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Moody's: Fannie Mae HFA Preferred Risk Sharing offers new financing opportunities, but with risks

Global Credit Research - 08 May 2013

New York, May 08, 2013 -- The Fannie Mae HFA Preferred Risk Sharing program, which allows Housing Finance Agencies (HFAs) to offer high loan-to-value mortgage loans with no mortgage insurance, creates an attractive product for the HFAs that can enhance revenue streams, says Moody's Investors Service in a new report. The program, however, does include some risk because the HFAs retain some responsibility for the performance of the loans they generate under the program.

"HFAs' expansion into Fannie Mae HFA Preferred Risk Sharing is credit positive as the program provides HFAs with a new type of mortgage loan to offer borrowers, thereby increasing their presence in the affordable housing market," says Omar Ouzidane, a Moody's Assistant Vice President and Analyst and the author of "Fannie Mae HFA Preferred Risk Sharing Offers HFAs New Financing Opportunities But Carries Some Credit Risks."

"In order for an HFA to participate in the program, however, it must agree to share some of the risk with Fannie Mae," says Moody's Ouzidane.

Fannie Mae HFA Preferred Risk Sharing is a conventional mortgage loan financing offered to HFAs because of the role they play in financing affordable housing. The mortgage loan, which can be sold to Fannie Mae, provides financing of up to a 97% loan-to-value (LTV) ratio and does not require the borrower to obtain mortgage insurance. Eliminating the mortgage insurance requirement enhances affordability by lowering the borrower's monthly payments.

HFAs are increasingly seeking alternatives to fund their operations because traditional tax-exempt mortgage revenue bonds (MRBs) no longer provide enough spread advantage to attract investors in today's ultra low interest rate market, says Moody's.

The program also enables participating HFAs to generate additional revenue through increased loan processing fees and the positive carry generated on their loan warehousing facility. HFAs servicing their own loans are also able to collect and retain servicing fees for the life of the loan.

There could be an increase in HFAs' costs, however, if there is an unexpected spike in early loan payment defaults or if the loans are not properly managed. The increase could occur if the HFA is required to repurchase loans when they become delinquent in the first six months after sale to Fannie Mae, or if it breaches any of its representations and warranties under the program.

Also, like other secondary market operations, implementation of the program entails considerable upfront costs. However, most participating HFAs already have an established and successful secondary market operation.

Currently, eight HFAs are participating in the program. These HFAs sold approximately $1.18 billion of mortgages under the program in 2012 and project selling another $1.27 billion by the end of 2013. The program has been extended through the end of this year.

The report can be viewed at http://www.moodys.com/research/Fannie-Mae-HFA-Preferred-Risk-Sharing-Offers-HFAs-New-Financing--PBM_PBM153575

***

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

Omar Ouzidane
Asst Vice President - Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

John C Nelson
MD - Public Finance
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's: Fannie Mae HFA Preferred Risk Sharing offers new financing opportunities, but with risks
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