State Housing Agencies Are Feeling The Credit Crunch

The credit crunch has claimed another group of victims: housing-finance agencies operated by state governments that cater to first-time homeowners.  Now, at a time when housing-finance agencies’ services are needed more than ever, most states have sharply curtailed their housing-finance operations. A handful of states, including California, Texas and Wisconsin, have suspended their mortgage-lending programs altogether.

The agencies aren’t in trouble because of bad lending. Although their borrowers tend to be of moderate or low income, they had to have good credit and stable income to get a state-backed loan. As a result, default rates and foreclosures on these mortgages are low. “They’re set up to be not fool-proof, but as close as you can get,” says Charles Giordano, senior director of the tax-exempt housing group at Fitch Ratings.

Nevertheless, the agencies are getting slammed by a host of market forces: rising interest rates on municipal securities, the disappearance of investors who can take advantage of tax-exempt securities and a funding mechanism designed to leverage the agencies’ lending ability that backfired, prompting some agencies to begin a painful deleveraging process.

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