We are providing live updates to today’s S&P Webinar: Is the Housing Market Bottoming Out? I’m Jim Henry posting this on behalf of Lisa Sarajian.
To join the webinar click here. If you have any questions feel free to ask in the comment section below. We will be addressing these throughout the week.
Question-Lisa Sarajian: Valerie—you recently published a commentary on the impact of low interest rates on the housing finance agencies (or HFAs). Can you talk a bit about their role and how interest rates impact the HFA industry?
HFAs issue tax-exempt bonds to fund mortgage loans for first-time home buyers with low-to-moderate incomes with a different price limit. These borrowers qualify for competitive interest rates through HFA programs despite smaller down payments and lower credit rating scores. The HFAs’ potential to generate revenue heavily depends on their ability to originate mortgages at rates higher than the bonds they issue and thereby generate spread earnings. In the last 15 years or so— the commercial mortgage market began to offer mortgage products previously unavailable to the specialized borrowers that HFAs served.
In response, to compete, HFAs lowered mortgage rates on the products they offered to at or below market rates in order to compete with commercial lenders. The resulting factors–low mortgage rates not only limit loan production due to competition with the commercial mortgage market but also limit issuer earnings on bond spread.
In addition, low interest rates on invested monthly mortgage deposits pledged to semiannual bond payments further limit earnings and long-term growth of assets in bond transactions. Lower earnings on bond programs negatively affect the agency’s bottom line, particularly in those instances where the agency’s sole source of revenue comes from its bond programs. Examination of continued low interest rates in the immediate future through Fed Reserve Board low interest rate period–we projected assumed interest earnings and liability on bond payments would remain constant through 2014.
Question-Lisa Sarajian: In the REIT space, we are seeing a rebound of the rental market while the homebuilders industry continues to experience little recovery. What are your observations of this market dynamic as it relates to HFAs.
HFAs do provide mortgages for affordable rental properties as well which are financed through their bond programs.
We are seeing a bit of resurgence in the rental market and, as such, we are finding that the dynamic of commercial mortgage rate competition for HFAs is not as prevalent in the rental market and, indeed, like in your sectors,we are seeing increased activity in the rental market through affordable housing.
However, the low rate of return on investments of mortgage payments is universal and does hamper somewhat the opportunity for income growth in any bond program.