WASHINGTON, March 7 The credit quality of U.S.
state finance agencies is still at risk from low mortgage rates
and home prices, high unemployment and uncertainty over federal
policy, Moody's Investors Service said on Thursday.
Despite signs of life in the housing market, the ratings
agency is keeping its negative outlook for the entire state
housing finance agency sector, it added.
The agencies "weathered the recession well," Moody's said.
According to the credit rater, the agencies maintained a
steady median asset-to-debt ratio of approximately 1.2
throughout the 2007-09 recession, and their median profitability
has now stabilized between 8 percent and 9 percent over the last
three years after dropping in 2007.
"If the economic recovery continues along the expected
timetable and the economy experiences lower unemployment, higher
interest rates and higher conventional mortgage rates in 2014,
housing finance agencies will benefit," it said.
"However, given that the economic recovery remains shaky
and may proceed slowly in the near term, we believe that the
negative outlook remains appropriate for the next 12 to 18
months," it added.
The agencies are charged with creating affordable housing,
and their primary financing tool is issuing municipal bonds.
When the credit freeze descended on the bond market in late
2008, the agencies struggled to provide financial help to
homeowners who had been hit by the housing market downturn.
The housing sector has been steadily improving of late,
Moody's said. But now the main concern is that the unemployment
rate is above 6.5 percent.
When unemployment is high borrowers are more likely to fall
delinquent on loans from the finance agencies and the rating
agency said it does not expect the country's jobless rate to dip
below 6.5 percent through 2014.
Unemployment could also fuel foreclosures. As housing prices
remain below their peak levels, the agencies may not be able to
sell foreclosed homes at prices to recoup their losses.
Meanwhile, the Federal Reserve is indicating it will keep
its federal funds rate low until unemployment is below 6.5
percent, making it hard for the agencies to achieve investment
returns that they can use to make loans.
At the same time, the central bank is buying agency
mortgage-backed securities, keeping mortgage rates depressed,
and Moody's expects housing agencies "to struggle to issue bonds
at rates low enough to finance competitive mortgate loans."
Uncertainty from the federal government could also hurt the
agencies. It is still weighing whether to change or eliminate
Fannie Mae and Freddie Mac and to modify the role of the Federal
Housing Administration. In the same light, Congress and
President Barack Obama have discussed limiting the tax exemption
for interest paid on municipal bonds, which could result in
higher borrowing costs for the agencies.
Moody's is also looking at the banks and mortgages insurers
who act as counterparies to the agencies and who also have
negative outlooks, and at the agencies who have issued
variable-rate demand obligations with high liquidity fees. In
some cases, the fees have risen since the bonds were first
issued, putting pressure on the agencies.