Housing Finance Authorities: A Pocket of Value in an Increasingly Crowded Municipal Market

As part of our municipal credit research process, we regularly take a deep dive into the various sectors of the municipal market.

In February, we reviewed and confirmed that Housing Finance Authorities (HFAs) remain one of our favorites. At just over a 1% weighting within the benchmark, HFA’s represent a small portion of the overall muni market, but with strong credit profiles and attractive yields, they represent big value.

Housing Finance Agencies are agencies established by state or local law to provide financing for affordable housing. They play an important role in the housing market as HFAs are used to support single‐family mortgage loans at below market rates or finance affordable multifamily rental projects. HFAs sell tax‐exempt and taxable housing bonds and use the proceeds to support families with incomes below thresholds established by their individual governing body. Both single and multi-family bond issuances are structured as being self-supporting, and debt service is repaid from the loans they finance.

Most issuers are rated in the 'AA' category and housing is one of the highest‐rated sectors in the municipal market. The high ratings are the result of having issues supported indirectly by the U.S. government through loan insurance. Single family loans benefit from the muni/treasury spread, ensuring a competitive advantage over conventional loans, low unemployment rates, and favorable loan-to-value ratios. Multi-family projects are important and typically exhibit low vacancy rates, as there is limited affordable rental supply among the low-to-median income population. The northeast and west coast, where housing costs are particularly high, have strong demand for such affordable rental housing units.

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The very high portion of insured loans, oversight, and healthy loan‐to-value ratios should support the ratings even during a downturn. Stresses occur during rising unemployment and increasing loan default rates. HFA’s have strong loan underwriting to minimize risk at origination, and servicing practices to help cure troubled loans. Loan repayment to service the debt should be manageable during a downturn as most loans are MBS, government enhanced, have primary mortgage insurance, or are uninsured with a loan to value below 80%.

All of these factors contribute to the attractiveness of the sector, and are reasons we carry an allocation to HFA’s across our municipal strategies.