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U.S. Housing Finance Agency Issuer Credit Ratings Build Strength Ahead Of New Challenges

What We're Watching

Likelihood and severity of economic recession and the impact on U.S. state HFAs

The odds that the U.S. economy will avoid recession over the next 12 months have dimmed, and we expect the U.S. will fall into recession in 2023 (see "Economic Outlook U.S. Q4 2022: Teeter Totter," published Sept. 26, 2022, on RatingsDirect). Rising prices and interest rates are primary indicators and drivers of this revised outlook. While a recessionary environment is sure to pose challenges for rated HFAs, the affordable housing industry is largely counter cyclical, where the demand for services and products increases as economic conditions worsen and household purchasing power erodes. For that reason, combined with strong financial positions built up over the past decade of economic prosperity, we believe that HFAs are well prepared to weather the economic downturn in 2023.

U.S. housing market

The housing market has started to show signs of losing momentum after year-over-year (y/y) home price gains reached heights in 2022 that hadn't been seen since 1987. Housing prices are falling, albeit slowly, with the July 2022 S&P CoreLogic Case-Schiller 20 City Index decreasing by 0.75% from the previous month and eight of nine census divisions showing month-over-month declines, according to the September Federal Housing Finance Agency house price index. However, still-high prices and interest rates make homeownership out of reach for many Americans. HFA down payment assistance programs and preferrable mortgage rates will remain in high demand for homebuyers. In addition, the squeeze on the housing market is pushing up rental rates, emphasizing the need for subsidized and affordable multifamily production in this market.

Risk management

The concept is as important as it is broad, as well as being a large part of our management and governance assessment for HFAs. In addition to managing debt-profile and asset-base-related risk, authorities are required to assess and prepare for the spectrum of environmental, climate, and cyber threats and changing political environments. While none of these areas are new, they are constantly changing and a nimble, proactive, and engaged management team is the best defense. We're watching how authorities are preparing for and adapting to environmental and climate changes that directly affect their state, as well as indirect effects such as how a general increase in insurance claims across the board is pushing up the price of insurance premiums. HFAs are among the higher-risk entities for cyber crime due to the amount of personal information used for program enrollment, mortgage data, and income information. Stronger management and governance that use cyber-protection tools, education, and policies and have robust insurance plans are more likely to avoid hacks and disruptions in operations. As for the ever-changing political climate, HFAs have generally received bipartisan support, boding well for programs that endure from one administration to the next. In addition, the current administration has taken steps through a variety of programs that reflect support of HFA priorities. HFAs can capitalize on this support in the near term to help offset potential reductions in other funding streams as interest rates rise and margins could decrease.

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Ratings Remain High Investment-Grade

Rating actions and outlook revisions for U.S. state HFAs were positive in 2021 and 2022 to date. Since S&P Global Ratings' previous update, "U.S. Housing Finance Agency Ratings Hold Strong Despite Pandemic Pressure," published Sept. 23, 2021, we upgraded one HFA to 'AA' from 'AA-' (Kentucky Housing Corp., or KHC) on Dec. 28, 2021, and revised one outlook to positive from stable (Illinois Housing Development Authority, or IHDA) on July 14, 2022, bringing the total number of HFAs with positive outlooks to four, with the remaining 19 having stable outlooks. The upgrade on KHC follows multiple years of improving financial strength ratios, consistent profitability, and low-risk asset base coupled with exiting the commonwealth's pension fund, which reduced a material liability for KHC. The outlook revision on IHDA reflects our view of the authority's strengthening asset base and its financial ratios that are approaching those of higher-rated peers.

Our outlooks on three HFAs--the District of Columbia HFA, Virginia Housing Development Authority, and Utah Housing Corp.)--remain positive following outlook revisions made in 2021.

The median issuer credit rating (ICR) across HFAs is 'AA', the same as a year ago, with 21 of the 23 ratings in the 'AA' category (chart 1).

