Overview

Ratings are stable at high investment grade

Under our revised MRB program criteria, U.S. HFA MRB program ratings fared well, with six positive rating actions and no negative rating actions, as indicated in our report "U.S. Mortgage Revenue Bond Program Rating Actions In Line With Expectations After Application Of Updated Criteria," published May 18, 2023, on RatingsDirect. The median MRB program rating remains 'AA+', unchanged from prior to the rollout of the revised criteria.

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Compared with last year, the percentage of 'AAA' rated programs increased to 18% from 16%, and the percentage of 'AA+' rated programs to 74% from 66%. At the same time, the percentage of 'AA' and 'AA-' rated programs declined to 5% and 1% from 11% and 2%, respectively. Chart 1 shows MRB program rating distribution before and after criteria rollout, and table 3 shows program ratings for the past five years.

All MRB program rating outlooks are stable, but prior to the criteria release three were positive (MassHousing housing bonds, Virginia Housing rental housing bonds, and Utah Housing Corp. single-family mortgage bonds) and one was negative (Michigan State Housing Finance Authority single-family mortgage bonds). In the past year, two programs--California Housing Finance Agency's (CalHFA) home mortgage revenue bonds and New Jersey Housing and Mortgage Finance Agency's 1995 multifamily housing revenue bonds--were redeemed in full and defeased, and CalHFA's new affordable multifamily housing revenue bond program was added, bringing the number of program ratings to 73 from 74.

For the purposes of this report, we have separated program types into two groups: single-family and hybrid programs, and multifamily programs. While several hybrid programs are a mix of single- and multifamily loans, the vast majority consist of single-family whole loans and single-family MBS. As shown in chart 3, single-family and hybrid programs make up the majority of ratings overall and account for the highest proportion of 'AAA', 'AA+', and 'AA' ratings (85%, 74%, and 80% respectively). The lone 'AA-' MRB rating is on a multifamily whole loan program.

Chart 3

Losses vary by program type and rating

We use minimum A/L parity to assess loss coverage at the highest rating that the program can withstand. The median minimum A/L parity across HFA MRB programs was 121% as of July 13, 2023. The median credit loss for all programs is 4.6%, and the median net parity after losses is (NPAL) 115%. Chart 4 shows the medians for MRB program credit losses, A/L parity, and NPAL by rating.

Chart 4

'AA+' rated programs have the lowest median credit loss, as the majority consist of federally enhanced mortgage-backed securities, for which we assess no losses at the same rating as the enhancer. 'AAA' rated programs must meet a higher threshold of loss, meet our criteria for ratings above the sovereign, and be able to withstand stress scenarios such as stressed interest and reinvestment rates and additional prepayment scenarios. Although our base loss assumptions decrease with the rating scale (i.e., a program must withstand more loss to be rated higher, all else equal), the median loss was calculated at higher levels for 'AA' and 'AA-' programs than for those rated 'AA+'. We attribute this trend to some 'AA' and 'AA-' ratings' representing subordinate pledges of programs to which the same nominal loss constitutes a higher percentage of assets, in addition to the higher representation of multifamily programs--against which we generally apply more loss, given lower recoveries from insurance and guarantees--at these ratings. In addition, many 'AA+' rated programs have portfolios partly or fully consisting of MBS.

The median estimated loss for single-family and hybrid programs is approximately 1.8% lower than that for multifamily programs, with the widest difference, 5.3%, at the 'AA+' loss level. Recoveries from MBS and other government insurance in the single-family and hybrid programs largely account for this spread, as rated multifamily programs have a lower proportion of direct enhancement (see chart 12).

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We note that 'AAA' and 'AA+' rated programs exhibit very similar loss levels throughout the loss-level scale, while the median overcollateralization cap is 'aaa' across all programs. This indicates that the majority of 'AA+' rated programs could likely withstand our 'AAA' loss levels, although other factors may limit the program rating, such as cash flow stress tests (including stressed interest rates or reinvestment rates), program management and operational risks, or dependencies on the HFA issuer credit rating. Conversely, 'AA' and 'AA-' rated programs exhibit higher losses at high investment-grade levels, suggesting that their overcollateralization has more impact on the program rating and that they might not be able to withstand the losses at a higher rating.

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Robust management and low operational risk underpin MRB program strength

We believe proactive management and oversight can mitigate risks in an MRB program. HFA management of MRB programs is typically strong, so our program management and operational risk assessment is either neutral or negative. The majority (86%) of MRB programs have a neutral assessment, meaning that program management is strong and that operational risk is low. A neutral assessment results in no cap to the anchor. The remaining 14% of the programs had one to two negative program management or operational risk attributes, capping the anchors in the 'aa' category. Chart 7 shows the distribution of program management and operational risk caps.

