those whose portfolios are stable or declining. The
ability of an HFA to issue debt at a low enough
rate to support affordable loans at a higher rate,
“earning spread”, is a key element to profitability
and speaks to an agency’s financial acumen and
access to capital markets.
Standard & Poor’s will adjust leverage and prof-
itability measures for GASB 31, the accounting rule
that requires governmental entities to reflect their
assets and income for changes in the value of
investments. HFAs have considerable investments
that they will hold until the term of the bond issue.
GASB 31 requires these investments to be reflected
at market value and for that change in value to be
reflected as a loss or gain in income. Because agen-
cies will not liquidate investments prior to their
maturity at face value, GASB 31 is not relevant to
HFAs and introduces unnecessary volatility in net
income and net assets.
Besides the asset quality elements described
below, Standard & Poor’s assesses an HFA’s loan
portfolio through ratios. The main ratios measure
an agency’s loans that are at least 60 days or more
delinquent or in foreclosure against an agency’s
assets and reserves. An agency with a comparably
high percent of NPAs to assets will not be penalized
as much if it has a high level of reserves to cover
losses on those loans.
The final set of ratios measure an agency’s liquid-
ity to cover short-term financial needs. The main
ratio of loans to assets tends to be among the most
stable of all HFA ratios. While desirable, high liq-
uidity is often at odds with an agency’s mission of
providing access to loans and reduces profitability.
As a result, liquidity ratios receive the lowest
weight in terms of significance.
The financial analysis described above is viewed
within the risk profile of an agency. One tool that
Standard & Poor’s incorporates to determine an
agency’s risk profile is capital adequacy analysis.
This process involves adjusting an agency’s equity
for any risks and shortfalls it may have to cover in
scenarios that include default or catastrophe, such
as an earthquake. Standard & Poor’s will evaluate
an HFA’s loans, contractual obligations and restric-
tions on equity to determine what assets would be
available for the agency to honor its commitments
or maintain the ratings on various bonds.
Standard & Poor’s uses three principal ratios to
measure an HFA’s capital adequacy:
■Adjusted unrestricted assets to total debt out-
standing (leverage ratio),
■Adjusted unrestricted assets to total GO debt
outstanding (GO leverage ratio), and
■GO debt exposure (GO debt to total
debt outstanding).Housing Finance Agencies ................................................................................................
http://www.standardandpoors.com 291The following are some of the ratios Standard & Poor’s uses in analyzing the financial
performance and earnings quality of state HFAs. While many other ratios may be
incorporated on a case-by-case basis, these ratios provide a benchmark for
comparison among other state HFAs.
Profitability ratios
Return on average assets is the most comprehensive measure of an agency’s
performance. However, when evaluating return on assets, it is necessary to
examine both the amount and quality of the reported earnings.
Net interest income margin measures the most important source of quality
earnings-net interest income. The ratio is affected by the volume and type of
earning assets, as well as the cost of funds. Key to continued profitability is
an agency’s ability to manage its net interest margin.
Leverage ratios
Adjusted unrestricted assets to total debt, adjusted unrestricted assets to total
GO debt, total equity to total assets and total equity and reserves to total loans
measure an agency’s capital base available to promote investor confidence and
absorb operating deficiencies.
GO debt to total debt (GO debt exposure ratio) measures the extent to which an
agency has leveraged its GO pledge. It is a good indicator of the potential dispersion
of an agency’s unrestricted assets to support GO debt.
Liquidity ratios
Total loans to total assets and total investments to total assets measure an
agency’s ability to access funds for short-term demands.
Asset quality ratios
Nonperforming assets to total loans, net charge-offs to nonperforming assets,
loan-loss reserves to loans, and loan-loss reserves to nonperforming assets measure
the diversity and quality of an agency’s portfolio of earning assets. Net charge-offs
are an indication of the actual loss experience of the mortgage portfolio, while
loan-loss reserves should be adequate to absorb those losses.
Key financial RatiosA predecessor to the ICR, the top-tier designation is Standard & Poor’s recognition
of an HFA’s history of superior portfolio management and underwriting, depth of
financial resources, and prudent investment policies. Standard & Poor’s expects
top-tier agencies to meet the financial thresholds and have the highest level of
performance in the categories described below. Standard & Poor’s maintains
top-tier designations on a smaller number of agencies than on which it has ICRs.
Elements for the top-tier designation are similar to those for ICRs and include:
■Bond issuance
■Sufficient unrestricted net assets
■Internal controls and financial management
■Portfolio quality
■Administrative abilities
■Investment policy, and
■Government support.
■The consistency of bond issuance reflects the agency’s ability to resolve
difficult situations amidst changes in the economy, governor and legislature.
■Analysis of the other components is similar to that of an ICR.Top-Tier Housing Agency Criteria