Of 24 HFAs that S&P Rates, 21 have ratings of AA-minus or higher, the rating service said in a report Wednesday. Financial ratios such as equity as a percent of assets and return on assets have also climbed to highs of 20.4% and 0.82%, the report said.
"Despite the lingering effects of the economic and housing market downturn, HFA ratings are now higher than they were before the economic and financial crisis," S&P said in the report. "Conservative management, traditional loan products and debt structures, and mortgages with federal guarantees have all contributed to the improvement in credit quality."
HFAs were forced to adapt their business model at the onset of the financial crisis, as yields on mortgage revenue bonds rose and the practice of issuing tax-exempt MRBs with competitive rates became a challenge to HFAs, who provide the products to low- to middle-income homebuyers. Interest rates on the rise will be a boon to HFAs, S&P said in a September report. Moody's Investors Service on Monday raised its outlook on HFAs from negative to stable.
"HFA management teams are among the most experienced in the municipal bond business and HFA managements quickly recalibrated through all of challenges over the last few years," Tom Kozlik, director and municipal credit analyst at Janney Capital Markets, said in an email.
Those challenges included auction-rate securities failures, problems with variable rate demand obligations and a low interest rate environment, Kozlik said.
The only HFA downgraded in 2013, S&P said, was the Pennsylvania Housing Finance Agency, which was dropped to AA-minus from AA. S&P has raised HFA issuer credit ratings 11 times and downgraded them five times. The two HFAs that had their credit ratings raised this year were the Illinois Housing Development Authority, from A-plus to AA-minus, and the District of Columbia Housing Finance Agency, from A-minus to A.
HFA equity as a percent of assets continued to rise from a 2009 high of 17.4%, reaching 20.4% in 2012. In 2011, the figure touched 18.3%. Increases in larger equity positions and smaller balance sheets due to fewer assets and liabilities contributed to the climb, S&P said.
"Higher mortgage rates going forward will make traditional bond financed state HFA single family products more competitive to conventional rates," according to Kozlik, a former housing banker. A higher interest rate environment will be better for state HFAs, he said. "They will be able to originate more loans because their products will be even more competitive."
Rates in the range of 5.5% for a 30-year fixed rate mortgage would provide a competitive position for HFAs and would slow prepayments on loans already made by the issuers, S&P said. The higher interest rate environment will mean more investment income as well, Kozlik said.