- The sudden economic stop has created a backdrop of uncertainty and volatility.
- Unemployment, coupled with eviction and mortgage foreclosure moratoriums, will stress the housing sector, particularly housing finance agencies (HFAs) and stand-alone multifamily properties.
- Age restricted properties in particular could face pressure on net operating income due to extended vacancies and higher expenses from the pandemic.
- Liquidity will be key to navigating through any interruption or decrease in revenues for HFAs, community development financial institutions (CDFIs), and multifamily property owners.
The seismic shift in the U.S. economy, along with provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act to keep renters and homeowners in their residences through eviction and foreclosure moratoriums, will add significant stress to the U.S. municipal housing sector over the next several quarters. This was a central reason for our revising the outlook on the sector to negative (see "All U.S. Public Finance Sector Outlooks Are Now Negative," published on April 1, 2020, on RatingsDirect). As the situation plays out, S&P Global Ratings expects that any rating actions in the housing sector will generally lag this downturn, in contrast to other sectors where the financial effects have been immediate.
COVID-19 Financial Impacts Wash Over The U.S. Economy
The longest economic expansion in U.S. history has abruptly ended due to the financial fallout of the COVID-19 pandemic; in a report published March 17, 2020, S&P Global Economics said the world's biggest economy had fallen into recession (see "A U.S. Recession Takes Hold As Fallout From The Coronavirus Spreads"). S&P Global Economics forecasts a 1.3% decline in GDP in 2020, down from its December 2019 forecast of a 1.9% gain (see "It's Game Over For The Record U.S. Run; The Timing Of A Restart Remains Uncertain," published March 27, 2020). The shelter-in-place mandates for nearly 90% of Americans have caused a sudden stop in economic activity across the country; S&P Global Economics forecasts that consumer spending will decline 13.2% in the second quarter of this year.
For the week ended April 10, U.S. jobless claims surged another 6.6 million, bringing to 16.78 million the total claims filed in three weeks, significantly surpassing the total jobs lost during the Great Recession. S&P Global Economics revised its expectation for over 20 million jobs to be lost by May (see "U.S. Biweekly Economic Roundup: The Beginnings Of A Sudden-Stop Recession," published April 3, 2020).
As is typical in recessions, the economic downturn will hit low- and moderate-income households and communities hardest--those stakeholders served by the entities and transactions we rate. By March 27, 2020, one in every five Americans reported having their jobs cut or hours reduced since the beginning of the crisis; women and low-income households experienced this the most. We expect this significant increase in un- or under-employment will lead to a significant number of forbearance requests for HFAs.
The recently enacted CARES Act allows a borrower with a federally insured or guaranteed mortgage loan, or a loan purchased or securitized by a government-sponsored enterprise, experiencing financial hardship due to COVID-19 to request forbearance on the loan, regardless of delinquency status. This forbearance period could be granted for up to 180 days, and can be extended for an additional 180 days. Mortgage servicers are asked to provide forbearance upon the borrower's request and to use any established escrow fund to make disbursements. The act also includes provisions that allow certain renters to avoid eviction if they are not able to make their monthly payments due to COVID-19.
The CARES Act also includes specific household financial support through expanded unemployment benefits and checks for eligible taxpayers (up to $1,200 for individuals). It's still too early to tell whether households will choose to spend these funds on their housing expenses. The economic impact of the pandemic hit in mid-March, after rent and mortgage payments were already submitted. We are still days away from April payment deadlines and don't yet have a full view of how many borrowers or renters are requesting relief. With lenders already receiving requests for forbearance or other payment deferrals, we expect the full financial effects on our rated sectors will come out over the next several months, with some of the first delinquency information reported by month-end. Early indications, from the Mortgage Bankers Association's April 7th published survey, reported an increase of 4.25% for Ginnie Mae and 1.68% for Fannie/Freddie borrower forbearance requests.
Given the potential for increased delinquencies from unemployment, delayed or suspended rental payment relief, and mortgage forbearance, HFA programs could experience pressure as they face these tough circumstances. While the post-Great Recession shift of many HFAs to a higher reliance on mortgage-backed securities (MBS) assets will mitigate the credit fallout of delinquencies, those HFAs that service loans could face additional stress to advance mortgage and escrow payments for the expected higher numbers of borrowers who will enter forbearance. U.S. residential mortgage servicers will need to address what is almost certain to be an unprecedented number of loss-mitigation assistance requests by borrowers as a result of fallout from the COVID-19 pandemic. (See "U.S. Residential Mortgage Servicers Gear Up To Face COVID-19 Related Challenges," published April 10, 2020.)
