State Housing Finance Agencies Remain Stable Amid Market Challenges

Despite housing market challenges, U.S. state housing finance agencies (SHFAs) remain financially sound as mortgage revenue bond issuance, net interest, median ratios, and other factors trend upward.

A recent peer study of the SHFAs from Fitch Ratings found that throughout fiscal year (FY) 2014, low conventional mortgage rates hindered SHFAs from originating new whole loan mortgages through their own debt. The report showed compared with FY 2013 results, balance sheet numbers decreased by 4.5 percent, aggregate debt declined 6.9 percent, and aggregate loan dropped 4.1 percent.

"These decreases mark the fourth straight year of across-the-board declines, reflective of the economic environment during that time period and the shift in SHFAs’ business model in response to that lending environment," Fitch said.

Maura McGuigan, senior director of Fitch Ratings also added that balance sheet declines are "expected to continue in the short-term; however, some SHFAs are beginning a return to mortgage revenue bond issuance and this slow movement back may take time to appear on audited financial statement balance sheets."

The peer study provides a snapshot of 51 SHFA's five-year financial position, a ranking chart that demonstrates how each SHFA performed in FY 2014 relative to the industry median, mortgage-backed securities held by the SHFAs, and variable debt rates.

Although balance sheets fell in FY 2014, overall equity is still trending upward for the fifth year straight, with aggregate adjusted equity increasing 4.5 percent from FY 2013 and up 13 percent from FY 2010 levels. The rise in equity levels stemmed from up-front cash generated from the sale of loans.

The report also revealed an uptick in the net interest spread (NIS) for the SHFAs from the agencies' efforts to economically refund prior debt obligations, which lead to lower bond interest costs. The median net interest spread increased to 30.1 percent in FY 2014 from 24.5 percent in FY 2013 and has risen from 21.0 percent in FY 2010.

The peer study also showed increasing net operating revenues (NOR) and variable-rate debt among the SHFAs, and leverage ratios continued to improve as debt to equity (DTE) ratios declined.

"Rising net operating revenue for state housing finance agencies is likely attributed to rising profitability within housing bond programs and the up-front revenues generated from alternative financing methods in recent fiscal years," McGuigan said.

The FY 2014 report highlighted some of the ongoing issues that SHFAs have dealt with over the last five years as investment income was hindered by low rates and low conventional mortgage rates lowered the volume of SHFA-issued debt for originating new whole loan mortgages. In turn, the SHFAs found news ways to be profitable by originating loans through the to-be-announced (TBA) market, utilizing direct sales of MBS, and issuing MBS pass-through instruments.

"Despite the challenging environment, FY 2014 results demonstrated that SHFAs are financially sound, as median ratios, such as NIS, NOR, and DTE, continue to trend positively," the report said. "Given the recent uptick in new mortgage revenue bond issuance financing single-family whole loan mortgages to remain on SHFA balance sheets, Fitch expect FY 2015-2016 ratios may exhibit some changes. "

Click here to view Fitch Ratings full FY 2014 peer study report.