The financial health of state housing finance agencies (HFA) is mixed, Fitch Ratings reported Tuesday.

While some measures of state HFAs' financial health are improving, one important measure is steadily worsening, according to the report, which covered fiscal 2011 and four previous fiscal years for 50 state HFAs and the District of Columbia.

On the positive side, the agencies' median net interest spread improved to 22.9% in 2011 from 20.1% in 2009. The net interest spread is a measure between costs and revenues of the state housing finance agencies, said Fitch Senior Director Charles Giordano. At 22.9 it is slightly above the average of the last 10 years of medians of 21.9.

On the other hand, median net-operating revenue as a percent of total revenue - without a market value accounting adjustment - has gone down over the last five years. It declined to 5.5% in 2011 from 12.7% in 2007. It was 5.3% in 2010.

Because of low prevailing interest rates, the HFAs are making money on the mortgages but not on their financial investments, Giordano said.

The current low interest rates are a negative for the agencies, he said. Traditionally, their mortgage rates are one percentage point below the market rate. However, they cannot afford that now. The HFAs are generally not offering bonds right now because they would have to offer mortgages at market rates and would not be able to cover their bonds' interest rates, Giordano said.

Because of this, in 2011 the agencies' total debt decreased by 5.3%.

According to inflation-adjusted Thomson Reuters figures, new long-term issuance for public housing went up by 16.5% to $35.046 billion in 2006 from $30.079 billion in 2002. From 2006 the issuance then declined 73.5% to $9.298 billion in 2011.

The median adjusted debt-to-equity ratio for the state housing finance agencies declined to 5.0 in 2011 from 5.5 in 2010. That is lower than the 5.9 average of the last 10 years of median agency values.

"SHFAs performed relatively well in light of the fact that low interest rates suppressed investment income and the continued lack of new bond issuance," Fitch analysts wrote. "SHFAs were able to increase net interest spread, decrease variable-rate debt exposure, and continue to reduce debt-to-equity ratios amid a relatively unstable housing market, illustrating their financial strength as they face new economic challenges."

In a separate report from Moody's Investors Service, senior analyst Ping Hsieh wrote that rising mortgage fees are a credit positive for housing finance agencies, "because higher conventional mortgage fees buoy demand for down-payment assistance offered with [agency] mortgages." By mid-2011 fees on a $200,000 mortgage had increased 8.8% from the 2010 average. Moody's expects the fees to continue to increase in 2012. 

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