Moody's puts FHA and VA bonds on downgrade watch

Moody's Investor's Service recently reported it is putting bonds backed by the Federal Housing Administration and Veterans Affairs loans on downgrade watch. The $3.5 billion of residential mortgage-backed securities are showing some faults, according to the ratings agency.

Housing Wire reported two days prior to Moody's warning, that Barclays Capital suggested investors look into purchasing government-backed bonds such as FHA/VA re-performing transactions.

"Senior bonds from FHA/VA re-performer deals provide a very stable yield profile even in dire economic scenarios and look very attractive with leverage," Barclays said in the report.

The Department of Housing and Urban Development pays claims on defaulted loans backed by FHA/VA, but has strict penalties for servicers unable to meet required timelines or perform annual audits correctly. Moody's argues that due to staff cuts and new regulations, many servicers will meet the HUD requirements.

"As a result, we foresee an increase in self-curtailments, and any associated expenses that servicers pass through to the trusts will result in higher loss severities on defaulted loans," said Moody analysts.

The Department of Housing and Urban Development recently announced by the end of August it will release a guidance for the new loan limits, set to be lowered on October 1st. Reverse Mortgage Daily reported that the reverse mortgage industry believes the loan limit change will have a negative effect on lending in areas where home prices exceed the new limit of $417,000, as many borrowers will not meet the requirements to obtain a loan, thus hurting the already weak housing market.  

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