Chart 1

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Balance Sheets And Profitability Improve in Fiscal 2021; HFAs Weather Turbulent 2022

Capital adequacy

HFA balance sheets remained strong through fiscal 2021,  positioning them well for the more uncertain fiscal- and interest-rate environment that 2022 has seen so far. Average assets (which includes total assets plus deferred outflows) and equity (calculated as audited net position less fair value reporting) across rated HFAs increased again in fiscal 2021 marking the fifth consecutive year of average increases for both. Average assets increased 6.9%, reaching $4.03 billion and average equity increased 9.5% to $1.07 billion. Median total assets and equity across rated issuers equal $2.8 billion and $732.8 million, respectively, better capturing the typical balance-sheet size across the group.

Capital adequacy ratios also improved in 2021,  on average, with total equity to assets rising to 31.6% from 30.6% and net equity to assets to 26.6% from 25.4%, the largest increases over the five-year period 2017 through 2021 (chart 2). In our analysis, net equity equals audited net position plus audited provision or allowance for loan losses and less fair value reporting, S&P Global Ratings-calculated losses, and net position unavailable for general obligation or debt covenants, for example, net invested in capital assets, or restricted for federal programs.

Broadly, the 9.5% increase in average equity and, notably, a 9.8% increase in average net equity to $888.6 million, surpassing the increase in assets over the same period, drove the improved metrics in fiscal 2021. The narrowing gap between the total equity to total assets and net equity to total assets ratios over the past five years--to approximately 5.0 percentage points in fiscal years 2020 and 2021 from 6.1 percentage points in fiscal 2017--indicates that, generally, higher quality and higher performing loan balances comprise HFA loan portfolios. The continued shift to HFA single-family program portfolios consisting of larger percentages of mortgage-backed securities (MBS) compared with whole loans is one underlying cause for lower losses applied to HFA loan balances. In addition, prudent loan management during the pandemic kept year-end average delinquencies and realized losses relatively low through the most difficult months. Even with the moderate spike of average delinquencies in fiscal 2020, S&P Global Ratings-calculated haircuts on HFA loan balances remained largely stable, resulting in higher net equity as total equity increased, all else equal.

We expect growth in balance sheets and capital adequacy ratios will slow in fiscal 2022  compared with the increases seen in 2021 due to the rising interest-rate environment and onset of a recessionary economy. Loan originations might slow but prepayments should also decline leaving asset bases largely intact, albeit with lower y/y increases and potentially the first average y/y decrease in many periods. In our view, however, the slower growth, stagnation, or even marginal drops in balance-sheet size and related ratios should not threaten credit quality during the next year. The demand for HFA products and services should remain high even as economic momentum of the past several years constricts.

Chart 2

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A variety of HFA strategies led to the increase in assets and equity across rated issuers in fiscal 2021. Management of certain HFAs cited increases in loan assets as part of deliberate growth of bond-financed programs, while others noted that cash and cash equivalents were higher than usual due to the timing of year-end reporting and the receipt versus spending of federal stimulus funds. Still other authorities attributed increasing equity balances, specifically relative to asset base size, to higher revenues generated from the then-favorable to-be-announced (TBA) market. Those using the TBA market have sold a significant portion of originated loans directly into the secondary market, keeping only loans with the highest spread and most favorable impact on net position on their balance sheets.

Average debt balances rose in fiscal 2021 as HFAs continued to capitalize on the lower-interest-rate environment that persisted through the period, funding loan originations with bond proceeds. While debt paydowns were substantial as prepayments of loans continued, the overall rate of new issuance outpaced refundings, increasing average debt outstanding 4.5% to $2.2 billion in fiscal 2021 across rated HFAs (chart 3). However, again due to the magnitude of increases to equity balances, debt ratios strengthened, with average net equity to debt increasing to 73.8% in fiscal 2021, up substantially from 55.6% in fiscal 2020 and 46.5% five years prior in fiscal 2017, indicating authorities, on average, ended 2021 far less leveraged than in the recent past even as absolute debt levels have steadily risen. In addition, prepayments and debt repayments allowed HFAs to pay down more expensive debt resulting in average interest expense decreasing 4.9% to $63.5 million from $66.8 million in fiscal 2020. Therefore, interest expense as a percent of total debt dropped to 2.8% compared with 3.1% in 2020 and 3.4% in 2019--a timely savings opportunity going into 2022.

Similar to our expectation of HFAs' asset side, debt balances will likely stabilize or increase at a slower rate in fiscal 2022 as paydowns from loan prepayments slow and new issuance could drop compared with the record years of the recent past.

