S&P Finds Muni Housing Stable Despite Uncertainties

Standard and Poor’s finds some legislative and other uncertainties in the municipal housing sector, but the company expects ratings in it to remain fairly stable through at least the next 12 months.

“We expect the coming 12 months to continue the trends of 2012: stable ratings with similar numbers of upgrades and downgrades for most program types but more pressure on certain securities, such as unenhanced multifamily transactions, that have been more volatile historically,” the company said in a report Thursday.

Increasing mortgage rates could benefit muni issuers as lower rates “have compressed the difference between the typically higher rates on loans and the rates on tax-exempt bonds to slim margins that often render bond-financed mortgage financing infeasible,” the report noted. But it also noted that the 30-year mortgage rate is still low by historical standards, making it likely that housing finance agencies will continue to struggle to originate through mortgage revenue bonds and will have to continue to mix bond-financed loans with other techniques such as pass-through structures.

Also, “questions remain regarding the framework of municipal housing, including the tax treatment of bonds and loans, as well as how government sponsored entities, such as Fannie Mae and Freddie Mac, will participate in the market,” which creates uncertainty.

On one hand, U.S. fiscal constraints could affect financial resources available for the sector, but on the other, “municipal housing’s proven track record of providing affordable housing has resulted in supportive regulatory treatment even while policymakers try to prevent a deterioration of lending standards,” the report noted.