Sequestration could impact housing bond issuers: Moody’s
The government's sequestration process mandates roughly $1.2 trillion in spending cuts over a 10-year period, with $85 billion set to occur in the next six months.
From a broad view, the ongoing sequestration is likely to have a low to moderate impact on public financing housing bond issuers, Moody’s Investors Service claims in a new report.
Over time though, any reductions in federal employment, as well as any sequester-related economic downturn, will have the largest impact on housing programs that are extremely sensitive to household financial stress, including single-family and multifamily mortgage programs.
"Housing finance agency (HFA) delinquency and foreclosures rates are likely to remain elevated, mostly because borrowers are low-to-moderate income households susceptible to economic distress due to unemployment or under-employment," said William Fitzpatrick, vice president and senior credit officer for Moody’s.
Furthermore, reducing federal employment and economic activity will increase delinquencies, consequently affecting single-family and multifamily-bond programs.
Mortgage payment delinquencies and foreclosures are key credit drivers for single-family whole loan bond programs because the bonds are secured primarily by payments on the loans financed under state and local housing finance agency programs.
Additionally, because HFA loans are made only to residents within the agency’s state, the impact of sequestration on a specific program will be a function of how the economy and employment is impacted.
Moody’s also noted that most rated housing programs do not depend directly on federal housing funds subject to sequestration. However, the major exceptions are Public Housing Authority (PHA) capital fund bonds and, to a lesser extent, multifamily bond programs financing developments with Section 8 subsidies.
On March 11, the Department of Housing and Urban Development provided guidelines for handling Section 8 project-based rental assistance payments, which were designed with the intent to avoid disruptions in payments until after September 2014.
"Cuts to Section 8 payments will negatively impact stand-alone multifamily bond financings that are secured by mortgages on projects with Section 8 contracts. There may be some impact on State HFA bonds secured by pools of multifamily projects, but the impact will be lessened by the diversity of projects securing the financing," the analysts explained.
Cuts to other HUD programs, such as housing choice vouchers and HOME funds, will not impact rate bond programs directly, but over time could reduce resources available to housing finance agencies for enhancing existing programs.
"The loss of such funding could reduce the resources available to HFAs for program functions such as improving performance of multifamily projects experiencing weak financial performance," according to Moody’s.