time may be now. Despite the challenges HFAs have faced this year, as we head into 2021, we expect the majority of HFA ICRs will be unchanged and remain in the 'AA' rating category due to proactive management, prudent underwriting, risk mitigation, and sufficient financial cushion built over the last decade.

Table 1

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Table 3

Table 4

Related Research

• U.S. Public Finance Report Card: The Not-So-Secret Sauce In State Housing Finance Agency Programs' Stability, Oct. 15, 2020
• Economic Research: The U.S. Economy Reboots, With Obstacles Ahead, Sept. 24, 2020
• U.S. Public Finance Housing Mid-Year Sector View: Uncertainty Lies Ahead, Aug. 27, 2020
• How The U.S. Municipal Housing Sector Is Bracing For COVID-19 Related Impact, April 14, 2020