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Outlook For U.S. Public Finance Housing: Sheltered From The Storm


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Outlook For U.S. Public Finance Housing: Sheltered From The Storm


Our 2021 housing sector view highlights four key questions that matter for the health and stability of credit quality. While issuers are experiencing an uptick in loan delinquencies, the federal relief bill passed in December includes funding for households, one-time emergency funding to community development financial institutions (CDFIs) and increased annual appropriations to them as well as public housing authorities (PHAs). Moreover, President Biden's platform includes several relevant initiatives, including a first-time buyer housing tax credit. This backdrop, among other considerations, is addressed in the questions below along with potential disruptors: delays in federal stimulus; a delayed immunization campaign; and a markedly slower economic recovery than currently expected.

Chart 1


Questions That Matter

1. Why is the sector view stable?

What we think and why

Increased delinquencies offset by strong financial metrics.  In 2020, lending organizations--housing finance agencies (HFAs) and CDFIs--faced increasing loan delinquencies and forbearance requests. However, this increase followed nearly a decade of declining delinquencies, which reached historic lows by the end of 2019. In addition, issuers completed 2020 with both strong capital and liquidity positions which will provide the resources needed to steer through what may be a bumpy year of recovery. Last year, HFAs' median equity grew by 8.49% due to improving profitability as their net interest margin reached an all-time high of 1.8%. Program metrics are also strong with median parity of just under 125%. The low-interest-rate environment and house price appreciation may drive a higher than normal level of prepayments, which may erode these metrics marginally.

CDFIs exhibit similar strengths with average equity/assets a still-strong 29.76%, down 1.1% from the year prior, and their net interest margin up 0.63 to 3.51%. PHAs' EBIDTA growth was up 5.7% partially due to increased HUD funding levels and debt/EBIDTA rose to 7.82% from 5.69% reflecting the significant increase in borrowings.

Interim federal relief.  The March 2020 federal CARES Act support in the form of stimulus checks, expanded unemployment benefits, funding that flowed into state and local housing payment programs, and funding for businesses, has helped limit the magnitude of the impact of the sudden-stop recession on HFA and CDFI loan portfolios. PHAs also received increased direct funding to sustain their operations during the pandemic.

Further relief is a partial bridge.  While December's Ccoronavirus supplemental relief act offers significant additional support, it is unlikely to completely bridge the gap until the economy fully recovers. The $600 relief check to qualifying individuals and the extension of special emergency benefits of $300 a week are a positive to help sustain households' finances. In addition, the $25 billion Emergency Rental Assistance Program provides funds for up to 12 months of past due or current rent obligations and utility costs, plus an additional three months under certain circumstances. While $25 billion is a sizable down payment on the missed rent payment ledger, most experts have opined that it won't be enough to address the need.

Housing market strength is a bright spot.  The housing market itself has been considered a bright spot during the pandemic as low interest rates and the desire for larger space provided by single family living stimulated housing purchases and pushed sales of new homes to their highest levels in over a decade. The increase in demand also drove housing prices higher through much of the country--creating a double-edged sword for HFA borrowers. It exacerbates the affordability challenges for first-time buyers hoping to compete in markets with limited housing stock and rising prices; November 2020 median prices for existing homes increased by 14.6% to $310,800 from a year prior according to the National Association of Realtors. However, we have not yet seen any measurable decrease in demand for HFAs' mortgages and down-payment assistance, a trend that we expect to continue through 2021. Nor have we seen a deviation from market underwriting standards that could threaten the quality of newly originated loans in HFA portfolios. The increase in housing prices also creates equity for all homeowners, including those in distress, which may allow them to sell and fully repay their mortgages if they are unable to resume payments. We expect this may also contribute to the uptick in prepayments mentioned above.

Management strength and governance.  Most housing organizations benefit from experienced management teams, which developed crisis management muscles during the Great Recession, supporting their efforts to steer through a bumpy 2020 and will help them navigate 2021. While the Great Recession taught many the importance of preparedness and resilience, the pandemic has drilled home the need for liquidity and operational nimbleness.

