For the second consecutive year, Moody’s Investors Service has assigned a stable outlook to the state housing finance agency sector.

The outlook is driven by strong and improving revenue margins, which reached 11% in 2013, says Moody’s in a new report, “2015 Outlook - US State Housing Finance Agencies: Strong Margins Drive Stable Outlook.”

“We anticipate that HFA margins will increase incrementally in 2015 as revenue from loan sales continues increasing, full spread mortgages drive revenue growth, and loan portfolio performance continues to improve,” says Rachael Royal McDonald, a Moody’s Vice President and Senior Analyst, in a client note.

Moody’s does expect margins to remain below the pre-crisis peak of 15%.

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An additional factor behind the stable outlook is the ability of mortgage loan revenues, the most stable HFA long-term revenue source, to cover general and administrative expenses. While the ratio of loan revenues to expenses has declined significantly since 2008, the ratio remains healthy at 3.6x.

Moody’s also notes that HFA portfolio performance continues to strengthen, which will bolster both current future mortgage loan interest income. A year-over-year decline of over 4% in single-family delinquencies will both reduce loan losses and help steady monthly mortgage loan revenues. Delinquencies in the 60-89 day category also dropped to its lowest percentage in five years.

“Furthermore, higher interest rates would drive margins upward as HFAs realize more income off of investments,” said McDonald.

What could change the analyst outlook is this: Margins of over 15% would provide HFAs with enough cushion to weather a housing or economic crisis that rivaled the most recent one. Between 2007 and 2010, median HFA margins declined seven basis points from 15% to 8%, they say. Operating margins of over 15% would signal that HFAs had enough income to endure a similarly stressful hit to their income.

Margins over 15% are not the only prerequisite for a positive outlook, Moody’s says.

In addition to strong financial performance, HFAs must make a marked return to financing on-balance sheet mortgage loans so that they have a predictable revenue stream to cover their operating costs. A ratio of mortgage loan interest income/G&A expenses of over 4x would indicate strong coverage of G&A expenses. In addition, strong portfolio performance would also be a prerequisite to a positive sector outlook.

Conversely, several factors could drive a negative sector outlook including operating margins under 10%, mortgage loan interest income/G&A expenses of under 3x or a significant weakening of portfolio performance.