Falling mortgage rates and tighter credit may force state housing finance agencies to issue even fewer mortgages to low-income borrowers this year, according to Standard & Poor’s research.
State HFAs finance the purchase of affordable housing as long as the rate on their debt is less than the mortgage rates the agencies charge. The downgrade of U.S. credit — by S&P — and other factors drove up the costs on state agency debt. At the same time, mortgage rates continue to plunge to new lows thanks to the Federal Reserve.
The return between their debt and rates is still positive, according to S&P, but thinning.
“The low rates on borrowed money have made the spreads increasingly thin, leaving the agencies with reduced profitability and diminished debt service coverage,” analysts said. (Click on the graph below to expand.)
Issuance of HFA multifamily bonds shifted above $200 billion in 2011, more than doubling from two years prior.
Before the downgrade of the U.S. debt, S&P rated more than half all affordable housing issuance AAA, but as of July, only 8% of these bonds hold the gilded rating, because of the agencies’ link to the U.S. rating.
The loans themselves perform better than the average mortgage, even though borrowers generally have lower FICO scores and a small, if any, down payment. The delinquency rate on HFA loans was roughly 6% in the third quarter, less than the average rate across the entire mortgage space.
Some are already looking to the secondary market to fund future affordable housing loans, according to Moody’s Investors Service.
“Some HFAs have also diversified somewhat and receive revenues from other sources, such as servicing fees,” S&P analysts said. “As long as interest rates remain low, agencies that can exercise these options will remain more strongly capitalized and, in our opinion, have stronger credit quality.”
