Foreclosures, Floating-Rate Debt Will Weigh on State Housing, Moody's Says

Foreclosures, unemployment and the amount of floating-rated debt are among the most critical factors in determining credit ratings for state-housing finance agencies, Moody’s Investors Service said in a report.

The report, published today, is the first of three grading “roadmaps” for U.S. municipal bond issuers. Housing agencies still face challenges even though the U.S. Treasury implemented two programs last year allowing them to offer mortgages at rates competitive with private loans and lower the cost of supporting floating-rate bonds, the report said. Moody’s is maintaining a “negative” outlook on the area.

“This year we’re much more concerned about the loan performance of the state HFA single-family loans because we’ve seen an increase in delinquencies,” said Florence Zeman, a senior vice president at Moody’s who wrote the report, in an interview today. “We’re a lot more concerned about the asset side, the loans, than the liability side.”

Moody’s expects the loan portfolios to deteriorate further in the next 12 to 18 months as U.S. unemployment, currently at 9.5 percent, stays elevated and home-price declines persist. The rating company, which ranks $55 billion of state-housing agency single-family mortgage bonds, expects unemployment to peak at 10.18 percent.

The weighted average of such loans in foreclosure rose to 1.87 percent as of Dec. 31, from 1.12 percent the previous year. Loans delinquent more than 90 days measured 2.92 percent, Moody’s said in the report.

Bond Insurance

Housing agencies will also be dogged by problems related to floating-rate debt. Many borrowers who converted their adjustable-rate bonds to fixed-rate using derivatives known as interest-rate swaps have had to pay banks billions of dollars to terminate the agreements when bond insurers guaranteeing the debt lost their top credit ratings.

Agencies that maintain their floating-rate bond portfolios are also having to pay more to banks for acting as a buyer of last resort in the event the securities can’t be resold to investors, Moody’s said. Fannie Mae and Freddie Mac, which have provided temporary credit lines to the state agencies, are raising their fees 0.25 percentage point, Zeman said.

“Liquidity fees in general have not gone down sufficiently to make other commercial alternatives advantageous,” she said.

To contact the reporter on this story: Martin Z. Braun in New York at

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