H
ousing finance agencies (HFAs) have built up a
considerable level of expertise in real estate
finance, development, and portfolio management.
Because of their prudent and conservative approach
and many successful years of bond issuance, many
HFAs have built up significant net assets in their own
general funds or under various bond resolutions.
Standard & Poor’s Ratings Services has given
varying levels of credit support to an HFA’s bond
programs, particularly if an agency has a proven
track record in management and substantial finan-
cial resources outside of an indenture. To determine
if an HFA is eligible for this flexibility, Standard &
Poor’s considers:
■Agency’s managerial expertise
■Issuer’s financial strength
■Purpose of investment or credit support, and
■Portfolio performance and cash flow strength of
the bond program.
Rated HFAs may pledge their GO to financings
to cover all or a portion of security for bonds.
External evaluators, such as U.S. government agen-
cies, credit enhancers, and government-sponsored
enterprises, also look to issuer credit ratings as a
way to assess the overall capacity and credit quality
of an agency.HFA ICR Criteria
Standard & Poor’s analytical approach to assessing
an issuer credit rating (ICR) for an HFA takes mar-
ket, as well as agency-specific, risks into account,
particularly when evaluating how an agency gener-
ates revenues and what factors could adversely
affect its ability to service its GO debt. In assigning
HFA ICRs, Standard & Poor’s assesses the stability
and level of agency capital available to absorb loan
losses and other charges related to its debt struc-
ture, as well as the quality and liquidity of its
assets. ICRs entail an in-depth assessment of finan-
cial strength, management, and the agency’s rela-
tionship with state or local government. Economic
factors endemic to the state or locality in which the
agency operates also are considered in light of the
agency’s financial position and the loan portfolio.
Agency assets consist primarily of mortgage loans
for single-family homeownership and multifamily
rental housing for low-and moderate-income indi-
viduals and families. The relatively low tax-exemptinterest rates and access to federal, state, and local
housing assistance programs provide the necessary
subsidy to create high-quality, below-market-rate
loans. In addition, HFAs are answerable to state
legislatures and other governmental entities. The
public nature of HFAs makes the autonomy of their
management and security of general net assets an
important credit consideration.
Standard & Poor’s evaluates the capacity and
willingness of HFAs to repay GO debt by examin-
ing five basic analytical areas:
■Earnings quality, financial strength, and capital
adequacy,
■Asset quality,
■Debt levels and types,
■Management and legislative mandate, and
■Economy.
Earnings quality, financial strength,
and capital adequacy
In order to gauge earnings quality and stability,
Standard & Poor’s reviews financial performance
for the most recent five years, with emphasis placed
on any notable fluctuations. A premium is placed
on consistency of performance. However, one bad
year is not necessarily a negative factor, unless it
signifies the beginning of a permanent shift.
Standard & Poor’s uses income statement analy-
sis to evaluate revenue sources, cost controls, and
profitability in tandem with a balance sheet analysis
of liquidity, capitalization, and asset quality as dis-
cussed below. Both approaches require evaluation
of an agency’s cash accumulation levels, types of
investments, interfund borrowing, historical use of
debt, loan loss reserves, REO, net charge-offs, equi-
ty, and quality of unrestricted net assets.
The principal areas of analysis are leverage, prof-
itability, asset quality and liquidity. While all these
factors are important, Standard & Poor’s tends to
place the highest emphasis on equity, since it gives an
indication of the resources available to sustain opera-
tions in difficult circumstances or fund programs that
further the mission of expanding housing affordabili-
ty. HFAs tend to be well-capitalized entities that have
been able to build equity in various environments.
Profitability indicates how efficiently an agency
operates. Agencies that are able to grow large loan
portfolios typically have higher profitability thanHousingHousing Finance Agencies
290 Standard & Poor’s Public Finance Criteria 2007