Chart 3

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Profitability

Profitability metrics and average balances also fared well in fiscal 2021, with net income and return on average assets (ROA) materially improving and net interest margin (NIM) dropping slightly but still very strong for the sector, on average. NIM, calculated as interest income from investments, loans, and program MBS over average earning assets, decreased to 1.4% from 1.6% primarily due to the low-interest-rate environment dampening revenue generation from those assets. Net income, which is audited change in net position after removing fair value reporting, on average across rated HFAs, reached $95.4 million, up a material 49.3% from $63.9 million in fiscal 2020 (chart 4). Average ROA, calculated as S&P Global Ratings' net income divided by current year and previous year average assets, improved to 2.6% from 1.9% largely fueled by huge increases in revenues among HFAs using the TBA market and those with greater revenue diversification such as loan servicing and financing-fee income streams. While a handful of HFAs saw decreases in revenues due to the low interest rates through the period, the boost from those that saw increases was enough to bring average revenues to $270.3 million, a 16.2% increase from $232.6 million in fiscal 2020. Contributing to the very large average increase to net income, was the much smaller 8.2% average increase in expenses across rated HFAs. As previously noted, the decrease in interest expense was a key component in keeping expenses lower, contributing to a profitable year, on average. Also accounting for lower expenses compared with revenues y/y is that some HFAs reduced their provision for loan losses in 2021 after increasing the reserves in 2020 to prepare for pandemic-related losses that largely did not materialize.

We expect NIM will remain largely stable in 2022 with any increase being spurred mostly by spread earned on investments. With new loans earning more in the higher-interest-rate environment, debt will also cost more, largely eliminating the benefit there. Interest income from investments should increase as rates rise, though, compensating, if only partially, for lost income on NIM on loans and program MBS.

In our view, average ROA is likely to drop in 2022 as large one-time revenue generation from selling loans in the secondary market likely will decrease as interest rates rise and after the Federal Reserve stopped mortgage purchases, or quantitative easing, a tool it used to stabilize the economy during the pandemic. However, HFAs that have benefited from strong revenue generation in the TBA market should weather lower-revenue years after building equity balances. Furthermore, these authorities could use this environment as an opportunity to keep more loans on balance sheet, pivoting back to an annuity revenue model as margins in the TBA market narrow.

Chart 4

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Asset Quality

HFA asset bases are generally composed of cash, cash equivalents, and high-quality, low-risk investments and loans, including MBS held as investments and within bond-financed programs. This composition has resulted in high-performing asset bases that generate reliable revenue streams and rarely suffer losses and write-offs. The financial reports during the pandemic proved that the quality of these assets persists through uncertainty and strain. The pandemic did cause a spike in non-performing assets (NPAs)--defined as loans delinquent more than 60 days or in foreclosure--which increased 55.5% to $61.4 million in fiscal 2020 from $39.5 million 2019. However, through prudent asset management and loan workout strategies, HFAs brought that number down by 46.4% in fiscal 2021 to $32.9 million, a five-year low for the period from fiscal 2017 through 2021. Notably, even in fiscal 2020 when NPAs increased, loan write-offs as a percent of NPAs were 4.5%, below the five-year high of 5% seen in fiscal 2017. As further evidence of the conservative approach HFAs take to guarding against losses, in addition to prudent asset management, the average loan loss reserves to total loans ratio has always been well above the NPA to total loans and real estate owned ratio, ensuring ample coverage in the event losses occur (chart 5).

Contributing to the rising asset base discussed above, total whole loans and program MBS increased, on average, to $2.47 billion in fiscal 2021, up 5.2% y/y from 2.34 billion. Average investment balances also increased reaching $1.2 billion, up 17.9% y/y. Largely fueling the increase in investment balances, which include cash and cash equivalents, are required and restricted reserves associated with program debt issuance and, in a few instances, yet-to-be-distributed federal stimulus funds still on hand for some HFAs with June 30 fiscal year-ends.

We expect asset quality will remain high in 2022 despite economic uncertainty. HFAs have shown expertise in managing situations that stress borrowers' ability to stay current on loan repayment. While we expect asset quality will remain strong through fiscal 2022, the effects of a longer recession could pose different challenges than those seen during the first two years of the pandemic. Specifically, if unemployment significantly worsens, higher loan-to-values and new loans could create risk as borrowers are strained to make their payments on time and in full.

