October 1, 2010
U.S. Public Finance Report Card:
HFA Multifamily Bond Indentures
Show Improvement Despite Sluggish
Recovery In The U.S. Economy
Primary Credit Analyst:
Mikiyon Alexander, New York (1) 212-438-2083; [email protected]
Secondary Credit Analyst:
Valerie White, New York (1) 212-438-2078; [email protected]
Table Of Contents
Commentary/Key Trends
Monitoring Delinquency And HFAs' Reserve Provisions For Loan Losses
Financial Performance Remains Solid, With Low Declines In
Overcollateralization Ratios
Rating Action
New Issue Bond Program And Temporary Credit And Liquidity Program
Issuer Review
Contact Information
www.standardandpoors.com/ratingsdirect
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U.S. Public Finance Report Card:
HFA Multifamily Bond Indentures Show
Improvement Despite Sluggish Recovery In The
U.S. Economy
Commentary/Key Trends
Standard & Poor's Ratings Services' ratings on housing finance agencies' (HFAs) multifamily bonds continue to
remain, in our opinion, strong as housing market pressures subside. Despite the most recent market pressures, HFA
multifamily parity bond indentures have remained, in our opinion, strong, weathering the market conditions with
great stability and minor changes in overcollateralization levels. In 2008 and 2009, HFAs experienced turbulence
with counterparty risk, which lead to failed remarketings and higher borrowing cost. Multifamily issuance was
down generally in 2009. Standard & Poor's believes this can be attributed to the affordability of bond rates and the
lack of equity via low-income housing tax credits (LIHTC), which are generally a source of financings for these
programs. During 2008 and 2009, we saw the LIHTC market dissipate, but we believe it is slowly returning.
Although the Tax Credit Assistance Program yielded HFAs marginal relief in 2009, it allowed for transactions that
were stalled to obtain financing by way of the tax credit exchange program. For nearly 18 months, we saw supply of
new LIHTC decline in demand from investors as prices for the credits sharply decreased. For some properties and
some locations, we saw the market entirely disappear. However, despite the lack of new issuance, Standard &
Poor's rated HFAs have sustained growth in profitability for their multifamily programs as measured by their
overcollateralization ratios.
We reviewed all of our rated multifamily bonds to assess the impact of the decline in overall multifamily
development and the performance of HFA loan portfolios. The factor that favors multifamily loans, in our opinion,
is that these loans provide stability to HFAs' portfolios by reducing prepayment risk, as developers are less likely to
refinance before the expiration of low income housing tax credits associated with many transactions. Also, many
HFAs generate multifamily loans that have an initial 10-year lockout period during which prepayments are not
permitted. In addition, many HFAs are conduit issuers for debt secured by loans from eligible borrowers'
multifamily projects. HFAs typically receive issuer fees, which can be sizable depending on the par value of
issuances.
From 2009 to date, Standard & Poor's continues to monitor the variable-rate debt exposure and the potential risk
of all rated HFA multifamily programs. The HFAs' multifamily bonds currently have what we consider significant
cash reserves and excess assets to withstand our stress scenarios (see chart 1).
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Chart 1
Standard & Poor's rates six of the 15 active HFA multifamily programs pool financings based primarily on the
strength of the multifamily mortgage collateral. Another seven programs are rated based on the general obligation
(GO) pledge of a rated HFA (see table 1) and not on the quality of the underlying loans. The ratings on the bonds
issued under these parity bond indentures are a reflection of what we consider the very strong credit quality of the
HFAs', as all the bonds issued by the HFAs, but for two, are rated in the 'AA' category. For these indentures,
projected losses that can not be supported by program equity within the indenture are applied as capital exposure to
the HFAs unrestricted net assets as part of Standard & Poor's analysis of the HFA's issuer credit rating (ICR). The
remaining two active resolutions pursuant to which HFAs issue bonds are combined single-family and multifamily
pools. In general, HFAs' multifamily programs have in our view demonstrated strong and stable credit quality.