What could change the trajectory?

COVID-19 surges.  Possible new waves of COVID-19 cases and further delays in vaccine deployment would extend containment measures and risk delaying economic recovery. Any credit implications will also depend on a transition to effective post-COVID policies.

Premature austerity.  If 2021 economic conditions were to deviate significantly to the downside compared to our current macroeconomic base case without additional federal funding support, we would expect to see additional negative rating pressure. Less supportive fiscal stimulus could hurt employment and the solvency of small or more exposed businesses.

2. Is additional federal relief funding a prerequisite for stability in 2021?

Although the CARES Act included significant support for households, it also introduced some unexpected risk into the housing sector by shifting the non-payment risk to lenders, servicers, and landlords. The recent $900 billion supplemental coronavirus relief act provided additional critical support to the economy and specific supportive funding discussed above.

How this will shape 2021

Without additional federal aid, in addition to December's relief package, households or businesses that missed payments may be unable to cover their back rent or resume their mortgage payments once the forbearance/payment holiday period ends and the current federal funding is depleted. This could cause higher delinquencies and pressure revenues needed to repay funding sources.

What we think and why

Elevated unemployment.  The Bureau of Labor Statistics' December jobs report indicated a 140,000 drop in nonfarm payrolls, driven primarily by the pandemic-sensitive leisure and hospitality sector. The latest data reported the number of continuing unemployment claims was 20.6 million in the week ended Nov. 28. With unemployment levels at 6.7% and 9.8 million fewer jobs than pre-pandemic, we expect the 22 million jobs lost in March and April 2020 won't be regained before 2023.

Mortgage forbearance levels remain elevated.  Securitized loans in forbearance have dropped from their spring highs, but still remain elevated at 5.53% as of December 27, 2020 according to the Mortgage Bankers Association. Ginnie Mae-backed loans continue to exhibit the highest forbearance percentage at 7.92%. While the GSE or government backing guarantees ultimate payment, servicers are required to advance payments during the forbearance period. In addition to taxes and insurance, servicers must provide advances for up to four months of principal and interest for loans in Fannie- and Freddie-backed MBS; Ginnie Mae servicers may access a liquidity program established to cover their advances.

HFA performance has been resilient.  HFA delinquency and forbearance reporting also indicates elevated levels, ranging from the low single digits to near 20%, with the highest figures in states with higher unemployment rates. As stated above, this increase comes on the heels of historically low delinquencies; we reported median NPAs hit a 10-year low of 1.6% in their last reported fiscal year. Those HFAs with the highest levels of forbearance have MBS assets in their resolutions and do not service their loans, limiting their financial exposure. Many borrowers in forbearance are still paying --ranging from a low of 2% to a high of 40% based on responses to our monthly survey. Furthermore, many states have directed some of their CARES Act funds to address mortgage and rental payment needs. New Mexico was able to help defray past due amounts for over 2100 households, thereby reducing its seriously delinquent loans significantly. HFAs that act as servicer have had to advance tax and insurance payments for loans in forbearance but to date these advances have not strained their financial position. MassHousing reported advancing $3.1 million for taxes and insurance by year end, almost three times the prior year, but still negligible and it has not needed to make advances for principal and interest payments.

Financial risk transfer will be a focus.  Single-family lenders and servicers and multifamily owners could be challenged to meet their debt service obligations due to the elevated forbearance and payment holidays of their borrowers and tenants. The $25 billion rental assistance program buys time for some but likely not all rental households at risk. While we expect there will be pain in the second half of 2021, we do not expect it will be of sufficient magnitude to pressure ratings. HFAs that service single-family and multifamily programs have demonstrated the strength and access to internal or external liquidity to withstand the heightened level of non-payments at their current rating levels.