Chart 5

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Table 1

HFA Averages 2017-2021
2017 2018 2019 2020 2021
Equity / total assets 30.42 30.28 30.52 30.64 31.60
Net equity / total assets 24.29 24.51 25.45 25.40 26.60
Return on average assets 1.23 1.50 1.69 1.91 2.65
Net interest margin 1.60 1.60 1.74 1.60 1.44
NPAs / total loans + REO 2.59 2.50 2.18 3.20 2.60
GO debt / total debt 11.86 11.30 10.74 10.43 10.20
NPA-Nonperforming asset. REO--Real estate owned. GO--General obligation.

Table 2

HFA Ratings And Metrics, Fiscal 2021
HFA Rating Outlook Equity-to-total assets Net equity-to-total assets ROA NIM NPAs-to-total loans and REO GO-backed debt (%)
Alaska Housing Finance Corp. (AHFC) AA+ Stable 35.40 31.10 0.25 1.62 3.04 100.00
Arkansas Development Finance Authority (ADFA) AA Stable 76.73 54.40 2.95 2.23 4.52 0.00
California Housing Finance Agency (CalHFA) AA- Stable 71.25 52.29 16.33 2.25 1.64 18.91
Colorado Housing & Finance Authority (CHFA) AA- Stable 19.58 19.66 2.89 1.05 1.37 0.00
District of Columbia Housing Finance Agency (DCHFA) A+ Positive 25.82 22.94 2.78 0.37 0.00 0.00
Illinois Housing Development Authority (IHDA) AA- Positive 29.10 26.61 1.62 2.68 1.53 7.17
Iowa Finance Authority (IFA) AA+ Stable 25.30 23.26 1.96 1.20 0.90 4.00
Kentucky Housing Corp. (KHC) AA Stable 45.50 41.45 5.25 1.84 3.88 0.00
Massachusetts Housing Finance Agency (MassHousing) AA- Stable 24.14 19.52 1.16 0.89 0.80 0.00
Michigan State Housing Development Authority (MSHDA) AA- Stable 15.18 14.83 0.85 1.55 1.31 0.00
Minnesota Housing Finance Agency AA+ Stable 22.66 15.12 8.10 0.85 1.02 0.00
Missouri Housing Development Commission (MHDC) AA+ Stable 35.12 33.94 0.88 1.06 0.20 0.00
Nbraska Investment Finance Authority (NIFA) AA Stable 26.13 24.90 0.18 0.95 7.57 0.00
Nevada Housing Division (NHD) AA Stable 20.78 20.48 1.01 0.33 0.00 0.00
New Jersey Housing & Mortgage Finance Agency (NJHMFA) AA Stable 31.24 29.42 2.41 0.62 4.70 0.00
New York City Housing Development Corp. (NYCHDC) AA Stable 15.34 12.74 1.46 1.45 0.14 0.00
Pennsylvania Housing Finance Agency (PHFA) AA- Stable 15.81 13.41 0.22 0.53 6.50 0.00
Rhode Island Housing & Mortgage Finance Corp. (RIH) AA- Stable 13.93 9.53 0.60 1.59 2.92 0.30
Utah Housing Corp. (UHC) AA- Positive 30.47 29.15 4.46 2.03 5.74 3.71
Virginia Housing Development Authority (VHDA) AA+ Positive 40.38 36.38 1.52 2.28 1.51 100.00
West Virginia Housing Development Fund (WVHDF)* AAA Stable 46.49 34.20 1.56 2.19 3.50 0.00
Wisconsin Housing & Economic Development Authority (WHEDA)* AA Stable 28.14 17.50 1.25 1.70 4.00 0.00
Wyoming Community Development Authority (WCDA) AA Stable 33.41 25.99 0.95 0.96 6.00 0.00
*Estimate. ROA--Return on average assets. NIM--Net interest margin. NPA--Nonperforming asset. REO--Real estate owned. GO--General obligation.

This report does not constitute a rating action.

Primary Credit Analyst:Joan H Monaghan, Denver + 1 (303) 721 4401;
Joan.Monaghan@spglobal.com
Secondary Contact:Marian Zucker, New York + 1 (212) 438 2150;
marian.zucker@spglobal.com

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