To assess HFA single-family whole loan and hybrid (combined MBS and whole loan) resolutions' capacity to withstand these pressures, we evaluated their ability to absorb losses equivalent to their respective peak delinquency levels during the Great Recession, which ranged from 2% to 26%. Coincidentally, the highest delinquency levels occurred in judicial foreclosure states, some of which had the most reported cases of COVID-19, as of April 6, 2020 (these states are: Connecticut, Illinois, Kentucky, Maine, Massachusetts, New Jersey, Pennsylvania, and Vermont). Although unemployment levels have spiked higher than in the Great Recession, we expect current borrowers will behave differently this time, to protect the equity in their homes.
HFA resolutions are entering this recession with significantly more equity than in 2008; not surprisingly, our analysis of their ability to withstand their highest historical single family delinquency rate showed that all had sufficient equity to cover credit losses, as measured by their asset-to-liability parity ratio. All resolutions demonstrated enough liquidity to withstand their respective liquidity stresses.
For those agencies that service loans, we expect that the influx of forbearance requests and resulting mortgage payment advances will undoubtedly stress their balance sheets--more specifically, their liquidity. We generally view HFA access to both internal and external credit and liquidity as strong. Although the average short-term investments to total assets ratio is 17%, the percentage of appropriate liquidity for an HFA hinges on the relative risks carried in its portfolio, which we evaluate individually. Many HFAs have untapped liquidity facilities or bank letters of credit on hand, which will be reliable resources during the forbearance period, in our view. As the situation evolves, we expect to update our assumptions and evaluate the capacity of HFA resolutions and ICRs to maintain the current ratings.
Liquidity will also be a key factor for CDFIs to address emerging risks as a result of COVID-19, including any loan extensions or interest deferrals. Interrupted revenue streams for these issuers will necessitate sufficient liquidity sources to cover financial obligations in the near term and continue to meet their missions. Similar to HFAs, CDFIs are mission-driven lenders entering this crisis with strong balance sheets and sophisticated management teams who actively manage their loan portfolios for signs of stress or possible delays in payments from their borrowers. The quality of the rated CDFIs' assets is very strong, with a median delinquency below 1% of loans, and a median asset base of nearly $380 million. We believe the pandemic's effects on the rated CDFIs will vary over time, with limited immediate credit risks identified thus far.
COVID-19's effects on CDFI loan portfolios remain to be seen. A sizable portion of some CDFI lending portfolios consists of early financing loans (construction, predevelopment, acquisition, bridge), which could be relatively susceptible to timely repayment risk in the current setting due to regional shutdowns or slowdowns of construction projects. Some loans for affordable housing, charter schools, or healthy food projects may prove more resilient through this crisis than those for other commercial or retail borrowers struggling to maintain positive cash flow. CDFIs have already begun to identify those loans likely to request extensions, delays in payments, or other relief measures; and senior management teams expect the number of such loans will only increase in the coming weeks
Significant delays in receiving interest or principal payments from borrowers could limit some CDFIs' abilities to make their own timely debt service payments. In general, the sector relies heavily on low-interest rate loans and grant funding from both private and government sources (including the U.S. Treasury's CDFI Bond Guarantee Program, various Federal Home Loan Banks, and Community Reinvestment Act-motivated lenders). Without flexibility or relief from these sources, CDFIs could find it difficult to make scheduled debt payments, meet loan collateral requirements, and maintain financial covenants, if a significant number of their borrowers struggle to repay their loans on time.
Overall, CDFIs ended 2019 with strong balance sheets and robust liquidity. Furthermore, most of the rated CDFIs maintain healthy access to external lines of credit from large investment-grade banks, and most haven't drawn on them. Thus, most of the rated CDFIs have some options to meet liquidity needs as the crisis unfolds and there are early indications of willing support from outside organizations, if needed. With little clarity on the duration of the current financial stresses, CDFIs are preparing for immediate and medium-term liquidity demands. Should these organizations' liquid assets be constrained, with limited resources to cover potential payment delays or loan extensions, this could strain credit quality.
PHAs are generally highly rated, ranging from 'BBB+' to 'AA', and we expect this will continue through the pandemic. We view PHAs' reliance on federal funding as a credit strength during this period of unprecedented uncertainty. The stimulus package contains provisions to help authorities compensate for reductions in revenue and continue their operations. This support during this crisis contrasts to the sometimes-volatile funding levels appropriated by Congress, which we have viewed as a credit risk. Although PHAs with a heavy concentration of federal funding are generally susceptible to fluctuations in appropriations and potential declines in EBITDA, we believe those with more reliance on Department of Urban Housing and Development (HUD) funding may, in fact, see less volatility in their revenues as a result of COVID-19 effects. In our opinion, in the near term there's little risk that PHAs' main funding streams (operating subsidies, Section 8 revenue, and capital grants) will significant dwindle before the direct and indirect effects of COVID-19 subside.
