S&P Viewpoint

The HFA single-family and multifamily indentures contain reserves that are sufficient to maintain adequate equity for foreclosure rates much higher than HFAs are experiencing. For example, a 'AA' rated indenture in a large state should be able to withstand foreclosure of 42% of the loans. Over-collateralization of assets versus bonds tends to be in the 5% to 15% range, which when combined with mortgage insurance and guarantees would enable an indenture to pay bonds should the foreclosure rate reach at least 42%, as described in the above example. The minimal impact on individual resolutions should result in a similar effect on HFA ICRs. HFA audits typically have June 30 dates, therefore current information is not available, and these figures include both single-family and multifamily loans. Comparing 2006 to 2005 figures for non-performing assets (NPA) show that eight HFAs had declining NPAs while eight had rising NPAs. The average NPA rate declined during the year. There is no clear trend from these numbers to indicate that HFAs are facing any danger from foreclosures.

The lending practices of HFAs seem to have insulated them from the direct risks of subprime lending. Offering traditional products to qualified homeowners differs from the techniques of subprime lenders, who may compete with HFAs for the same borrowers. HFAs lost ground in terms of volume to the conventional mortgage market by not offering numerous loan options to less creditworthy borrowers. But in doing so, HFAs maintained a low to moderate risk profile that should limit any fallout from subprime lending.

Homebuyer education also provided the benefit of causing potential homeowners to pause, and even decide not to make purchases. During the refinancing boom of the early part of the decade, mortgage brokers and lenders experienced a large increase in volume. HFAs were often unable to compete and lost loans through prepayment. From 2002 to 2004, the 25 HFAs with ICRs lost $5.3 billion in loans, more than 10% of their portfolio. Meanwhile, loan volume increased in the broader market, and these entities hired additional staff and offered an array of products to generate revenue.

HFAs continued to offer 30-year fixed-rate mortgages, using conventional insurance and guarantors like FHA and VA, or PMI (private mortgage insurance) loans using underwriting guidelines from Fannie Mae and Freddie Mac. Some HFAs expanded their product lines, but the new offerings did not involve the risk of many subprime loans. California Housing Finance Agency has a loan that pays interest only during the first five years, but the rate is fixed at closing for the entire term, which is extended to 35 years to permit an amortization period of 30 years. Wyoming Community Development Authority has long offered loans to so-called subprime borrowers, but these borrowers must still provide full documentation verifying employment and income. The only difference is that these borrowers can have a slightly lower FICO score. Delinquency on these loans in June 2006 was 4.8%, not much higher than the 3.8% for the indenture that holds the loans.

Standard & Poor's rates 32 groups of single family bonds through which HFAs periodically issue additional debt that have unsecured whole loans as collateral, and 25 ICRs on HFAs. These programs generally hold about $500 million to $1 billion in loans, and the largest indenture, California Housing Finance Agency's home mortgage revenue bonds, contains more than $4 billion in loans. Information from June 2006 to Feb 1, 2007 on seven diverse single-family programs indicates that the percent of loans that were delinquent at least 60 days or in foreclosure -- nonperforming assets (NPAs) -- ranged from 0.8% to 5.7%.

The average NPA was 1.97% and the highest rate from Feb. 1, 2007 for Colorado Housing and Finance Authority’s (CHFA) single-family mortgage bond indenture represented only a slight rise from 5.3% in August 2006. CHFA loans compare favorably with those of the state when adjusted for loan insurance type. About 80% of CHFA loans are insured through FHA, which has higher delinquency and foreclosure rates than other loans. If Colorado had the same concentration of FHA-insured mortgages, nearly 7% of its loans would be NPAs.

Actual losses are much lower than NPAs. Only 1.1% of the loans in the CHFA indenture have gone into foreclosure since it opened in 2000. In recent years, HFAs have been able to gain on the sale of foreclosed properties reducing accumulated losses.

Why would HFAs emerge relatively unaffected from subprime lending, while subprime lenders serving some of the same clientele experience a number of negative outcomes, including bankruptcy? An overriding factor is a difference in motivation. The interaction between borrowers and HFAs is more relationship-based, whereas for subprime lenders, the relationship is focused more on producing loans, which are then sold in the secondary mortgage market. HFAs hold on to their loans through maturity.

HFAs see their primary motive as increasing housing affordability, so that their activities before and after the loan improve a borrower's chances to repay it. HFAs offer homebuyer education classes that vary in rigor and length, but give an uninitiated customer background that helps prepare them to purchase a home. Following the closing on the loan, HFAs monitor loan repayment, sometimes even servicing their own loans. HFAs also institute loss mitigation to help delinquent borrowers become current on their loans and avoid foreclosure. Of course, not all of these safeguards will be effective in every case, but they differ dramatically from more common lending practices.

Several HFAs are even offering to assist borrowers in danger of defaulting on subprime loans. Colorado Housing and Finance Authority recently initiated a program called HomeStretch, which is a $50 million pilot program with about $4 million in reservations, although no loans have closed yet. The loans will be 40-year, fixed-rate loans that CHFA intends to sell to Fannie Mae, but the HFA will retain the servicing to generate fee income without assuming any risk. The loans will be underwritten to Fannie Mae guidelines and will be conventionally insured. The PMI insurance will also include six months of unemployment insurance for borrowers in the event they lose their jobs. Borrowers are not eligible if they have previously refinanced and taken cash out as part of the refinancing. The program requires a $500 deposit by borrowers, who must also take a homebuyer education class.