State Housing Finance Agencies Deal With Higher Delinquency and Foreclosure Rates

Moody's Investors Service said last week that U.S. State Housing Finance Agency (HFA) single-family whole loan programs continued to experience significant increases in both delinquencies and foreclosure rates during 2009.  However, the service said they remained  well below the default rates that Moodys has incorporated into its rating process.

Loans in foreclosure in particular grew at a rapid pace with the weighted average percentage rising to 1.87 percent as of the end of the year.  This is 75 basis points higher than the average on December 31, 2008.  The 90+ day delinquency rate was 2.92 percent compared to 2.0 percent one year earlier while the 60+ date rate was 1.97 percent, up from 1.61 percent. 

The total delinquency rate in 2009 was 6.76 percent while 4.79 percent of loans are considered seriously delinquent.  A year earlier the respective rates were 4.73 percent and 3.12 percent.  It is generally considered an anomaly when a 90+ day delinquency rate registers higher than the 60+ day rate.  However, Moody's notes that this situation has now been present in the portfolios for two straight years.

The ratings service said that it expects the deterioration of many single family loan portfolios to continue persist for the next 12 to 18 months. Based on discussions with HGA management teams, Moody's believes that the continued high distress rates are the result of economic factors including unemployment and underemployment, and declining home prices which are driving some homeowners to voluntarily default on their mortgages.  The high 90 day rate is also the result of the number of loans in the process of loan modification which remain in the 90 day bucket for prolonged periods of time.

Of the 35 programs included in the survey, 34 experienced a rise in total delinquencies and foreclosures in 2009; a South Dakota program was the sole exception.  Three quarters of programs had a foreclosure rate above 1 percent compared to less than half one year earlier.

HFA loans are, however, performing better than either FHA or other loan types in their respective states.  HFA loans are most comparable to those guaranteed by FHA because the borrowers generally have similar income characteristics and purchase similarly priced homes.  However, in most cases, HFA's loans are outperforming FHA loans in their states because of the Housing Finance Agencies active involvement in the management of their loan portfolio.  At the end of 2009 the HFA loans were, as noted, running a seriously delinquent rate of 4.79 while the FHA rate was just under 6.77 percent.

The Moody report said that continued declines in property values could increase HFA's loan losses and adversely affect some ratings, particularly in states where property value declines and foreclosure rates are most severe.  29 of 30 states with a Moody's-rated whole-loan program have seen a decline in home prices and two agencies reside in California and Michigan which have each experienced a greater than 20 percent decline in home prices (39 percent and 24 percent respectively) while ten have seen between a 10 and 20 percent price decline.

HFA portfolios remain predominately filled with 30-year fixed rate loans, which comprise, on average, 89 percent of HFA loans.  Moody's offered other comments on the composition of the portfolios:

• Approximately 45.6 percent of the portfolios, on average, were insured by government-sponsored mortgage insurance providers such as FHA or VA and 26 percent were insured by private mortgage insurance companies (PM), 7.3 percent were covered by the HFA insurance fund, 18.7 percent (generally low LTV loans) were uninsured and 2.5 percent were mortgage-backed securities.

• Portfolios typically contain a diverse group of vintages. As of December 31, 42.9 percent of loans were originated in 2005 or earlier.

• In response to the Treasury's New Issue Bond Program, many HFAs opened new bond indentures and will be issuing under them for much of 2010. In these cases, the characteristics within the loans pools that support existing indentures such as loan type, insurance type, and vintage, will remain relatively static through the year.

• As the credit quality of many PMI providers has declined, many HFAs report that they are shifting to government insurance or wrapping their new loans with Ginnie Mae, or GSE guarantees. Over time, Moodys said, this shift should begin to strengthen HFA programs which did not open new NIBP indentures.

Moody's said the higher loan losses it expects based on its projections that the portfolios will continue to deteriorate over the next 12 to 18 months have been incorporated into its analysis of loss assumptions.  They are assuming higher levels of default in loan loss calculations for many HFAs based on the historical performance of FHA-insured loans in each agency's state.  The weakened performance of FHA-insured loans in 2009 has resulted in higher default probability assumptions for most states.

In states where they exist, the service is also factoring in unusually high foreclosure rates, a large proportion of interest only loans, severe home price depreciation, or high unemployment and may further adjust upward the assumed probability of default.  The revised loan loss calculations generally assume the probability of default ranges as follows:

The assumed probability of default may rise above the top end of the range if the characteristics or performance of the loan portfolio suggest greater vulnerability than historical performance would imply.

Moody's said it also compared each HFA's asset-to-debt ratio with its calculated loan losses to determine if the programs overcollateralization is sufficient to cover these losses and maintain a program asset-to-debt ratio consistent with the current rating.  Because the projected loan loss calculations have increased, the report says, some HFAs may face difficulty in meeting the targeted benchmark levels and their bond ratings could suffer accordingly.