U.S. housing finance agencies (HFAs), whose primary goal is to provide affordable housing, have seen their profitability (as a result of ongoing low interest rates) and loan performance deteriorate since 2008. Standard & Poor’s Ratings Services believes this trend will continue and possibly lead to negative rating actions in the absence of alternative revenue sources. However, although HFAs’ ability to originate loans has declined, their equity has grown because their reserves have remained largely intact. In fact, average equity is at its highest level ever, providing more security for these issuers’ general obligation debt and some other obligations.
This increased equity has come at the price of declining balance sheets as HFAs use loan payoffs to redeem bonds. We have previously commented that low interest rates will continue to test HFAs’ profitability. Yet despite the limited net income, equity could continue to grow if the HFA loan pool shrinks and if HFAs use the proceeds of refinanced loans to pay down debt.
We believe the rated HFAs fall into three broad categories:
- Those with healthy and stable profitability,
- Those with stagnant or declining profitability, and
- Those that have experienced significant losses.
The issuer credit ratings (ICRs) in the first group will probably not face any negative rating actions and could even rise. Those in the second group will likely be stable, while those in the third group will face stronger prospects for negative rating actions if the losses continue.
We believe that profitability ratios will remain low but that equity will keep growing in the coming years. Less predictable is loan performance, which, more so than other ratios we compute, relies on general economic conditions. However, all asset performance measures that we track indicate that the slow increase in delinquencies has leveled off. Because equity ratios have the biggest influence on our ratings, HFA ICRs with continued growth in equity could experience further upgrades, but downgrades are possible for the few agencies with sizable losses.
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