Chart 7

Of the 10 programs for which we assessed negative factors, four were multifamily and six were single-family or hybrid. In our opinion, the majority of negative factors relate to counterparty risk concentration and asset and liability management. Those programs that exhibit concentration in counterparties typically have one or two providers for all swaps, which we view as riskier than a diversified counterparty strategy. We assessed negative factors under the asset and liability management category for four programs, mainly as a result of initiatives that management deliberately implemented or legacy legal provisions, strategies, or practices whereby assets can be withdrawn from the resolution to a level below the program's overcollateralization. Three programs were found to have weak program strategy and governance, in our opinion, and one was assessed as having higher-than-average delinquencies in its loan origination and monitoring practices.

No MRB programs were found to have negative factors in liquidity risk management, as we consider all programs to have sufficient reserves and investment guidelines to support liquidity needs. In addition, no programs have derivative contracts that introduce liquidity risks that the program or HFA cannot manage, in our opinion.

Chart 8 shows the proportion of negative factors.

Chart 8

Single-Family Programs Continue Shift Toward Federal Enhancement

Single-family MRB program ratings remained mostly unchanged under the new criteria, with some exceptions. Six programs saw a one-notch positive rating action, after being identified as under criteria observation. Also, Nebraska Investment Finance Authority's (NIFA) single-family housing revenue bond program saw a one-notch positive rating action to 'AAA' following the receipt of detailed loan information and cash flows that demonstrated the program's ability to withstand our 'AAA' loss assumption as well as meet all other requirements to be rated above the sovereign. This is particularly significant as MBS account for 100% of NIFA's program assets.

Slowing prepayments and increases in origination and investment revenue boost parity

Overall, A/L parity for single-family programs has improved this year. The median opening and minimum parity ratios for single-family programs are 122% and 119%, respectively, both up from the 118% median opening parity as of our previous median report published Oct. 20, 2022. The median NPAL is 109%, which provides significant support given the high median rating.

Along with rising interest rates, issuance volume rose in the past year as MRB execution became more economic compared with other non-bond avenues such as to-be-announced market sales. The higher parity also resulted from slower single-family prepayment and more investment revenue.

High foreclosure frequency and high loss severity do not equal high losses

While our typical pool definition includes first-time homebuyers with higher loan-to-value (LTV) ratios at origination, which would be generally be considered risky, HFA loan performance is stronger relative to that of other U.S. mortgage loans, in our view. Therefore, our foreclosure frequency assumption for a typical pool of loans originated or purchased by HFAs is approximately 70% of those established in our U.S. RMBS criteria. This is a result of HFAs' robust borrower screening and third-party or internal servicing and monitoring, a focus on borrower education, lower mortgage interest rates that place a lesser debt burden on borrowers, and down payment and closing cost assistance programs.

The median foreclosure frequency for single-family whole loans is 22.3% of the loan pool balance, or about 1.5x the 'AAA' level base foreclosure frequency. Loan-level characteristics such as LTV, seasoning, loan type, property type, and delinquency status, and pool characteristics such as average FICO score, pool size, and other qualitative factors, affect foreclosure frequency. The median LTV cohort for single-family loans is 90% to 95%, median 30-plus-day delinquency rate (including foreclosures) is 5.3%, and the median FICO score is 691; these are the primary factors in the higher-than-base foreclosure frequency for these programs.

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The median weighted average loss severity for single-family whole loan programs is 56.8%, which is estimated based on LTV cohorts, market value decline assumptions, lost interest, and foreclosure costs. Foreclosure hard costs, which are state-specific, often exceed the program's market loss and interest loss. Our loss severity calculations consider our view of over- or undervaluation for each state and will tend to be higher for states that are overvalued given the potential for a larger correction in home prices. As noted in our report "U.S. Home Price Overvaluation Continues To Ease But Remains High," published Aug. 7, 2023, we believe overvaluation may have peaked, as our assessment decreased three percentage points to 14.6% at the nationwide level. According to the report, about a third of states experienced home price depreciation in first-quarter 2023, down from two-thirds in the fourth quarter.

In most HFAs' cases, including those where loss severity is higher than the median, recoveries from mortgage insurance and guarantees significantly offset higher foreclosure frequency and loss severity assumptions. Federal insurance or guarantees, including the Federal Housing Administration (57%), the U.S. Department of Agriculture's Rural Development (25%), and the Veterans Administration (9%), cover approximately 91% of single-family whole loan portfolios. Government insurance and guarantees have increased since the Great Recession. Compared with last year, the proportion of government insurance and guarantees increased by 20 percentage points. Likewise, the proportion of MBS to whole loans continues to rise, increasing to a median of 57% single-family program assets from a reported 39% last year.

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Delinquencies since the worst of the COVID-19 pandemic decline further to 10-year lows

Continuing the trend of the past few years, the median 30-plus-day single-family delinquency rate was 4.6%, not including foreclosures, as of second-quarter 2023. Seriously delinquent loans (90 days through foreclosure) equaled 1.1%, slightly lower than the 1.6% national rate for all loans as of second-quarter 2023, and significantly lower than the 3.7% Mortgage Bankers' Assn. national rate for FHA loans.

