Standard & Poor's this week placed thousands of publicly financed housing bonds with FHA guarantees on CreditWatch negative in response to its downgrade of the United States' long-term credit rating to AA+ from AAA.
Separately, S&P said it would leave on CreditWatch 'Negative' 744 structured finance transactions -- including some MBS -- that are exposed to the nation's sovereign credit risk.
Valerie White, an analytical manager at S&P, told National Mortgage News that public finance transactions with FHA guarantee exposure would be stress-tested to see if they can support their current ratings. This may depend on various features of the bonds such as any reserves they might have.
She said the FHA mortgage guarantees that were placed on CreditWatch are part of parity bond programs from state housing finance agencies. The AAA bonds affected are backed by whole loans and carry partial FHA backing.
Parity bond programs support/cross collateralize each other, so unlike a traditional MBS the monthly payments from the loan pool feed into a master trust that backs a single state's semi-annual housing bond payments over time. (These pools contain some FHA loans.)
S&P said some of these housing bonds might be exposed to sovereign risk because FHA covers all losses from government loans that have defaulted. It sees FHA as assuming the risk of recouping its expenses through the sale of the foreclosed property. Here, the issuer receives the claim from FHA for the outstanding balance of the loan (and other expenses) but has no claim to the sale proceeds. Thus, in the foreclosure process, S&P views the issuer's entire exposure as being exclusive to FHA. The agency declined to comment.
In a separate report on the structured finance transactions, S&P said among the mortgage securitizations it expects to downgrade are bonds issued by Fannie Mae and Freddie Mac. However, GSE bonds do not require a rating to trade unless they are repackaged as part of other bonds and sold in the private-label market.
--Brian Collins contributed to this report.
