As of June 30, 2014, U.S. housing finance agency (HFA) single-family loan delinquencies had fallen to their lowest level since the third quarter of 2009, signaling a downward trend that that may indicate HFA delinquencies will stay in a lower range. State delinquency rates continue to be lower than those for HFAs, but the gap continued to narrow in the second quarter of 2014. This was the second consecutive quarter in which HFA loan delinquency rates improved, and the difference between state loans and HFA loans was its smallest since the third quarter of 2012. The gap difference between HFA and state loans is an important consideration in that it addresses the influence of the state real estate market on HFA loans. By comparing HFA loans to state loans, one can better explain the performance of HFA loans. HFA loan delinquencies declined to 6.29% of the total outstanding loan balance (compared with 6.64% in the first quarter), and state prime loan delinquencies rose slightly, to 4.64% from 4.58% in the second quarter. A recovering housing market is probably the largest reason for the improved performance, but then again, the state rate nudged up a bit during the same time.
Despite the improvement in HFA loan performance, the same factors that have contributed to higher delinquencies for HFA loans since 2008 persist. Most HFAs are unable to add new loans to their balance sheets because of an inability to fund them in a mortgage revenue bond program. State pools, on the other hand, include newer loans with better performance. This means HFA pools are at a disadvantage compared with the respective pool of state loans with similar mortgage insurance characteristics. HFA loan performance has been generally stable during the past 17 quarters, with the average delinquency rate ranging between 6% and 8%. We believe that if HFAs were able to add new whole loans to their bond programs, their delinquency rates would be similar to or even below those of similar loan pools in the states. State subprime delinquencies, at 11.53% in second-quarter 2014, were nearly twice as high as delinquencies for HFA loans, which have subprime characteristics.
Foreclosures remained low for both HFA and prime state portfolios, but, as with delinquencies, they were much more prevalent for subprime state portfolios. The foreclosure rate for HFA portfolios was 2.3% in the second quarter of 2014, compared with 1.7% for state prime loans and 4.5% for state subprime loans.
With this recent improvement, HFA loans continued to perform well within our stress test assumptions for the ratings, and we expect that loan delinquencies will remain within a range the agencies can manage. Furthermore, HFA loans continued to perform much better than subprime state loans even though the former share some characteristics with subprime loans, such as low borrower credit scores and high loan-to-value (LTV) ratios. Standard & Poor’s Ratings Services’ U.S. public finance (USPF) criteria assumes foreclosure rates that are comparable to our U.S. residential mortgage backed securities (U.S. RMBS) criteria, but market value decline assumptions in the USPF criteria are significantly lower. The result is a loss severity for USPF lower than that in U.S. RMBS. However, given the diverse vintage and seasoning of loans within HFA bond programs, the portfolios with varying amortization periods, varying pledged credit enhancements from issuers that we rate, and the mission-driven activities of the issuers, assumptions in USPF are consistent with those in U.S. RMBS.