Monitoring Delinquency And HFAs' Reserve Provisions For Loan Losses
Standard & Poor's believes that the multifamily loan portfolios backing most HFAs' bonds have experienced
minimal delinquencies and few actual losses. For the most part, HFA loan portfolios have, in our view, performed
well, with strong debt service coverage, loan-to-value ratios, and high occupancy levels. The loan losses experienced
by some HFAs have, in our opinion, been caused primarily by factors such as rent freezes in the Section 8 program
or discontinued subsidy appropriations by the state. To mitigate these losses, HFAs have created large reserve
provisions. They have also managed risk through what we consider active oversight, strong asset management, and
prudent financial management of their multifamily loan programs.
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U.S. Public Finance Report Card: HFA Multifamily Bond Indentures Show Improvement Despite Sluggish Recovery
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Table 1
Rating Characteristics Of Bonds Issued Under HFA Multifamily Pooled Financings
Multifamily indenture
Rating
Rating derived from GO pledge of the rated HFA
Michigan State Housing Development Authority--Rental Housing
Revenue Bonds
AA/ Stable
117
Minnesota Housing Finance Agency--Rental Housing Bonds
AA+/Positive
151
Pennsylvania Housing Finance Agency–- Multifamily Bonds
AA/ Stable
113
Virginia Housing Development Authority--Rental Housing Bonds
AA+/Stable
119
Wisconsin Housing and Economic Development Authority--Housing
Revenue Bonds
AA/ Stable
143
Illinois Housing Development Authority--Housing Bonds
A+/Stable
127
California Housing Finance Agency--Multifamily Housing Revenue
Bonds III
A/Negative
108
Combined single-family and multifamily Pools
Connecticut Housing Finance Authority-–Housing Mortgage Finance
Program Bonds
AAA/Stable
113
Maine State Housing Authority--Mortgage Purchase Program Bonds
AA+/Stable
116
Rating based on the strength of the multifamily mortgage collateral
Colorado Housing & Finance Authority--Multifamily Housing Project
AAA, AA, A+ /Stable*
Bonds
Asset-to-liability parity (%)
159 (class I), 106 (class II), 103 (class
III)
Massachusetts Housing Finance Agency (MassHousing)--Housing Bond
Program
AA-/Stable
113
New Jersey Housing and Mortgage Finance Agency--Housing Revenue
Bonds
A+/Stable
104
New York City Housing Development Corp.--Housing Revenue Bonds
AA/Stable
120
Rhode Island Housing and Mortgage Finance Corp.--Rental Housing
Program Bonds
A+/Stable
113
Vermont Housing Finance Authority--Multifamily Mortgage Bonds
A+/Stable
114
*Multiple ratings represent different classes of bonds within the same indenture.
Financial Performance Remains Solid, With Low Declines In Overcollateralization
Ratios
Standard & Poor's closely follows the ratings of all HFA bonds to assess overcollateralization ratios. Our analysis
shows that the overcollateralization ratios for outstanding multifamily parity indentures have increased in most
cases over the past year. About 58% reported a rise in their overcollateralization levels compared to 39% the year
before (see chart 2). Currently, 21% of multifamily programs reviewed by Standard & Poor's did not see a change
in their overcollateralization levels, which is lower than the 23% in the previous year. Although 21% of these
programs showed a decline in their overcollateralization ratios, the declines are lower than the previous year of
38%. Standard & Poor's has not taken negative rating action on the bonds issued under the 21% of parity
indentures as we believe the rated bonds issued under HFA multifamily programs have additional strengths to
support their ratings.
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Chart 2
Rating Action
To date, the bonds issued under one indenture have seen negative rating action. On March 31, 2010, Standard &
Poor's removed its issuer credit rating (ICR) on California Housing Finance Agency's (CalHFA) from CreditWatch
with negative implications, where it had been placed on July 8, 2009. On the same date, Standard & Poor's lowered
its ICR on CalHFA to 'A' from 'AA-'. Finally, Standard & Poor's lowered its long-term rating and underlying rating
(SPUR) on CalHFA's outstanding GO debt to 'A' from 'AA-'. The outlook is currently negative. The rating action
for the ICR directly affected the multifamily bond indenture due to its GO pledge to the program.
