Overview

Ratings remain stable through volatile markets.   U.S. housing finance agency (HFA) single- and multifamily programs exhibited rating stability through the volatility of the COVID-19 pandemic and are on track to do so in the face of the economic struggles expected through the next several years. S&P Global Economics has revised its economic forecast downward; its U.S. GDP forecast is 1.6% for 2022 and 0.2% for 2023, as the U.S. economy falls into a shallow recession. Although unemployment remains low at 3.5% in September 2022, we expect unemployment to increase to 4.8% by the end of 2023 and to remain over 5% through 2026 (see "Economic Outlook U.S. Q4 2022: Teeter Totter," published Sept. 26, 2022, on RatingsDirect). Most HFA single-family borrowers are likely to have accumulated equity in their homes, providing flexibility in the event of job loss, although delinquencies might rise in the next several years. Nonetheless, we believe the prudent lending frameworks and active oversight and management of HFAs should limit delinquencies and their impact on the strength of loan programs.

Interest rate increases add to the homebuyer affordability challenge.   The Fed's hawkish stance has already pushed mortgage rates up to 5.18% in the second quarter of 2022, a 13-year high. Mortgage rate increases paused briefly in July but have since risen more than a percentage point over the past two months. The ongoing uncertainty about the impact of the Fed's reduction of its mortgage-backed securities (MBS) and Treasury holdings is adding to the volatility in mortgage rates.

Mortgage payments as a share of household income, on average, were still narrowly below the 25% threshold of affordability through first-quarter 2022. Our affordability measure of mortgage payments as a share of income, assuming a 10% down payment, likely topped 25% in second-quarter 2022 for the typical first-time buyer and is set to worsen to 28% by fourth-quarter 2022--its highest since first-quarter 2007 during the financial crisis--on soaring home prices and mortgage rates (see "The American Dream May No Longer Be In Reach," July 20, 2022). Housing affordability issues have also filtered into the rental market as would-be homebuyers continue to rent, sustaining high demand for rental properties.

Price growth is slowing but demand is cooling.   Coming off a two-year run-up in house prices, the U.S. housing market seems to be losing steam as higher interest rates, inflation, and recession fears have emerged. Before this recent, albeit marginal, slowdown, home prices had surged since the second half of 2020. The S&P/Case-Shiller U.S. National Home Price Index posted a record high in March 2022 at 20.6% year-over-year growth versus March 2021, quadruple the annual average 5% growth rate from 2015 to 2019. More recently, home prices have weakened and we expect the cool-off will continue over the next year. There's evidence that the U.S. housing market may have already slipped into a downturn: Eight of nine census divisions are showing month-over-month declines, according to the September Federal Housing Finance Agency house price index.

We expect these factors to cast a chill on the U.S. housing market generally, but we don't expect them to translate into rating volatility for most HFA programs, as slower originations and prepayments are not necessarily credit negatives. Conventional mortgage applications have been decreasing; according to the Mortgage Bankers Association, mortgage application activity dropped to its slowest pace since 1997 for the week ended Oct. 7, 2022. At some HFAs, single-family originations have fallen as prices and rates push mortgage payments out of reach for their audiences. This experience varies by location and generally those HFAs reporting reductions are experiencing a larger drop in the number of loans originated and higher home prices and related mortgage amounts causing a smaller decrease in loan dollar volume. Much of the decrease in total volume is attributed to declines in utilization of the TBA market, as single-family bond issuance appears to be underway to match last year's volume.

Rents are increasing.   Multifamily affordability is also being stressed, as indicated by the Department of Housing and Urban Development's (HUD's) Rental Affordability Index, which fell to an all-time low of 93.1% in the second quarter, on the heels of a 3.4 percentage point decline to 96.5% the previous quarter. HUD considers a rental affordability value of less than 100.0 to indicate that a renter household with median income has less income than typically required to qualify for a median-priced home/rental property. The drop in single-family housing starts, which likely reflects builders' pessimism about the sale of their completed inventory by year-end, may exacerbate the persistent housing supply-demand imbalance and in so doing, might also force some would-be buyers to rent, further pressuring rental affordability given the recent high growth in rents.

Ratings on HFA programs remain high investment-grade.  Demonstrating organizations' resilience and stability during the pandemic, median HFA single-family and multifamily program ratings both remain at 'AA+' with a stable outlook. Single-family opening parity increased to 118.0% from 117.8% while S&P Global Ratings adjusted parity dropped to 112.6% from 114.3%, in part due to heightened prepayments and increasing issuance. In the last year, ratings were unchanged. We revised the outlook to positive from stable on Virginia Housing Development Authority's homeownership mortgage bonds, the outlook on Michigan State Housing Development Authority's single-family mortgage revenue bonds remains negative, and all other program rating outlooks are stable. In the past year, several single-family programs have been redeemed in full, including New Issue Bond programs issued by the District of Columbia HFA, Nebraska Investment Finance Authority, Nevada Housing Division, and North Carolina HFA. Other redemptions include the Montana Board of Housing's first-lien SF II Indenture and Tennessee Housing Development Agency's 1985 General Homeownership Program Bond Resolution.

