April 9, 2013 / 5:59 PM / 4 years ago

Moody's sees public housing finance impact from sequestration limited

April 9 (Reuters) - The federal spending cuts known as "sequestration" will have a low to medium impact on the financing for public housing, Moody's Investors Service said on Tuesday, adding that the largest drag will come from possible federal layoffs or any economic downturn resulting from the automatic reductions.

"Furloughs, reductions in employment levels at federal agencies or federal contractors, or a broader impact on GDP will negatively impact those programs by increasing stress on households," William Fitzpatrick, Moody's vice president and senior credit officer, said in a statement.

Public housing authority capital fund bonds and housing subsidies, known as "Section 8," will be directly affected, while some of the programs providing affordable housing may suffer from staffing cuts at federal mortgage insurers, Moody's said.

Sequestration, set to cut federal spending by $1.2 trillion, is mainly a risk to housing finance agencies since it raises the specter of the economy entering another downturn. Some economists say federal austerity will slow the country's recovery from the 2007-09 recession.

"Mortgage payment delinquencies and foreclosures are a key credit driver for single-family whole loan bond programs sponsored by state and local housing finance agencies because the bonds are secured primarily by payments on the mortgage loans financed under the program," Moody's said.

Those agencies' "delinquency and foreclosures rates are likely to remain elevated mostly because borrowers are low-to-moderate income households susceptible to economic distress due to unemployment or underemployment."

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