Muni spotlight: Our approach to evaluating Housing Finance Authorities

Housing Finance Authorities are a fundamentally different sector than other municipal sectors. The purpose of an HFA is to provide affordable housing to low- and middle-income individuals and households. How effective an HFA is varies depending on local and state regulations, availability of funding/financial support, and management. Even if an HFA is providing less affordable housing than one of its peers, it’s better that some affordable housing is being provided versus none, in our view.

Given the uniqueness of this sector, we updated the way HFAs are evaluated under our ratings methodology. Headline risk now determines whether an HFA is eligible or ineligible for inclusion in our funds.

What do we mean by headline risk?

Headline risk is the risk of negative environmental, social, and governance (ESG) events that call into question an issuer’s ESG bona fides. What constitutes a negative ESG event varies by sector. For utilities, for example, it would most likely be a significant environmental accident that could have been prevented through better management or climate resilient infrastructure.

For HFAs, headline risk events include possible corruption, poor or dangerous living conditions, and misuse of resources. Examples we’ve encountered in our credit research include extreme heat conditions, possible mishandling of complaints, maggot infestations, possible corruption by preventing federal funds from being distributed properly, delayed or bungled distribution of federal funds, and others.  

All of the above issues are significant and concerning; they call into question the management of these HFAs and their ability to make good on their mission of providing affordable housing.

What did this change mean?

This change made it possible for us to take advantage of more opportunities that support positive social outcomes, specifically affordable housing and poverty reduction.

HFAs continue to be scrutinized as carefully as before. We continue to monitor headline risk, as well as whether an HFA provides reasonable affordable housing opportunities. When possible, we engage with problematic issuers to understand their perspective on headline risk events and how they plan to address these risks and events in the future.

Issuer case study: Statewide Communities Development Authority

This Statewide Communities Development Authority joined our list of eligible HFAs, thanks to our present approach. Based on our previous approach to the sector, this Authority likely wouldn't have been eligible, since it doesn't conform to the typical HFA structure.

This Authority was established in the 1980s for the purpose of supporting community-based programs for public benefit. The Authority currently serves as a conduit issuer for more than $530 cities, counties, and special districts. As a conduit, it has issued more than $70 billion in tax-exempt bonds and supported community infrastructure, education accessibility, health care accessibility, affordable housing, and job creation projects.

The Authority’s finance programs include the following:

• Public Agency Programs 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 provide 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 that are then converted to income and rent-restricted affordable housing units for moderate/middle-income households. It's 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.