Moody's Upgrades Mortgage Bond Programs; Ability to ~Weather Economic Difficulty' Cited

WASHINGTON -- Moody's Investors Service has upgraded credit ratings on 26 tax-exempt mortgage bond programs in 15 states, citing their ability to persevere through the financial ups and downs of the last decade.

"The raised ratings reflect the affected programs' success in weathering the economic difficulties of the 1980s, and are assigned primarily to programs with older, more seasoned loan portfolios," says the report, issued on Friday by the public finance department at Moody's. The agency rates a total of 178 mortgage bond programs in the 50 states.

Moody's raised ratings on programs in Alaska and Missouri to Aaa from Aa. Ratings were raised to Aa from A1 in California, Georgia, Hawaii, New Jersey, and Utah.

The upgrades also included the assigning of Aa1 ratings to state mortgage bond programs for the first time. Programs in Alabama, Alaska, Arkansas, Hawaii, Idaho, Kentucky, Louisiana, Missouri, North Carolina, South Carolina, and West Virginia received the rating, up from Aa.

The Aa1 rating reflects "some of the stronger factors and subtle differences that distinguish these programs from the others within the Aa category," the report states. Most of the Aa1 programs have seasoned loan portfolios, and most are insured by the Federal Housing Administration or guaranteed by the Veterans Administration.

John T. McEvoy, the executive director of the National Council of State Housing Agencies, said the results of the Moody's review show the strength of state housing agencies' underwriting standards.

"What the Moody's study underscores is that, not only has there never been a default on a state issue, but also that ratings are raised when they are reviewed," he said.

Moody's decided to review the ratings on all state housing agency mortgage bond programs because most began in the late 1970s or early 1980s, and there is now 10 years of historical data on them.

Along with general economic problems, mortgage bond programs also were hit with a host of other financial problems, including the general decline in the banking industry, massive failures in the savings and loan industry, and increased financial pressures from state governments.

"Faced with such capital and operating pressures, many housing agencies have had to make dramatic changes in order to continue to operate and to maintain their programs' credit quality," the report states.

Many state agencies found they had to get into the business of originating loans, servicing loans, and managing real estate. For example, the savings and loan crisis left the Wyoming Community Development Authority with so few servicers for its mortgage loans that the agency took on the responsibility of servicing the loans itself.

Other states -- such as California and New York -- decided to combat the rising cost of private mortgage insurance by setting up their own mortgage insurance funds, the Moody's report says.

An ongoing concern for many state agencies will be the inability of financially strapped states to support the programs, and those states' desire to view the programs as revenue sources, the report states.

"To a great extent, state governments view the large general fund balances maintained by some of the housing agencies as available cash," Moody's says in its report. "As state revenues continue to decline, the temptation to appropriate funds from the state housing agency's general fund is great."

Bond programs in two states -- Arkansas and Alaska -- maintained their high ratings despite giving "a considerable sum of money" to their state governments, the report states.

But in general, the rating agency cautions that, for housing bond programs to maintain credit quality, "it is critical that state housing agencies be cautious with the amount of funds transferred to their state government."

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