A federal plan aimed at helping boost housing finance agencies (HFAs) is in the final stages of being prepared, according to an official at the Department of Housing and Urban Development (HUD).

The plan will address three challenges facing the agencies—lack of financing for new HFA housing bond issuance, lack of liquidity to support state HFA variable-rate debt obligations, and ongoing credit and balance sheet stress for HFAs at risk of ratings downgrades.

“Detailed guidance on this effort should be available in the near term,” said William Apgar, senior adviser on mortgage finance to HUD Secretary Shaun Donovan, in written testimony to the House Financial Services Committee.

Under last year’s Housing and Economic Recovery Act, Congress provided HFAs $11 billion in new housing bond authority through 2010 to finance single-family and multifamily mortgages.

“Unfortunately, HFAs have not been able to translate these additional resources into expanded housing opportunities in this time of expanded need,” Apgar said, citing the housing finance crisis.

He continued that the agencies have been “virtually frozen out” of the tax-exempt bond market for many months because they are unable to find investors willing to buy bonds at rates that allow HFAs to lend the proceeds affordably.

HFA ratings outlook

Recently, Standard & Poor’s took its first negative ratings actions on HFA issuer credit ratings (ICRs) since 2004, changing the rating outlooks on the California Housing Finance Agency, the Colorado Housing and Finance Authority, and the Wisconsin Housing and Economic Development Authority to negative from stable. “All of these agencies have considerable variable-rate debt, and California HFA is working within a significantly weakened housing market,” noted Standard & Poor’s in its new report, Actions on Housing Finance Agency Ratings in a Challenging Environment.

The ratings firm, which maintains ICRs on 24 state housing agencies, pointed out that not all HFAs have the same risk profile. It changed the outlook to positive from stable on the District of Columbia Housing Finance Agency, the New Mexico Mortgage Finance Authority, the Alaska Housing Finance Corp., and the Nevada Housing Division.

“While we believe HFA loan collateral is performing well, agencies that rely more heavily on bank and mortgage insurance support are experiencing more stress than those with more basic structures,” said the report.

The housing agencies are having a hard time finding a market for bonds that will lead to prudent transactions. Most of the ICRs fall within the AA and A categories. In general, an issuer credit rating is an opinion of an obligor’s overall financial capacity to pay its financial obligations.

There have been two recent ratings upgrades, the Massachusetts Housing Finance Agency to A+ from A on Jan. 29 and the Iowa Finance Authority to AA from AA- on Feb. 24.

Standard & Poor’s noted that the state agencies continue to adapt their programs on the asset and debt side as market conditions change. Many are limiting new loan activity to the most basic and least risky loan type and issuing mostly debt as fixed rate. And, private mortgage insurance providers are toughening their underwriting requirements, pushing the agencies to finance more of their loans with Federal Housing Administration insurance.

“Still, with the passage of the Housing and Economic Recovery Act, we believe HFAs could have more tools at their disposal to provide affordable finance and issue fixed-rate debt,” said the report.