Single-Family Programs Remain Highly Rated

Through September 2021, most housing finance agency (HFA) single-family program ratings remain stable at 'AA+', with about a quarter of the programs rated 'AAA', higher than the rating on the U.S. (see chart 1). The lowest rating of the single-family program universe, at 'AA-', is for subordinate debt classes within programs where S&P Global Ratings rates the senior class 'AAA'.

Chart 1

Mortgage-backed securities (MBS) assets represent an average of 37% of programs' outstanding balances, consistent with the 36% in 2019, with the remaining balances consisting of whole loans. While some programs' assets consist solely of whole loans, the balance of MBS within rated programs has increased in recent years, with 54% of programs now containing some balance of MBS. As of 2021, the median balance of MBS is about $548 million, ranging from under $1 million to over $1 billion. The 2021 median whole loan balance is just slightly higher, at $557 million. However, large loan balances alone don't necessarily drive a program's strong credit quality.

The median parity ratio has remained at comparable levels in recent years, at 121% in 2020 and 120% for those programs with 2021 information available thus far. Median parity for predominantly MBS loan portfolios is slightly higher, at 123% in 2020. These parity ratios have proved sufficient to withstand dips in loan performance due to COVID-19.

Strong Balance Sheets Cushion Single-Family Programs From Weaker Loan Performance

Not surprisingly, HFA single-family whole loan delinquencies rose in 2020, with a 2.4% median increase in delinquencies between second-quarter 2020 and fourth-quarter 2020. After reaching historic lows by the end of 2019 (at about 3.5%), the median single-family whole loan delinquency rate increased to above 6% by fourth-quarter 2020, with HFAs operating in states with judicial foreclosure processes reporting even higher delinquencies. From second-quarter 2020 to fourth-quarter 2020, we saw rising delinquencies in 23 programs, with 16 of those operating in nonjudicial states.

In the months that followed the onset of COVID-19, HFAs generally assessed their capacity to absorb higher levels of delinquencies and loans in forbearance than in 2019. In our internal analysis, we found that HFA single-family resolutions demonstrated sufficient equity to cover credit losses in the near term, as measured by their asset-to-liability parity ratios and liquidity profiles.

Chart 2

The negative effects of COVID-19 on loan performance seem to be slowing in 2021. By March 2021, the median whole loan delinquency rate decreased to 5.8%. First-quarter 2021 saw a fall in delinquencies for 25 programs, with a median decrease of 1.3%. In both judicial and nonjudicial states, HFA whole loan delinquencies rates decreased between fourth-quarter 2020 and first-quarter 2021, while during this same period the median state delinquencies for all loans reported by the Mortgage Bankers Assn. (MBA) increased by 1.4%. The average HFA forbearance rate decreased from about 5.4% in fourth-quarter 2020 to about 4.9% in first-quarter 2021. As of Sept. 13, 2021, the MBA reported loans in forbearance represented about 3.1% of servicers' portfolio volume and about 3.4% among Ginnie Mae loans.

As more borrowers overcome COVID-19-related economic and financial challenges, we expect the median delinquency rate to continue declining in the near term. The Homeowner Assistance Fund (HAF) discussed below could help servicers bring many borrowers current on their mortgages. Some post-forbearance options may include a reinstatement, repayment plan, COVID-19 payment deferral, or loan modification.

Federal Loan Insurance And COVID-19 Relief Help Mitigate Credit Risk

Government insurance accounts for an average of 61% of single-family programs' loan portfolio balances. This includes insurance or guarantees from the Federal Housing Administration, the Veterans Administration, or USDA Rural Development. About 23% of the average loan portfolio was uninsured (which may be more common for seasoned portfolios with lower loan-to-value ratios). That leaves about 15% of portfolios with private mortgage insurance (PMI).

Chart 3

The large majority of HFA loans with PMI are insured by providers with investment-grade ratings. For those HFA programs with PMI, most (81%) of loans with PMI were insured by investment-grade-rated providers, 10% were insured by a speculative-grade-rated provider, and 9% were insured by unrated providers. In a broader context, unrated providers insured no more than 0.5% of a portfolio's total loan balance. In total, PMI insurance is provided by 12 companies for the rated single-family programs.

Chart 4

Among those PMI providers with investment-grade ratings, two 'A' rated insurers carry ratings with negative outlooks. In our analysis of potential loan losses for single-family programs, we evaluate an insurer's capacity to pay as determined by the credit rating on the insurer and how that relates to the current and prospective rating on the bonds. Therefore, should S&P Global Ratings lower the PMI providers' ratings, we may determine that an HFA's PMI-insured portfolio exhibits a weaker capacity to pay, which can result in a higher assumed credit loss coverage.

