Overview

Ratings Are Stable At High Investment-Grade

S&P Global Ratings did not make any rating or outlook changes on MRB programs in the past 12 months, reflecting stability across all 74 ratings, and the median rating remaining unchanged from 2023 at 'AA+'. All MRB program rating outlooks are stable, the same as in 2023. In the past year we withdrew the rating on one program--New Mexico Mortgage Finance Authority single-family general indenture--at the issuer's request.

Chart 1 shows MRB program rating distribution in 2024 as the percentage breakdown between rating categories, including: 'AAA'(18%), 'AA+' (74%), 'AA' (7%), and 'AA-' (1%). One program, a multifamily whole loan program, is rated 'AA-'.

Chart 1

For the purposes of this report, we have separated program types into two groups: single-family and hybrid programs, and multifamily programs. While certain hybrid programs are a mix of single- and multifamily loans, the vast majority consist of single-family whole loans and single-family mortgage-backed securities (MBS). Single-family and hybrid programs make up 72% of all program ratings, with 21% and 72% of all single-family and hybrid programs having an 'AAA' or 'AA+' rating, respectively, while 81% of multifamily programs carry an 'AA+' rating (see chart 2).

Chart 2

Credit losses vary by program and rating

Minimum A/L parity reflects the loss coverage that each program can withstand at the highest rating. The median minimum A/L parity across HFA MRB programs was 123% as of Aug. 16, 2024, compared with 122% as of Aug. 21, 2023. The median credit loss for all programs is 4.1%, down slightly from last year's median credit loss of 4.6%. The median net parity after losses (NPAL) was 115.7%, which also improved from last year's median NPAL of 114.5%. Chart 3 shows the MRB program medians for credit losses, A/L parity, and NPAL by rating.

Chart 3

Single-family and hybrid programs have the lowest median credit loss (3.9%) compared with multifamily programs (9.6%). The primary difference in credit losses between programs stems from recoveries from MBS and single-family government insurance programs, while a low proportion of loans within rated multifamily programs have credit enhancement or guarantees.

We project no credit losses for single-family programs rated 'AA+' that consist primarily of federally enhanced MBS (about 46% of rated MRB programs), because the program rating is the same as the rating on the enhancer (the U.S. government). However, to meet our ratings above the sovereign analysis for 'AAA' rated programs, a higher loss threshold is required for the program to withstand stress scenarios such as stressed interest and reinvestment rates and additional prepayment scenarios.

Our base loss assumptions correspond to the rating scale (i.e., a program must withstand greater losses to achieve a higher rating, all else equal). However, the median loss for programs rated 'AA' and 'AA-' was greater than for those rated 'AA+'. We attribute this trend to some 'AA' and 'AA-' rated programs representing subordinate pledges to which the same nominal loss constitutes a higher percentage of assets. In addition, the increased losses at these lower ratings likely reflect the higher representation of multifamily programs--against which we generally apply more loss, given lower recoveries from insurance and guarantees. In addition, many 'AA+' rated programs have portfolios partially or fully consisting of MBS.

The majority of programs are overcollateralized to withstand our 'AAA' loss levels, but other factors 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. Of the 'AA' and 'AA-' rated programs, only one could not withstand higher losses, while the remainder of these program ratings reflect subordination, program management and operational risk caps, or liquidity risk.

Dynamic management and low operational risk support MRB program strength

S&P Global Ratings believes HFA's management and oversight of MRB programs largely mitigate program operational or credit risks. Given the general and cohesive strength of management teams, we typically view each aspect of our program management and operational risk assessment as neutral. However, in certain cases we could take a negative view of a particular component if we believe, for example, that counterparty risk is concentrated in a limited number of swap or liquidity providers, or origination and loan monitoring practices are weaker and are leading to higher loan payment delinquencies. We assess the majority of MRB programs as neutral (84%), indicating the program management is strong and operational risk is low, which results in no cap on the anchor. The remaining programs (16%) had one-to-two negative program management or operational risk attributes that cap the anchor in the 'aa' category (see chart 4).

Chart 4

Twelve programs have negative factors: four multifamily and eight single-family whole loan or MBS programs. Some programs exhibit more than one negative factor.

No programs have negative factors related to liquidity risk management as we view all programs to have reserve investment guidelines sufficient to support liquidity needs and no derivative contracts that introduce liquidity risks.

Chart 5

Credit Quality For Single-Family Programs Reflected In Improved Year-Over-Year Parity

Parity analysis between active and inactive programs

A/L parity for single-family programs continued to improve this year, with the median opening and minimum parity ratios for single-family programs at 122.7% and 119.4%, respectively, compared with the median opening and minimum parity ratios of 121.9% and 120.8%, respectively, as of Aug. 31, 2023. The median NPAL improved to 114.5% compared with 109.1% due to lower assumed credit losses, which provides significant support given the high median rating of 'AA+'. Despite issuance volume at a historical high in 2023 due to MRB executions being more economic compared with the to-be-announced market sales, median opening parity increased.