The federal government has signaled additional support for public housing through specific provisions in the CARES Act, which contains substantial funding for PHAs through $1.25 billion for tenant-based rental assistance to "prevent, prepare for, and respond to coronavirus, including to provide additional funds…to maintain normal operations and take other necessary actions…". This includes $850 million for administrative and other expenses for PHAs' Section 8 programs, and $685 million to help PHAs maintain normal operations; the latter will remain available until Sept. 30, 2021.
In the short term, net operating income might decline for PHAs. As a result of COVID-19's impact, tenants could have insufficient funds to pay their rent; the magnitude of this scenario varies based on each PHA's reliance on tenant income. To the extent this occurs in public housing units or Section 8 properties under management, we understand changes in tenants' income will be covered by increased government funding through tenant recertification. There may also be additional expenses incurred as a result of COVID-19 (such as personal protective equipment, cleaning supplies, and additional labor hours). The CARES Act funding should help cover administrative expenses for Section 8 programs to support or maintain the health and safety of assisted tenants, and costs related to retention and support of participating owners.
Nonetheless, given the uncertainty around timing of this situation, PHAs may face challenging economic conditions that could lead to longer-term suspension of nonessential maintenance activity, and less frequent or less thorough physical inspections. Similarly, if COVID-19 prevention measures delay maintenance staff or contracted personnel from upgrading units or preparing vacant units for new tenants, occupancy rates could decrease and ultimately weaken the authority's asset quality and operational performance--a measure of market position in our rating analysis.
Affordable Multifamily Properties
We also expect to see financial stress in stand-alone, non-federally subsidized affordable rental properties, as significant revenue declines due to eviction moratoriums, an uptick in operating expenses, and extended vacancies will pressure ratings, particularly for those properties already operating with slim margins and limited operating reserves. In addition, because seniors are among the most susceptible to serious consequences of the coronavirus, we believe age restricted properties with assisted living and memory care facilities are in a particularly vulnerable position and may see slower lease-ups and unforeseen operating costs. Recently, we revised the outlook to negative on seven senior living transactions due to what we view as the potentially severe and ongoing impacts associated with the COVID-19 pandemic. For these transactions, we believe the pandemic presents near-term liquidity pressure to operations and debt service payments and could create long-term downward pressure on credit quality (see "Outlooks Revised To Negative On Various Affordable Senior Living Transactions Due To Pandemic Risk," April 3, 2020). The private-pay nature and lack of government support through a rental subsidy for a majority of senior living transactions further expose these entities to revenue stress.
Federally Subsidized Affordable Multifamily Properties And Military Housing
Federally subsidized (largely Section 8) affordable multifamily properties will likely fare better, in our opinion, than other affordable multifamily properties given the significant financial assistance provided under the CARES Act for HUD programs. Among other things, the CARES Act provided $1 billion of additional appropriation for Section 8 project-based rental assistance. Although we expect that expenses could increase at these properties, HUD may waive or specify alternate requirements (other than fair housing, nondiscrimination, labor standards, and environmental requirements) for actions that are "necessary for the safe and effective administration of these funds . . . to prevent, prepare for, and respond to coronavirus," which could alleviate some strain at these properties.
Military housing properties may also see an uptick in expenses, as more maintenance may be required for housing during this time, but we do not expect revenue will decline for them, because the Basic Allowance for Housing (BAH) should not be reduced by COVID-19. Military personnel under COVID-19 related orders (such as the National Guard) will also see a boost in BAH payments under Title 32 of federal law, as a result of a recently enacted presidential executive order.
We expect any negative rating actions will be caused by the duration and severity of the macroeconomic downturn. At the same time, some entities we rate may avoid significant financial hardship and downgrades, due to strong balance sheets, robust liquidity, and proactive management, bolstered by any relevant federal government support.
This report does not constitute a rating action.
|Primary Credit Analysts:||Marian Zucker, New York (1) 212-438-2150;|
|David Greenblatt, New York + 1 (212) 438 1383;|
|Secondary Contacts:||Aulii T Limtiaco, San Francisco (1) 415-371-5023;|
|Alan Bonilla, San Francisco + 1 (415) 371 5021;|
|Ki Beom K Park, New York (1) 212-438-8493;|
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