Table 2
Recent Rating/Outlook/CreditWatch Actions
Issuer
California HFA
To
A/Neg
From
AA-/WatchNeg
Date
3/31/2010
Reason
S&P removed its issuer credit rating on California Housing Finance Agency
from CreditWatch with negative implications, where it had been placed on July
8, 2009. S&P also lowered its ICR on CalHFA to 'A' from 'AA-'. Finally, S&P
lowered its long-term rating and underlying rating (SPUR) on CalHFA's
outstanding GO debt to 'A' from 'AA-'. The outlook is negative.
New Issue Bond Program And Temporary Credit And Liquidity Program
In 2009, HFAs took advantage of the New Issue Bond Program (NIBP) and Temporary Credit and Liquidity
Program (TCLP) as a means to enter the market and serve their states via their mission by obtaining affordable
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rates. The program allowed HFAs to issue bonds and sell a portion to the Treasury. In addition, the TCLP program
allowed HFAs to lower their counterparty risk via temporary credit and liquidity enhancements from Fannie Mae
and Freddie Mac. Standard & Poor's rated $768 million of NIBP debt and $803 million of TCLP substitutions (see
table 3).
Table 3
NIBP And TCLP Participation
Issuer
Rating
Debt par amount (mil. $)
New multifamily parity NIBP debt
Connecticut Housing Finance Agency
AAA
27.61
Illinois Housig Development Authority
AAA
184.00
Utah Housing Corporation
AAA
32.00
Nevada Housing Division
AAA
25.00
Existing multifamily parity debt with NIBP debt
New York Housing Development Corporation AA
500.00
TCLP debt
California Housing Finance Authority
AAA/A-1+
775.00
Colorado Housing and Finance Authority
AAA/A-1+
Total NIBP and TCLP ratings
28.00
1,571.61
Standard & Poor's believes that HFA multifamily parity indentures continue to build strength. We believe this is
illustrated by the quality of collateral, demand for housing, the strong reserve levels, and strong management.
Standard & Poor's believes that loan portfolios have performed extremely well, as evidenced by high DSC and
occupancy levels, along with low delinquency rates and loan-to-value ratios. In rating HFA bonds, we consider the
varying reserve levels that may be required by HFAs as a result of the different loan products that they include in
their pools, especially as HFAs move further away from subsidized loans. If issuance remains stagnant for these
programs, Standard & Poor's believes that the wealth of the rated programs is not in jeopardy; however, at some
point, profitability levels could stabilize. Nevertheless, we believe that, based on the history of multifamily
indentures, HFAs should be able to absorb these risks and maintain their credit strength.
Issuer Review
Table 4
Issuer/Indenture/Rating/Rating/Comments
Current
Analyst
parity (%)
California Housing Finance Agency (Cal HFA)--Multifamily Housing Revenue Bonds III (A/Negative)
As of June 30, 2009, Cal HFA’s multifamily house revenue bonds III indenture had $1.16 billion of bonds outstanding, and the 108
loans represent 10% of Cal HFA's total asset base. Loans are primarily uninsured and unsubsidized, with 36% of loans
having either Section 8 or HUD risk-sharing security. In our view, the portfolio is perfoming well, with service loans achieving
a 1.44x debt service coverage ratio on June 30, 2009. Any real estate exposure associated with the multifamily loans is
factored into the agency's ICR (A/Negative). As of March 31, 2010, approximately 62% of the bonds are variable rate, of
which 91% is swapped to fixed rate.
Karen
Fitzgerald
Colorado Housing and Finance Authority (Colo HFA)--Multifamily Housing Project Bonds (AAA/Stable, AA/Stable, A+/Stable)
The largest of Colorado's multifamily indentures, the resolution consists of more than $750 million in outstanding loans that 159 (class I), Lawrence
are 27% FHA risk-share loans, 3% other FHA loans, 42% uninsured loans, 20% military housing loans, and 8% loan
106 (class II), witte
guarantees. Class I and II bonds are supported by collateral consisting of multifamily loans, business loans, federally
103 (class III)
guaranteed loans, and cash and investments. Approximately 85% of bonds under indenture are variable rate, and 72% of the
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bonds are variable rate hegded with interest rate swaps. As of July 1, 2010, just 1.9% of the outstanding loan balance was
60 or more days delinquent.