While median multifamily program opening parity fell to 133% from 143% on the heels of increased issuance and use of program wealth, median adjusted parity rose slightly to 120.3% from 118.6%, reflecting stronger underlying loan performance of the pools, and, in most cases, a return to near-zero delinquency rates after a slight increase during the first year of the pandemic. We recently upgraded two multifamily programs to 'AA+' from 'AA': Massachusetts Housing Finance Agency's housing bonds and Wisconsin Housing and Economic Housing Development Authority's housing revenue bonds. In March, we revised the outlook to positive from stable on the Virginia HFA Rental Housing Resolution; ratings on all other programs have stable outlooks. One multifamily program was redeemed in full: California HFA's Multifamily III Indenture. Average program size rose to $1.755 billion from $1.531 billion last year. Delinquencies have remained in a nominal range, declining year over year to 0.3% from 1.1%.

Chart 1

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Delinquencies Fall

Median single-family delinquencies continued their descent to 4.75% as of second-quarter 2022 from a pandemic high of 6.14% in fourth-quarter 2020, dropping by more than 1% as Housing Assistance Fund (HAF) resources were deployed and pandemic-related forbearances began to resolve. As of September 2022, six states' HAF programs were already closed or suspended, with the remainder operating and accepting applications. HFA delinquencies continue to trend higher, on average, than their respective states, as they have since second-quarter 2021. However, they are significantly lower than the 8.85% delinquency for Federal Housing Administration (FHA) loans as reported by the Mortgage Bankers Association's second-quarter 2022 national delinquency survey.

Chart 3

Government-Backed Assets Continue To Comprise A Larger Percentage of Program Loans

The post-financial crisis trend of HFAs' increasing use of government backing for mortgages continues. Of single-family home loans, 71% were backed by FHA, Veterans Affairs, or U.S. Department of Agriculture government insurance up from last year's 61%. Of the remainder, 15% have private mortgage insurance (PMI) and 14% are not insured, which is typically the case for loans with lower loan-to-value ratios. Of those loans with PMI, slightly more than half of the insurance providers are rated investment-grade.

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Chart 5

Similarly, MBS still constitutes an increasing portion of HFA program assets, inching up in 2021 to 38.9% on average, from 38% in 2020 and 36% in 2019. Although single-family whole loan programs remain the largest program type by percentage, program MBS assets are now included in over 58% of programs.

Chart 6

Single-Family Prepayments Should Slow

We expect single-family prepayment speeds to slow as homeowners opt to stay in their homes as the significantly higher prices make trading up more difficult and rising rates make refinancing less attractive. Residential MBS transactions experienced elevated prepayment speeds in 2020 and through third-quarter 2021; however, these have since dropped precipitously (chart 7). For those HFAs that do report prepayment speeds--like Connecticut HFA--prepayments similarly rose significantly in 2020 and 2021 to 172% and 260% Public Securities Association (PSA) prepayment speed from 92% PSA in 2019. Similar to the performance of RMBS (see chart 7), we expect Connecticut HFA's prepayments to decrease this year. For HFAs, this trend will likely strengthen asset-liability ratios and improve profitability over time.

Chart 7

Housing Trends Differ Across The Country

As reported by the St. Louis Fed, after decreasing each year from 2005 to a 2016 low of 62.9%, the U.S homeownership rate began to rise, reaching a high of 68% in 2020. As of second-quarter 2022, it had dropped to 65.8%. West Virginia's 77.8% homeownership rate is highest among the 50 states and the District of Columbia is the lowest, at 44.7%.

We believe housing is about 15% overvalued across the U.S. but differs considerably from state to state (see map).

Saurabh Khare, of CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai, contributed research to this report.

Related Criteria And Research

Related Criteria

• Methodology For Rating U.S. Public Finance Mortgage Revenue Bond Programs, Oct 10, 2022

Related Research

• Housing Overvaluation May Be Peaking: How It Affects U.S. RMBS, Oct. 17, 2022
• U.S. Housing Finance Agency Issuer Credit Ratings Build Strength Ahead Of New Challenges, Oct. 12, 2022
• RFC Process Summary: Methodology For Rating U.S. Public Finance Mortgage Revenue Bond Programs, Oct. 10, 2022
• Economic Outlook U.S. Q4 2022: Teeter Totter, Sept. 26, 2022
• Changing U.S. Home Price Trajectories Signal Cooldown, Sept. 15, 2022
• The American Dream May No Longer Be In Reach, July 20, 2022