|Last week, Moody’s Investors Service (Moody’s) released a report predicting a stable financial outlook in 2016 for state HFAs. The report concludes that the continued growth of state HFAs median margins (net revenue/total revenue) and strong loan production indicates a stable outlook for fiscal year (FY) 2016. Moody’s says HFAs must begin to rebuild their balance sheets by adding more mortgage loan assets to their portfolios to achieve a positive outlook.
In FY 2014, HFAs’ median margins reached a post-crisis high, surpassing 12 percent. Moody’s predicts this upward trend will continue in FYs 2015 and 2016. According to the report, while the trend will continue, median margins will not surpass 15 percent because short-term interest rates will not have an impact until later in FY 2016. The report places an emphasis on HFAs’ margins, explaining that margins between 10 and 15 percent support a stable sector outlook, while margins over 15 percent can indicate a positive outlook, and margins under 10 percent could drive a negative outlook.
The report also stresses the importance of HFAs’ strong loan production in 2014 and 2015 as a contributing factor to the sector’s stable outlook. State HFAs’ loan production is expected to grow to $11.5 billion by the end of calendar year (CY) 2015, up from $9.7 billion in CY 2014. Moody’s attributes the loan production growth to the loan sales HFAs are conducting on the secondary market. Secondary market loans sales accounted for 75 percent of new originations in 2014 and is on pace for the same percentage in 2015, according to the report. Moody’s predicts that HFA loan originations will continue to increase in 2016 and 2017 as millennials enter the housing market, spurred on by lower unemployment and wage growth.
Despite the stable outlook presented in the report, Moody’s believes there is a way HFAs can improve their outlook to positive. As HFAs are utilizing the secondary market more than ever to facilitate loan sales, they will become increasingly exposed to the short-term revenue volatility of receiving revenue only at the time of the sale. Under this method of financing, according to Moody’s, even a slowdown in originations for one month could have a large impact on HFA revenues. To insulate themselves from the volatility of the secondary market financing method, Moody’s recommends HFAs retain more whole loans and mortgage-backed securities (MBS) in their portfolios.
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