New York—State housing finance agencies (HFAs) will face unprecedented challenges from the capital markets, says Moody’s Investors Service in giving the sector a “negative” outlook for the next 12 to 18 months.

The latest expectations are a change from the “stable” outlooks that the sector has received for about the last 10 years. But these are not normal times for the industry.

“The unsettled capital markets have limited HFA access to long-term, fixed-rate debt and variable-rate debt, which has resulted in increased borrowing costs for many issuers,” reports Moody’s. Higher interest rates may pose difficulties for many HFAs to maintain the desired spread between bond costs and mortgage earnings.

In addition, some HFAs may face challenges from the single-family housing market, arising from declining property values and rising loan delinquencies. However, foreclosures remain very low, with more than 70 percent of HFA programs reporting foreclosure rates below 1 percent and half of those were below 0.5 percent, says Moody’s.

It is also important to note that the outlook does not reflect the ratings or outlook for a particular state HFA. The role of an HFA varies by state, but these agencies often administer bonds, low-income housing tax credits, and other financing tools used to develop affordable housing. The Moody’s report focuses on the bond activities of the agencies.

 Most HFAs will likely be able to retain their current ratings, says Florence Zeman, Moody’s senior vice president and author of the report.

Bond investors use the report to get a better understanding of the sector. The HFAs may also use the outlook to get an overall look at what’s happening in the field and where Moody’s sees the industry going.

Zeman notes that many state housing agencies enter the difficult times in strong financial shape. “Most are well-positioned and have good fund balances,” she says.  Fiscal years 2006 and 2007 were a time of growth for most HFAs, as demand for HFA loans drove up mortgage loan balances and bond issuances. HFAs’ combined fund balances rose nearly 18 percent during this period, as the median combined fund balance jumped to $291 million in 2007 and the ratio of combined fund balances to bonds outstanding increased to 18.43 percent in 2007, according to Moody’s.

The report says that overall HFA profitability has risen steadily from about 10.5 percent in 2005 to nearly 14 percent in 2007.

In addition, strong management will help many of the HFAs mitigate the market challenges.

The report, State Housing Finance Agencies—Sector Outlook, is available at