S&P Study Finds HFA Delinquencies Exceed State Averages for First Time

Although the nation is in the midst of an economic recovery, albeit a slow one, unemployment levels remain extremely elevated, and that â€" along with lower housing prices, diminished demand from homebuyers, and a large inventory of houses in foreclosure - is leading to an increase in defaults on housing finance agency (HFA) loans, according to the analysts at ""Standard & Poor's"":http://www.standardandpoors.com (S&P).

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State HFAs issue tax-exempt bonds to finance loans for borrowers and first-time buyers purchasing a home at a reduced interest rate. A recent study by S&P has revealed that delinquent HFA loans have exceeded state averages for the first time since the agency began tracking loans in single-family bond programs in 2006.

Valerie White, a senior director at S&P, describes the results as a ""troubling trend for HFA loan performance."" During the third quarter of 2010, delinquencies for loans owned by HFAs increased to their highest level and performed worse than state loan portfolios.

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For HFAs, the delinquency rate -- the percentage of loans delinquent at least 60 days or in foreclosure -- reached 7.12 percent. In 2006, the HFA delinquency rate was 3.14 percent.

By comparison, among state portfolios of similar loans, the delinquency rate decreased in the third quarter of 2010 to 6.97 percent, down from 7.24 percent in the second quarter of last year.

“In our view, the increase in HFA delinquencies is not surprising given the continued high unemployment rates,” S&P said in its report. “Until the job market improves, we believe that loans will continue to perform worse than their historical record. Based on Standard & Poor's economic outlook, high delinquency could affect HFAs for a few more years.”

In the third quarter of 2010, the Kentucky Housing Corp. posted the highest delinquency rate at 17.86 percent, compared to the state average of 9.68 percent.

Other housing finance agencies with delinquency rate among the five highest were in California, Georgia, Michigan, and New Jersey. However, Georgia and New Jersey’s rates were both lower than their state averages.

While HFA delinquency rates have been “stubbornly high,” S&P said, it could be the cast that HFA loss mitigation efforts, which keep delinquent loans active for a longer period, have contributed to the recent increases.

S&P notes that while the most recent quarter interrupts the historical relationship of lower HFA delinquency compared with states in which the bond programs are located, the year-over-year change in the third quarter of 2010 was not as great as in the second quarter, which in turn was not as high as that in the first quarter.