Federal support of $9.9 billion will offer financial relief for homeowners affected by the pandemic. The American Rescue Plan Act, enacted in March 2021, created the HAF, which is intended to prevent mortgage delinquencies and defaults, foreclosures, loss of utilities or home energy services, and displacement of homeowners experiencing financial hardship after Jan. 21, 2020. Per the U.S. Department of Treasury, funds may be used for assistance with mortgage payments, homeowner's insurance, utility payments, or other specified purposes, and with state allocations made based on need (e.g., unemployment and delinquencies). Treasury has not released the bulk of these funds. As of August 2021, per information collected by the National Council of State Housing Agencies, nine states have pilot programs running, with most others offering preliminary information about the use of their HAF allocation. The following map shows each state's HAF allocation.

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Up, Up, And Away: Housing Prices Soar While More Millennials Enter Homeownership

Not since early 2014 has the S&P/Case-Shiller U.S. National Home Price Index increased by more than 10% in eight consecutive months--until November 2020 to June 2021. This accelerated rate of increases highlights the difficulty aspiring first-time homebuyers face in finding affordable homes, and the expanding need for the assistance HFAs offer.

The rate of increases in sales price outpacing that of employee compensation creates an affordability challenge, particularly for first-time homebuyers with lower incomes. The median price of houses sold in the U.S. was nearly $375,000 in April 2021, approximately 14% higher than pre-pandemic levels in January 2020, per data from the Census Bureau and Department of Housing and Urban Development. Between July 2020 and October 2020, the median sales price increased by 6%, the largest change over any quarter since October 2014. In contrast, employee compensation increased by 5% between January 2020 and April 2021, less than half of the increase in median sales price, per the U.S. Bureau of Economic Analysis. Employee compensation had been relatively stagnant over the past decade, increasing no more than 2% in any quarter since October 2012.

The millennial generation's progression through their peak homebuying years is likely to keep demand for homeownership strong, even before the COVID-19 pandemic drove increases in homebuying, as noted in The State of The Nation's Housing 2021 report from the Joint Center for Housing Studies of Harvard University. Between 2015 and 2020, the homeownership rate hit 39% among those under age 35, a 4.1% increase, and rose by 4.2% to reach 63% for those 35 to 44 years old. These increases exceed those for other age groups, with the largest five-year increase for other cohorts no higher than 1.2%, according to Census Bureau data.

The general homeownership rate in the U.S. began to tick up in recent years, reaching about 67% in 2020 after decreasing each year from 2005 to 2016. Homeownership is most common nationwide among those aged 70-74, with an 82% homeownership rate in 2020. West Virginia had the highest homeownership rate among the 50 states and the District of Columbia (D.C.) in 2020, at 78%, while D.C. had the lowest, at about 43%.

Many of the themes highlighted in our article "Bridging The Affordability Gap: U.S. Housing Finance Agencies Find Balance-Sheet Growth While Aiding First-Time Homebuyers," published July 31, 2018, still hold true today. There is a combination of high home prices and a shortage of homes, resulting in an affordability gap for first-time homebuyers, and HFAs are becoming (or, in some cases, have become) the lender of choice for first-time homebuyers. Down payment assistance is part of the assistance HFAs offer to help these new borrowers afford mortgages. We continue to view this trend as a credit strength for HFA single-family programs.

After A Strong July, Could Single-Family Issuance Exceed Multifamily By Year-End?

According to Refinitiv, U.S. public finance housing bond issuance reached a new peak of $29.6 billion in 2020, with 45% ($13.4 billion) of that total coming from single-family issuance. Breaking from recent trends, the par amount of single-family issuance no longer outpaced multifamily issuance in 2020, after a 6% decline year-over-year for single-family issuance. While single-family bond issuance slowed in March 2020 with the onset of the COVID-19 pandemic, to its lowest monthly total since January 2018 (which followed a banner December 2017), it rebounded in the following months, such that issuance during April 2020 to December 2020 exceeded that from the same period in 2019.

Through July 2021, single-family issuance appears on track to exceed that of 2020, particularly as July 2021 issuance reached $2.4 billion, the highest monthly total reported since at least 2012; much of this activity can be traced to a handful of issuers in the Mid-South Atlantic and West regions executing new-money transactions. With interest rates remaining low and demand for affordable mortgages remaining high, we expect HFAs to continue accessing the capital market through the remainder of 2021.

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Related Research

• Despite Weaker Loan Performance Through 2020, HFA Single-Family Program Ratings Remain Strong, Sept. 23, 2021
• Keeping the Wolf From The Door: HFA Multifamily Programs Perform Well During The Pandemic, Sept. 23, 2021