The subprime lenders that worked: Part 1, who
Amid all the stories about the subprime sector’s troubles,
Gloom! Doom! Film at eleven!
a remarkable finding — a whole group of subprime lenders whose loans have done well — has gone largely and curiously unnoticed.
I’m modest about my accomplishments
Who are these heroes? As presented in this Standard and Poor’s report — the housing finance agencies:
Housing finance agencies (HFAs) also serve borrowers who would be candidates for subprime loans: low- to moderate-income and first-time homebuyers. However, Standard & Poor’s Ratings Services has found that HFAs face little risk from defaults on their loans.
When the nation’s largest subprime lender can go insolvent almost overnight (meltdown in a mere six weeks), the HFAs’ stability is thus truly remarkable:
We do not expect to see any impact from subprime lending on the ratings of HFA single family indentures – several series of bonds with the same collateral; or their issuer credit ratings (Issuer Credit Ratings), which measure the entities’ general creditworthiness.
Little risk of default, no bond issues in jeopardy, and no weakening of the entity’s creditworthiness.
Affordable housing in the frozen future!
The hardest thing in public policy is finding true matched-pair control groups, so when one emerges, its conclusions ought to be accorded great significance. Here is group of lenders who serve the same population, at roughly the same time, competing in the same marketplace, and yet they, unlike their private-sector competitors, have avoided the credit-default problems.
This ought to prove two things:
- Subprime lending is feasible, if done right.
- The HFAs have been doing right some things other lenders have been doing wrong.
These are huge conclusions.
So let’s make sure the HFAs are in fact healthy:
Standard & Poor’s rates 32 groups of single family bonds through which HFAs periodically issue additional debt that have unsecured whole loans as collateral, and 25 Issuer Credit Ratings on HFAs. These programs generally hold about $500 million to $1 billion in loans, and the largest indenture, California Housing Finance Agency’s home mortgage revenue bonds, contains more than $4 billion in loans. Information from June 2006 to
To restate, S&P is using a fairly conservative standard — a loan that is two months behind on its payments is classified as non-performing. Obviously a fair proportion of those loans can be restored to currency, or restructured via workout or otherwise.
And F is for Foreclosure …
The average Non-Performing Assets was 1.97% and the highest rate from
Actual losses are much lower than Non-Performing Assets. Only 1.1% of the loans in the [
CHFA loans compare favorably with those of the state when adjusted for loan insurance type. About 80% of CHFA loans are insured through FHA, which has higher delinquency and foreclosure rates than other loans. If
Hear that?
Our loans have lower defaults!
Adding FHA insurance to a loan increases its likelihood of being in default. When the Federal government is backstopping the losses, the originator and underwriter may be more generous or optimistic than when it is committing its own bond reserves. That’s a good example of moral hazard at work.
Nor are the HFAs’ portfolios suddenly getting worse:
Comparing 2006 to 2005 figures for non-performing assets (Non-Performing Assets) show that eight HFAs had declining Non-Performing Assets [Got better -- Ed.] while eight had rising Non-Performing Assets [Got worse -- Ed.].
Eight got better, eight got worse.
Some HFA’s are getting better all the time
The average Non-Performing Assets rate declined during the year.
On balance across the entire HFA inventory, the problem shrank during 2006.
There is no clear trend from these numbers to indicate that HFAs are facing any danger from foreclosures.
So the HFAs have lent into this market and are not suffering because of it.
What are the HFAs doing right?
S&P’s report illuminates six reasons:
[Continued tomorrow in Part 2.]