Additional funds to CDFIs.  Twelve billion dollars in additional funds was directed to CDFIs in the December relief bill, of which $3 billion went to loan funds to provide grants and other financial and technical assistance. The bill also increased annual funding to CDFIs by $8 million for a total of $270 million. Access to these funds along with existing levels of liquidity should provide enough buffer to offset delayed income from loan payment deferrals. CDFIs have also been the recipients of robust foundation funding in 2020, totaling in the billions; this recognizes their role as the go-to market participants able to quickly and strategically deploy funds to communities in need.

What could change the trajectory

Continued extension of forbearance and eviction provisions without additional financial resources could unduly burden certain lenders.

3. How will an uneven health/economic recovery affect housing?

How will this shape 2021

The sudden-stop recession, Covid-19 surges and social distancing measures have had a disparate effect on various industries, geographic regions and lower income households and households of color.

As vaccine rollouts in several countries continue, S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic and its economic effects. Widespread immunization, which certain countries might achieve by midyear, will help pave the way for a return to more normal levels of social and economic activity. We use this assumption about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research at As the situation evolves, we will update our assumptions and estimates accordingly.

What we think and why

Households' ability to pay their mortgage or rent depends on the economy reopening fully and a return to pre-virus employment rates. We expect the spike of COVID-19 cases during the onset of colder months and holiday gatherings will slow the pace of economic recovery and job growth. People-facing businesses have been particularly challenged by the social distancing efforts instituted to stem the virus' spread, causing higher unemployment in minority and lower income households who typically hold these jobs.

Environmental, social, and governance factors.  The pandemic and resulting recession have had a disproportionate impact on lower income households and households of color. The most recent Census Bureau Housing Pulse Survey for the period ending Dec. 21, 2020 (responses were provided prior to the passage of the supplemental coronavirus relief act) indicated 25.5% of Black renters and 21.0% of Hispanic renters are very likely to be evicted in the next two months vs. 18.9% of all households. This result is of significant societal concern and it highlights an important ESG consideration for the sector, since housing stability is a key component to economic mobility and equality. Compounding this, the Fourth National Climate Assessment report found low-income communities already have higher rates of many health conditions, are more exposed to environmental hazards and take longer to bounce back from natural disasters. Although HFAs make efforts to originate loans that support minority households we don't expect material financial pressure on loan portfolio performance due to the strong parity levels, underwriting standards, and levels of protection embedded in HFA resolutions.

Regional differences.  Regions dependent on hospitality, tourism, and energy have experienced higher unemployment and business disruptions due to the pandemic. Loans in these geographic areas are accordingly demonstrating a higher level of forbearance. The wide-scale transition to work from home has also affected central business district retail and commercial businesses' ability to survive and, in some instances, service their CDFI-funded loans. As a result, we have observed payment deferral amendments for up to 16% of certain loan portfolios that include non-housing loans.

What could change the trajectory

Push toward a more inclusive recovery.  The unified executive and legislative branch introduces the possibility that additional relief efforts may gain support and approval by Congress and the White House.

4. What other federal policy could affect credit performance?

How this will shape 2021

The day of payment reckoning will come when eviction moratoria and forbearance provisions expire, revealing the true impact of the COVID-19 shock on borrowers and renters. Without additional federal aid these households may be unable to cover their back rent and mortgage payments with millions at risk of losing their homes. The coronavirus relief act signed into law in December 2020 provides a brief reprieve from this housing doomsday.

What we think and why

Risk at the expiration of the rental eviction moratoria.  The federal and state moratoria that have provided eviction protections for renters have been an important policy initiative to keep people housed during the pandemic. Enacted in the CARES Act and extended by the Centers for Disease Control and Prevention, the limits will expire at the end of January. The 10-month payment holiday shifted the financial burden to property owners from tenants to continue covering operating expenses including any debt service payments and their lenders which have been precluded from foreclosing if there has been a COVID-related hardship.