Connecticut Housing Finance Authority (CHFA)-–Housing Mortgage Finance Program Bonds (AAA/Stable)
This resolution combines multifamily (16%) loans and single-family (84%) loans. The multifamily portfolio is composed of
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projects with FHA insurance, Section 8 subsidies, Section 236 subsidies, as well as uninsured projects. As of Dec. 31, 2008,
the authority had three multifamily developments which were delinquent, with mortgage principal of $10.662 million. In
addition, the authority had five multifamily developments on its watch list of potentially problem loans, with a total principle
balance of $7.731 million. As of Dec. 31, 2009, approximately 23% of the bonds under the resolution were variable rate.
Illinois Housing Development Authority (IHDA)--Housing Bonds (A+/Stable)
IHDA’s active multifamily indenture has $427 million of outstanding bonds as of July 1, 2010. The resolution's 'A+' SPUR is
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derived directly from the ICR and the credit quality of the pledged collateral. It finances multifamily mortgage loans for 99
developments. Approximately 71.5% of outstanding mortgage loans receive Section 8 subsidies, 6.7% receive Section 236
subsidies, 12.7% are FHA Risk Share insured, 1.3% are FHA-insured, and 7.8% are unsubsidized. Occupancy for
developments under the housing bond program has averaged approximately 97% in 2010. Four loans representing 0.78% of
outstanding loan principal were 60 days or more delinquent as of July 1, 2010.
Maine State Housing Authority (MSHA)--Mortgage Purchase Program Bonds (AA+/Stable)
The mortgage portfolio consists of 28% multifamily loans and 72% single-family loans, with $1.3 billion in bonds
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outstanding. Approximately 30% of the multifamily portfolio consists of projects that receive either Section 8 or 236
subsidies, and the remaining portfolio is unsubsidized. As of Dec. 30, 2009, additional security for the bonds is provided by
the housing reserve fund, funded at more than $170 million, approximately $21 million greater than the amount required by
the general resolution, and the bondholder reserve fund, funded at approximately $8 million. Both funds can be used to the
extent that there are deficiencies in cash flow needed to pay debt service on the bonds. The multifamily portfolio contains
635 loans, of which 178 receive full or partial Section 8 assistance. The remainder consists of conventional loans. As of Dec.
31, 2009, there were 16 multifamily mortgage loans that were more than 90 days' delinquent.
Massachusetts Housing Finance Agency (MassHousing)--Housing Bond Program (AA-/Stable)
This program serves as MassHousing's major multifamily financing vehicle. As of Dec. 31, 2009, the outstanding balance of 113
loans was more than $1.4 billion, supporting more than 46,000 units. These loans are supported by federal or state
subsidies, Fannie Mae or Ginnie Mae enhancements, or FHA insurance. Subordination is provided by program equity
available under the resolution, which grows rapidly after bond issuance. Current loan performance is, in our opinion, strong,
with average vacancy rate at 2.5% and $1.1 million delinquent as of Dec. 31, 2009, representing only 0.001% of outstanding
loan principal. Currently, only 8% of the resolution is variable-rate debt. The majority of the variable-rate debt is hedged with
interest rate swaps from highly rated counterparties.
Michigan State Housing Development Authority (MSHDA)--Rental Housing Revenue Bonds (AA/Stable)
This resolution had roughly $1.3 billion in bonds outstanding as of June 30, 2009. Approximately 49% of the rental housing 117
revenue bonds outstanding are variable rate, and about 47% of the total debt is hedged with fixed-to-floating rate swaps. As
of June 30, 2009, the resolution had $1.2 million in multifamily loans outstanding, of which about 29% was Section 8, 12%
was Section 236, and the remainder was unenhanced. Overall, the authority has experienced low delinquency rates for
multifamily resolutions. As of June 30, 2009, 22 loans were delinquent; however, MSHDA expects the loans to be brought
current in their mortgage payments via refinancing or resale. This portfolio continues to shift toward unsubsidized loans as
the older, federally subsidized loans prepay, and new loans originated are unsubsidized, thereby increasing the risk of
default. MSHDA has experienced low delinquency rates. The resolution is supported by the GO pledge of MSHDA.
