CHICAGO - State housing authorities have placed increasing emphasis on management and sophistication over the past decade, and rating agencies are giving more credit for that in their evaluations.

"State housing agencies are businesses owned by the state, and they are run as businesses that absolutely must meet the bottom line." said John McEvoy, executive director of the National Council of State Housing Agencies. "When you have to meet the bottom line, management becomes very important."

An upcoming article in John Nuveen & Co.'s Journal of Housing Finance says housing agencies have demonstrated expertise in managing bond programs.

They "have clearly gone beyond the revenue bond fold when it comes to creditworthiness," the article says.

"Many [housing] agencies are established as independent and proactive managers with significant funds on hand and are able, for instance, to respond to problems with investment agreements and to set aside special reserves against mortgage insurance exposure and even to supply their surplus funds to state government," the article adds.

Rating agency officials say key management areas include investing, master loan servicing, cash flows, refundings, and general troubleshooting. They say many housing agencies have taken over some of these functions that were once farmed out to professionals such as mortgage and investment bankers and financial advisers.

The New Mexico Mortgage Finance Authority was created by its state 15 years ago with a staff of two and acted basically as a conduit for housing deals, according to James Stretz, the agency's executive director.

"It was run with trustees, investment bankers, lawyers, and lender servicers taking care of everything for you," he explained.

But the housing agency underwent changes as a result of the tax law governing housing deals, the harmful effect of recession and low inflation on housing values, and a political environment in New Mexico that called for a greater emphasis on housing for its low-income population, Mr. Stretz said.

Mr. Stretz, who worked in banking and business before joining the agency three_and-a-half years ago, put a former mortgage banker in charge of the agency's program side and an experienced chief financial officer as head of the financial side. He also hired a financial analyst to do in-house cash-flow projections that had previously been done by the agency's financial adviser.

As a result of its more proactive role, the agency has moved from having a negative general fund balance three years ago to building a cushion of $10 million, according to Mr. Stretz. The agency has about $700 million of outstanding single-and multifamily housing debt with various ratings from Standard & Poor's Corp. and Moody's Investors Service.

"We're no longer a conduit financier. It's important that we have respect in the financial community, and if we make mistakes we'll be there to make them right," he said.

Growing Management

Standard & Poor's, in the more than 20 years it has been rating housing debt, has paid increasing attention to the growing management capabilities of housing agencies when reviewing their ratings.

"From the very beginning, when we rated state agencies we considered the management and that was reflected in the rating for the very basic oversight of programs and master [loan] servicing," explained Wendy Dolber, a director at the agency.

"The industry has definitely matured, and some state agencies have built up really big fund balances in their own general fund or under various resolutions," she added. "They've also built up years and years of expertise."

Now good management, coupled with strong fund balances, carries more weight in the rating analysis, she added.

"In a structured financing, every dollar you need to make the deal work has to be there under the resolution day one," Ms. Dolber said. "When you're giving more credit to agency management and fund balances, what you are saying is everything for the deal does not have to be specifically there under the resolution on day one. You can also look to the agency itself as a part of the financing."

Under a program Standard & Poor's instituted in the mid-1980s, housing agencies are awarded a "top-tier" status for strong administrative abilities and expert management among other factors that could result in a slightly higher rating for their debt.

In June, the rating agency introduced new criteria that give housing agencies more credit for their management and performance of their portfolios.

Standard & Poor's now takes a blended rating approach for providers of investment agreements and other credit supports for housing issues. The approach bases ratings on the quality of the entire pool of assets, rather than the rating of the lowest rated provider.

In the case of the Utah Housing Finance Agency's debt, this approach allowed the rating on its $422 million of debt to be raised last month to AA from the A-minus and A levels the debt had been downgraded to earlier in the year. That rating change was the result of downgrades of Citibank and Citicorp, which provide investment agreements for various funds of the housing agency.

Earlier this month, $60 million of New Mexico's single-family debt that had been downgraded because of its investment agreements from Citicorp was also upgraded to A-plus from A-minus and removed from Creditwatch. Standard & Poor's attributed the upgrade partly to "good agency management and improving financial resources."

Greater Sophistication

Meanwhile, at Moody's, management has been a factor in the agency's rating of housing debt for 15 years, according to William deSante Jr., a vice president and managing director there.

Mr. deSante, like officials at the other rating agencies, has noticed the growth in management at the housing agencies. "We do see a greater level of sophistication today or greater responsibility that the agencies did not have 10 years ago," Mr. deSante said. "They are now doing their own cash-flow projections or doing their own loan servicing."

A 1991 Perspective piece on how Moody's rates single-family housing revenue bonds points out that "the relative strength of a housing agency's management is critical to Moody's analysis of the credit quality" of the bonds.

"The experience of the agency staff in program operations, the oversight of loan servicing, and the relationship with the trustee are viewed as critical aspects of the credit," the agency writes. "Continuity of management, formal directions for investment policies, and the level of involvement of the board of directors in the operations of the agency are also reviewed and evaluated."

At Fitch Investors Service, the management of housing agencies is also considered "a significant factor for a rating assignment," according to Vincent Barberio, a vice president at the rating agency.

"Our rating approach is really an integrated approach and management is one of several factors," he explained, adding that management is one of Fitch's top five factors in rating housing agencies.

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