Yet HFA loan performance remains strong.  While the end of the eviction moratoria may result in a notable wave of evictions and pain for certain households, the tight supply of affordable housing will fuel landlords' ability to quickly re-lease their apartments. And despite concerns about tenants' inability to pay their rents, the delinquency rate for multifamily mortgages has not risen appreciably. HFAs have historically had few if any multifamily loan delinquencies; during the last six months they continued to report minimal multifamily delinquencies, a trend we expect to continue in 2021. For example, New York City Housing Development Corporation, the largest multifamily issuer, reported three delinquent loans and three loans in forbearance as of Oct. 31, 2020, comprising 0.08% and 0.4%, respectively, of its loan portfolio.

Single-family forbearance should be manageable.  The CARES Act provides that borrowers with a government-backed mortgage could request up to one year of forbearance on their mortgage by Dec. 31, 2020, with a prohibition on evictions and foreclosures during this period. FHA recently extended its deadline to Feb. 28, 2021. Therefore, forbearance expirations could begin as early as April 2021 and for FHA insured loans extend through February 2022. Fannie Mae, Freddie Mac and USDA have not announced an amended deadline for forbearance requests.

We are less concerned about the effect on single-family loan portfolios than multifamily loans because of the need for tenants to pay their full amount of past due rents at once. In contrast, at the end of the forbearance period, owners can qualify for a range of modification options (assuming resumption of regular mortgage payments) including: extending the loan term to add the unpaid amount to the back end of the mortgage, or repaying the missed payments over time. If borrowers are not able to resume payments, they can access the equity generated by the price increases in most homes through additional funding or if needed, by selling their home and paying off their mortgage.

What could change the trajectory

Acceleration of the Biden housing agenda.  With Democrats taking control of both houses of Congress, President Biden has a better chance to achieve his promised legislative agenda which includes numerous supports for the housing industry. However, we anticipate near-term changes will be limited, with an immediate focus on controlling the pandemic.

Rating Distribution And Performance

As of Dec. 31, 2020, S&P Global Ratings had 717 public ratings on U.S. public finance housing issuers and issues. Rating distribution spans from 'AAA' to 'CC', with a median rating of 'AA'. Ratings for rental housing bonds span from 'AAA' to 'CC' with a median rating of 'A'. The overwhelming majority of all ratings carry a stable outlook; 7% are negative, and 0.7% are positive.

Chart 2


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Chart 4


We took 149 rating actions in 2020, primarily downgrades within the rental housing bond subsector resulting from the implementation of the new rental housing bonds criteria (April 15, 2020). Downgrade actions were more than double the number of upgrades. In addition, outlooks for the age-restricted sector were all moved to negative as the pandemic disproportionately pressured that population and property type. Ratings for several age restricted properties were ultimately downgraded to 'D' and were subsequently withdrawn. Nearly all HFA, CDFI, and PHA ratings were affirmed, with two PHA and one HFA downgrade and one HFA upgrade. We also made 100 outlook changes, more than half of which moved to stable from negative in connection with a downgrade due to the rental housing bond criteria implementation.

Chart 5


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We expect the impact from COVID-19 to persist in 2021, with continued pressure for age-restricted rental housing assets. Although most states' vaccination distribution policies have prioritized the elderly, particularly those living in age-restricted properties, we expect it will be several months until such properties see stabilized performance metrics. We also expect stand-alone rental housing that don't benefit from federal support through military or Section 8 contracts to face challenges until the economy recovers.

This report does not constitute a rating action.

Primary Credit Analyst:Marian Zucker, New York + 1 (212) 438 2150;
Secondary Contacts:Aulii T Limtiaco, San Francisco + 1 (415) 371 5023;
Alan Bonilla, San Francisco + 1 (415) 371 5021;
Contributors:Adam Torres, New York + 1 (212) 438 1141;
Ki Beom K Park, New York + 1 (212) 438 8493;
Research Contributors:Saurabh Khare, CRISIL Global Analytical Center, an S&P affiliate, Mumbai
Prasad Patil, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai

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