Minnesota Housing Finance Agency (MHFA)--Rental Housing Bonds (AA+/Positive)
This indenture had $174 million of bonds outstanding and a total of 180 loans as of Dec. 31, 2008. The agency has an
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extensive multifamily portfolio of 330 projects, with about 45% of outstanding loans supported by full or partial Section 8 or
Section 236 subsidies from HUD. The loans are performing well, in our opinion, with only one loan in default (less than
0.05% of outstanding principal), and no loans are held as real estate owned as of Dec. 31, 2008. Currently, all debt under the
program is fixed rate. The resolution also has the moral obligation pledge of the state of Minnesota (AAA), but is rated based
on the agency's GO pledge (AA+/Positive) and the quality of the underlying assets. Cash flows with a basis date of June 30,
2008, reflect parity of nearly 152.7 as of Feb. 1, 2009, equal to program equity of more than $88 million
New Jersey Housing and Mortgage Finance Agency (NJHMFA)--Housing Revenue Bonds (A+/Stable)
NJMFA’s outstanding multifamily bonds are issued under two resolutions (1995 and 2005), of which the 2005 resolution is
currently active. Both resolutions have SPURs of ‘A+'. As of the May 1, 2010, the 2005 resolution had approximately $531
million in assets and $481 million of bonds outstanding. Approximately 62% of this debt is variable rate, and about 38% of
its floating-rate exposure is hedged with interest rate swaps and interest rate caps. As of September 2010 under the 2005
resolution, the breakdown in loans under the resolution is: unenhanced mortgage at 52.5%, Section 8 and Section 236
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Moraa
Andima
Steve
Tencer
Edward
Ubeira
Moraa
Andima
Mikiyon
Alexander
Edward
Ubeira
Steve
Tencer
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assisted at 33.6%; and FHA insured at 13.9%. Other than normal turnover, occupancy rates as of March 31, 2010, were
approximately 95%. As of that date, there were five properties with an aggregate principal balance of approximately $4.5
million that were in arrears.
New York City Housing Development Corp. (NYCHDC)--Housing Revenue Bonds (AA/Stable)
The overall mortgage portfolio is diverse and consists of mortgages secured and/or subsidized by federal, state, and local
programs. Collateral includes FHA-insured mortgage loans, Ginnie Mae-backed loans, SONYMA-insured loans,
REMIC-insured loans, Section 236-subsidized mortgage loans, and unenhanced mortgage loans. As of Jan. 31 2010, there
were 958 mortgages under the resolution with an outstanding balance of more than $2.7 billion, of which 877 were
permanent mortgage loans totaling $1.9 billion, and 81 were construction mortgage loans totaling more than $757 million.
The portfolio is, in our opinion, good physical condition, based on inspection ratings performed by NYCHDC every
one-to-three years on the loan type. As of Jan. 31, 2010, the physical condition of the inspected developments, based upon
the aggregate outstanding principal balance of permanent mortgage loans, was, in our opinion, satisfactory or better for
approximately 91% of the loans.
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Pennsylvania Housing Finance Agency (PHFA) – Multifamily Bonds (AA/Stable)
Loans under PHFA's multifamily bond programs continue to perform well, in our opinion. Average occupancy rates and debt 113
service coverage levels are 98% and 1.10x, respectively. The high occupancy rates are due to PHFA's conservative
underwriting policies in combination with their strong management and oversight practices. The portfolio consists of 141
loans that have project-based Section 8 subsidies, and 119 loans that are predominantly unsubsidized, but also have a small
percentage of portable Section 8 subsidies. Three of the loans (2.5%) are not current, and PHFA is working with the project
owners to restructure the loans. The agency acts as servicer for 99% of the portfolio. The agency has not issued debt to
finance any multifamily loans in either of the last two fiscal years. The mortgage loan balance declined 3.6% to $542 million
as of June 30, 2009, from $562 million one year prior. All of the multifamily debt is backed by the GO pledge of the agency.