Under the new MRB criteria, we evaluate delinquencies in the following cohorts: 30-59 days (3.2%), 60-89 days (0.9%), 90-119 days (0.4%), and loans 120-plus days or in foreclosure (0.7%). While our data are not precisely comparable with previous report cards, the delinquency rates approximate a 10-year low. Much of this decline is due to loan modification during the pandemic, federal and state forbearance and workout programs and, as previously mentioned, a further shift to government enhancement or MBS.

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Multifamily Programs Utilize Program Equity In The Face Of Rising Interest Rates

Multifamily loan portfolios' median opening A/L parity declined for the third consecutive year to 123%, from 133% in 2022 and 143% in 2021. NPAL also declined, to 117% from 120%. While the decline in parity in the past two years is material, HFA multifamily programs have built wealth since the Great Recession and maintain very high overcollateralization when compared with our loss assumptions and actual losses. Under the new MRB criteria, we took positive rating actions on two multifamily programs: the Michigan State Housing Development Authority's rental housing revenue bonds (to 'AA+' from 'AA') and the Wisconsin Housing and Economic Development Authority's housing revenue bonds (to 'AA+' from 'AA'). In addition, outside of the criteria change, MassHousing's housing and multifamily program saw a one-notch positive rating action to 'AA+' more as a result of improved credit quality than of the criteria application, with more than 80% of the loan portfolio benefiting from federal insurance and tax credits. Last, we assigned a rating to California Housing Finance Agency's affordable housing revenue bonds (AA), a new program.

The median rating for multifamily programs remains 'AA+'.

Multifamily loan portfolio credit quality is largely neutral

HFA multifamily loan credit quality remained on solid ground, leading to minimal delinquencies. The median base credit loss multiplier is 1.1x, meaning that HFA loans have only slightly higher-than-typical risks--with 1.0x being typical. The median proportion of lower-than-typical risk loans is 25%, which includes loans with strong performance and debt service coverage, low LTVs, high occupancy, and typical loan structures. The median percentage of typical risk loans in a portfolio is 32%, and the median of higher-than-typical risk loans (those that are underperforming or with low debt service coverage, non-reporting loans, watch-list loans, and loans with low or declining occupancy and high LTVs) is 36%.

Insurance and credit enhancement mitigate losses

The median credit loss for multifamily programs is 9.4% under the new criteria. The median recovery rate from insurance is about 20%, much lower than that for single-family portfolios. About half of the loan portfolios in HFA programs are uninsured, with the other half benefiting from insurance from NYC Residential Mortgage Insurance Corp., FHA, State of New York Mortgage Agency, and much smaller proportions covered by Fannie Mae, Freddie Mac, the U.S. Department of Agriculture, and the U.S. Small Business Administration. While half of the loan portfolios are uninsured, the vast majority of loans benefit from federal and state subsidies and/or low-income housing tax credits. In our view, the presence of these federal and state programs bolsters loan portfolio credit quality.

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Table 2

Challenging Market Conditions Are No Match For HFAs

Higher-for-longer interest rates and high home prices will continue to pose challenges for MRB programs. In our view, HFAs are nimble and have an arsenal of tools to aid in volatile market conditions. We anticipate more variable-rate issuance, as HFAs have strong access to external liquidity. On average, single-family and hybrid programs have 12% variable-rate debt, and multifamily programs 15%. However, the median percentage of such debt for all programs is zero, demonstrating additional capacity. In comparison, about a decade ago, an HFA's variable-rate debt exposure commonly hovered at 25% to 30%. We also believe that the equity that HFAs have built into their programs and on their balance sheets will help absorb additional risk, add subsidy, or write down financing costs if need be. Expansion of down payment assistance initiatives has spurred unprecedented growth in single-family production, which we anticipate will continue as home prices remain elevated.

For more information, see our report "Turning Houses Into Homes: U.S. HFAs Evolve Down Payment Assistance Programs Amid Changing Housing Market Dynamics," Sept. 14, 2023.

Appendix: MRB Program Information

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Table 4  |  View Expanded Table

Table 5  |  View Expanded Table

Table 6  |  View Expanded Table

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Related Criteria And Research

Related Criteria

Methodology For Rating U.S. Public Finance Mortgage Revenue Bond Programs, Oct. 10, 2022

Related Research

• Turning Houses Into Homes: U.S. HFAs Evolve Down Payment Assistance Programs Amid Changing Housing Market Dynamics, Sept. 14, 2023
• U.S. Home Price Overvaluation Continues To Ease But Remains High, Aug. 7, 2023
• Economic Outlook U.S. Q3 2023: A Sticky Slowdown Means Higher For Longer, June 26, 2023
• U.S. Mortgage Revenue Bond Program Rating Actions In Line With Expectations After Application Of Updated Criteria, May 18, 2023