Single-family and hybrid programs that did not issue debt in the past year experienced the largest increases in parity because bond redemptions outpaced mortgage loan prepayments. For programs not issuing debt, median low parity increased to 155% from 134% from August 2023 to August 2024. When comparing these with programs that issued debt in the past year, minimum parity decreased to 115% as of August 2024 from 117% in August 2023, largely reflecting growth in program debt outpacing asset growth. Median NPAL for programs actively issuing debt remained largely stable at 107% versus 106% a year earlier due to lower credit losses propelled by lower weighted-average foreclosure frequency (WAFF) and weighted-average loss severity (WALS).

Foreclosure frequency and high loss severity remain steady

Overall, the median WAFF remained stable near 23.7% compared with 23% the previous year. Foreclosure frequency reflects loan-level and pool characteristics such as loan-to-value (LTV), seasoning, loan type, property type, delinquency status, average FICO score, pool size, and other qualitative factors. The median FICO score remained stable at 691 compared with 694 in 2023, while the median 30-plus-day delinquency rate (including foreclosures) dropped slightly to 7.0% from 7.6%.

The median WALS for single-family whole loan programs is 40.3% compared with 59.4% in 2023, which is an estimate 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 property over or undervaluation in each state and are generally higher for homes in states that are considered overvalued, given the greater potential for price correction. In "U.S. Home Price Overvaluation Softens As Wage Growth Outpaces Home Price Gains," published April 15, 2024, we indicate that our view of overvalued markets continues to decline, decreasing approximately one percentage point to 14.3% as of fourth-quarter 2023 nationwide, down from 15.6% nationwide based on third-quarter 2023 data. Home price overvaluation depends on geographic location, with 89% of metropolitan statistical areas (MSAs) considered overvalued, with some MSAs overvalued by more than 40% while others remain undervalued by as much as 20%.

For most HFA programs, including those where loss severity is higher than the median, mortgage insurance and guarantee recoveries significantly offset higher foreclosure frequency and loss-severity assumptions. Lower loss severity could also, in part, reflect a higher proportion of MBS to whole loans, which increased to a median of 75% of single-family program assets compared with 57% and 39% of single-family program assets in 2022 and 2021, respectively.

Delinquency rates fluctuate

Across all single-family whole loan programs, the median 30-plus-day single-family delinquency rate increased to 6.3%, not including foreclosures, from 5.2% between 2023 and 2024. The change was mainly attributed to 30-59-day delinquency rates that increased to 4.1% from 3.6%. We evaluate median delinquencies in the following cohorts: 30-59 days (4.1%), 60-89 days (1.2%), 90-119 days (0.7%), and loans 120-plus days or in foreclosure (0.7%). The 1.4% of seriously delinquent loans (90 days through foreclosure) was consistent with the national rate for all loans as of second-quarter 2024, but lower than the 3.2% Mortgage Bankers' Assn. national rate for Federal Housing Administration loans.

Table 1

Multifamily Programs Are Stable Year-Over-Year, Reversing A Multiyear Trend

Reversing a three-year, declining trend, multifamily loan portfolios' median opening A/L parity remained stable at 128% and NPAL remained stable at 117.5% compared with 116.5% in 2023. Post-pandemic, HFAs used program equity to close financing gaps for multifamily deals as rising interest rates made these transactions more expensive and difficult to execute. Despite increased multifamily issuance in 2023 (up 6% compared with 2022), HFAs met program demand while maintaining strong program asset quality and overcollateralization.

Multifamily loan portfolios trend toward lower risk, helping stabilize program credit quality

HFA multifamily loan credit quality remained stable, with consistency in the median base credit loss at 1.1x year-over-year. The 1.1x metric reflects slightly higher-than-typical risks for HFA loans, whereas 1.0x would reflect typical risks. The median proportion of lower-than-typical risk loans rose to 26% from 25% due to loans with strong performance and debt service coverage (DSC), low LTVs, high occupancy, and typical loan structures. The median percentage of typical risk loans also increased to 38% from 32%, and the median of higher-than-typical risk loans (those that are underperforming or with low DSC, nonreporting loans, watch-list loans, and loans with low or declining occupancy and high LTVs) dropped significantly to 26% from 36%. The median credit loss for multifamily programs is stable at 9.6% compared with 9.4% the previous year.

Table 2

HFAs Are Poised To Navigate Changing Market Conditions

With MRB executions continuing to hold an economic advantage compared with secondary market executions, we believe single-family and hybrid programs will continue to fund their missions through issuing debt, which will likely lead to declining median parity for active issuers. However, we do not expect material deterioration in credit quality from this decrease and believe management teams will implement measures to balance mission and robust financial positions. In addition, we believe downpayment assistance programs will continue to boost single-family loan production as home prices remain high. We will monitor the potential for upticks in delinquency rates as our forecast for economic growth shows modest slowing with a gradual increase in unemployment, which together could create additional pressure on incomes and mortgage loan repayment.

Appendix: MRB Program Information

Table 3

Table 4  |  View Expanded Table

Table 5  |  View Expanded Table

Table 6

Related Research

• Sustainability Insights Research: No Quick Fix For the U.S. Affordable Housing Shortage, Aug. 21, 2024
• U.S. Public Finance Housing Outlook 2024: A Stable Foundation Despite Emerging Risks And Slower Economic Growth, Jan. 24, 2024