Rhode Island Housing and Mortgage Finance Corp. (RIHMFC)--Rental Housing Program Bonds (A+/Stable)
The housing bond loan portfolio contains loans related to a total of 73 projects (several projects have second mortgages from 113
the corporation). The majority (currently 79%) of the loans receives the benefit of Section 8 rental subsidies and/or state of
Rhode Island rental subsidies, and 86% of those loans have both FHA risk-share insurance and Section 8 subsidies. Several
projects have also been financed with 4% low-income housing tax credit equity, and four loans benefit from Section 236
mortgage assistance. Of the existing loans in the portfolio, 15 loans (representing approximately15% of the portfolio) are
servicing debt at less than 1.05x maximum annual debt service, according to data supplied by the corporation. Thirteen of
these loans have less than 1.0x coverage. When determining potential losses under the resolution, Standard & Poor's
assumes that all of these loans will default. Even given this conservative assumption, the resolution has sufficient excess
assets to cover expected losses. Additionally
Vermont Housing Finance Agency--Multifamily Mortgage Bonds (A+/Stable)
The bonds were issued pursuant to the agency's multifamily mortgage bond resolution adopted in 1977. A consolidated cash 114
flow certificate with a June 30, 2009, basis date indicates that there are approximately $78 million in bonds outstanding
under this parity resolution as of Feb. 15, 2010. The consolidated cash flow certificate for the resolution indicates an opening
asset-to-liability parity ratio of 113.861%, with opening excess assets of $12.264 million as of June 30, 2009. Loans financed
pursuant to the resolution are cross-collateralized, and all loan revenues may be used to pay off any series of bonds under
the resolution. The overall portfolio consists of seasoned loans with an average debt service coverage ratio of 1.08x.
Approximately 43% of the loans have debt service coverages of less than 1x according to information provided by the agenc.
Approximately 28% of the loans have debt service coverages of less than 1.0x according to information provided by the
agency. These loans represent about 17% o
Virginia Housing Development Authority (VHDA)--Rental Housing Bonds (AA+/Stable)
This resolution, which was adopted on March 24, 1999, had $2.5 billion of bonds outstanding as of June 30, 2009. As of
119
June 30, 2009, VHDA had multifamily mortgage loans outstanding under the rental housing bond resolution with an
aggregate principal balance of approximately $2.7 billion, including construction loans. Consolidated cash flow runs for the
resolution provided to Standard & Poor's indicated strong asset-to-liability parity of 119% as of July 1, 2009, with growth of
one-to-two percentage points per year during the next three years; thereafter, the parity is expected to grow even more
quickly. During the year, the agency has experienced several delinquencies, including several loans in the rental housing
bonds resolution. These loans represent less than two percent of bonds outstanding under the resolution, and most of the
delinquencies have been worked out with the borrower, reflecting the agency's objective to avoid foreclosure and instead
seek mutually beneficial workout agreements. VHDA's polic
Wisconsin Housing and Economic Development Authority (WHEDA)--Housing Revenue Bonds (AA/Stable)
This indenture began in 1974; 40% of the principal amount of mortgage loans receive support in the form of federal Section 143
8 assistance or Section 236 interest rate subsidy. The remaining 60% of mortgages are for tax credit and conventional
multifamily loans. The loans under the resolution are generally performing well, in our opinion, although more than 18% of
the developments are performing at debt service coverage levels below 1x as of Sept. 30, 2009. This is a slight deterioration
Standard & Poor’s | RatingsDirect on the Global Credit Portal | October 1, 2010
Edward
Ubeira
Steve
Tencer
Moraa
Andima
Edward
Ubeira
Moraa
Andima
Moraa
Andima
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in pool performance over the last year, as over 16% of the developments had debt service coverage levels below 1x as of
March 31, 2008. Since the resolution began, cumulative losses on delinquent and foreclosed loans have been minimal due to
the careful and proactive oversight provided by the authority. The loans in the portfolio are generally small and benefit from
the loss mitigation efforts of WHEDA. Currently, 30% of the debt outstanding under the multifamily resolution will be
variable rate, with almost 65% of that debt hed
*Multiple ratings represent different classes of bonds within the same indenture.
Contact Information
Table 5
Contacts
Credit Analyst
Location
Mikiyon Alexander New York
Phone
E-mail
212-438-2083 [email protected]
Moraa Andima
New York
212-438-2734 [email protected]
Lawrence Witte
San Francisco 415-371-5037 [email protected]
Steve Tencer
New York
212-438-2104 [email protected]
Edward Ubiera
New York
212-438-2034 [email protected]
Karen Fitzgerald
San Francisco 415-371-5023 [email protected]
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