Housing Finance Authorities stand apart from other municipal sectors. Their core mission is to offer affordable housing to those with low and middle incomes. However, their effectiveness is influenced by various factors such as local and state regulations, the availability of funding, and efficient management. Even if an HFA provides less affordable housing compared to its peers, the provision of some affordable housing is still better than none, in our opinion.
Revised Ratings Methodology for HFAs
Due to the uniqueness of this sector, we have updated the way HFAs are evaluated under our ratings methodology. Now, headline risk determines whether an HFA is eligible or ineligible for inclusion in our funds.Understanding Headline Risk
Headline risk refers to the potential for negative environmental, social, and governance (ESG) events that cast doubt on an issuer's ESG credibility. The definition of a negative ESG event varies by sector. For instance, in the utilities sector, it is likely to be a significant environmental accident that could have been prevented through better management or more resilient infrastructure.For HFAs, headline risk events encompass possible corruption, poor living conditions, and mismanagement of resources. In our credit research, we have come across examples such as extreme heat conditions, improper handling of complaints, maggot infestations, potential corruption in the distribution of federal funds, delayed or botched federal fund disbursements, and more.All these issues are significant and worrying as they raise questions about the management of these HFAs and their ability to fulfill their mission of providing affordable housing.Impact of the Change
This change has opened up more opportunities for us to support positive social outcomes, particularly in the areas of affordable housing and poverty reduction.HFAs are still being closely examined as before. We continue to monitor headline risk and whether an HFA offers reasonable affordable housing opportunities. Whenever possible, we engage with problematic issuers to understand their perspective on headline risk events and their plans to address these risks and events in the future.Issuer Case Study: Statewide Communities Development Authority
This Statewide Communities Development Authority has joined our list of eligible HFAs thanks to our current approach. Under our previous approach to the sector, this Authority might not have been eligible as it does not conform to the typical HFA structure.Established in the 1980s, the Authority's purpose is to support community-based programs for public benefit. It currently serves as a conduit issuer for more than 530 cities, counties, and special districts. As a conduit, it has issued over $70 billion in tax-exempt bonds and supported various community infrastructure, education accessibility, healthcare accessibility, affordable housing, and job creation projects.The Authority's finance programs are diverse and include:- Public Agency Programs, which are low-cost pooled finance programs designed to address short-term borrowing needs and budget shortfalls and provide capital for critical infrastructure improvements.- Property Assessed Clean Energy Programs that offer financing to residential and commercial property owners for water conservation, seismic improvement, energy efficiency, and renewable energy projects.- Through the issuance of government bonds, the Community Improvement Authority Workforce Housing Program acquires market-rate apartment buildings and converts them into income and rent-restricted affordable housing units for moderate and middle-income households. It is the largest workforce housing program in its state, having converted more than 7,700 units for low and middle-income tenants.- The New Markets Tax Credit Program encourages and supports businesses and real estate projects in low-income communities through Community Development Entities.- The Statewide Community Infrastructure Program provides financing to enable developers to pay impact fees and finance public infrastructure projects.- Private Activity Programs finance high-quality public benefit projects, including qualified non-profit organizations, housing bonds for low-income multifamily and senior housing, tax-exempt bonds for the rehabilitation or acquisition of equipment for exempt and solid waste facilities, and taxable bonds for public benefit projects by both public and private entities.
