WASHINGTON -- Standard & Poor's Corp. said yesterday that multifamily housing bonds issued under the Department of Housing and Urban Development's new risk-sharing insurance program will be eligible for the agency's highest credit rating of AAA.
After examining the program, Standard & Poor's concluded that claims involving defaulted mortgages are likely to be paid more quickly and completely this way than under HUD's traditional mortgage insurance program.
"From a credit standpoint, HUD has structured a risk-sharing program that can qualify for 'AAA' debt ratings," Standard and Poor's said in yesterday's edition of CreditWeek Municipal.
Created by Congress in 1993, the two-year program is testing the idea of permitting state and local housing agencies to share with HUD's Federal Housing Administration the risk of insuring multifamily housing loans. Risk-sharing is designed to revive the FHA's moribund insurance program, and lobbyists have predicted that it could lead to a resurgence in issuance of multifamily housing bonds.
Bonds backed by FHA-insured mortgage loans have traditionally been eligible for AAA ratings because of the federal guarantee involved. Under the new program, the participation of state and local agencies does not dilute that guarantee in the view of Standard & Poor's because risk-sharing requires FHA to pay the claim up front and then be reimbursed by the other agencies for the amount of risk they agreed to assume.
The rating agency also found other pluses with the risk-sharing pilot. For one, in the event of a mortgage default under the program, bondholders will be paid more quickly than under the traditional FHA program because paperwork requirements have been streamlined, the rating agency said.
"The FHA's traditional insurance program involves a much more cumbersome process to get to full claim payment," the article said.
In addition, "the risk-sharing program also is stronger with regard to sufficiency of the claim payment," Standard & Poor's said. Risk-sharing allows for payment of claims in amounts equal to 100% of the mortgage notes, while the maximum permitted under traditional FHA insurance is 99%.
In April, HUD announced that it had approved 33 agencies to insure the 20,000 units available to be insured in the fiscal year that ends Sept. 30. The law allows another 10,000 to be insured in fiscal 1995.
So far, no deals have been completed under the program, but earlier this month housing agencies in three states -- New Hampshire, Massachusetts, and New York -- said they are close to coming to market.
In its report, Standard & Poor's noted that housing agencies have not rushed into participating in the program.
"Indications are that agencies are taking a vary cautious approach to the program," the agency said. "Those that will participate are taking their time to understand the program as it unfolds, iron out details with HUD to make it more usable, and take a very conservative approach to underwriting and project selection."
Standard & Poor's said it remains to be seen "whether the program will become the credit enhancement of choice for housing finance agencies, or representative of a carefully metered leveraging of their financial resources."
