Single-Family Financing Essentials Part 1: Financing Options NCSHA HFA Institute January, 2015...

Single-Family Financing Essentials Part 1: Financing Options

NCSHA HFA Institute

January , 2015Ferdinand S. Perrault, Vice President – Senior Analyst

2NCSHA, January 2015

Rebounding from the Financial Crisis

• Positive trend continues with strong financial matrices amid deleveraging

– Rising profitability and asset to debt ratios allow HFAs to absorb counterparty and portfolio risk

– Increasing home prices reduce loan losses

– Counterparty credit quality stabilized, albeit at low rating levels

• Better positioned to address variable rate risks

• More diversified business model

• Profitability is central to our credit analysis but Mortgage Interest Income to General Expense Ratio is also important


Profitability and Equity Are Growing

Source: Moody’s adjusted audited state HFA financial statements


HFAs Are Better Positioned To Address Potential Variable Rate Challenges

Source: HFA Surveys


SBPA Fees Down; Provider Diversity Mitigates VRDO Risk

» Liquidity fees began to decline in 2013; a trend that is expected to continue in 2014 and 2015

» Lower liquidity fees is one of the drivers for improved profitability

» Counterparty credit quality has stabilized

» Counterparty diversity and staggered expiration dates mitigate VRDO Risks

» New variable rate products, with no demand features, are available to HFAs

» Pay down of fixed rate debt has increased the proportion of variable rate debt for some issuers; we are beginning to see issuance of new variable rate debt


Increasing Spread Between Mortgage Income and Bond Costs Increases Profitability

Source: Moody’s adjusted audited state HFA financial statements


HFAs’ New Business Model is More Flexible and Nimble

» Rewards

– New revenue streams

– Ability to originate competitive loans

– Future flexibility to switch between secondary and bond markets

– Broadened customer base

– Recognition from new bond investor bases

» Risks

– Trade-off of up-front transaction revenue from loan sales vs. long-term revenue from bond-financed loans

– New management challenges related to secondary market operations

– New counterparty risks

– Repurchase obligations related to Fannie Mae risk share

– Interest Rate Risk

– Pipeline risk (late delivery and fallout)

» Loan financing strategies include MBS sale in the secondary market, direct loan sales to Government Sponsored Entities, MBS pass-through bonds, and traditional Mortgage Revenue Bonds


Mortgage Funding Shifted From Bonds To TBA

Source: HFA Surveys


HFAs Become Active Users of Secondary Market

» HFAs increasingly accessed secondary market in the past two years

» Secondary market funding strategies commonly used by HFAs

– TBA

– Direct Loan Sale to the GSEs

– MBS cash sale in the Specified Pool Market

» “Best Execution” approach

Source: HFA Surveys


Ferdinand S. PerraultVice President – Senior Analyst [email protected] (212) 553-4461

Florence ZemanAssociate Managing Director [email protected](212) 553-4836

Kendra SmithManaging Director [email protected] (212) 553-4807

Single-Family Financing Essentials Part 1: Financing Options NCSHA HFA Institute January, 2015...

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