Fitch Rates Massachusetts HFA’s Housing Bonds 2013 E; Outlook Stable

Fitch Ratings assigns an 'AA-' rating to the following Massachusetts Housing Finance Agency's housing bonds:

--$29.4 million MHFA housing bonds, series E.

The bonds are expected to be sold the week of Nov. 14, and close on or about Nov. 21.

Fitch also affirms the 'AA-' underlying rating on approximately $1.7 billion of parity housing bonds.

The Rating Outlook on all bonds is Stable.

Security

The 2013 E parity bonds are special obligations of MHFA and are secured by multifamily mortgages, investments, reserves, and revenues held under the general resolution adopted by MHFA on Dec. 10, 2002.

Key Rating Drivers

Insured/Subsidized Portfolio: A majority of the underlying multifamily portfolio is either insured or subsidized which mitigates risk over potential loan losses. Approximately 62 percent of the multifamily loans (based on outstanding loan balance) are FHA insured, primarily under the FHA risk share program. Of the remaining 38 percent, approximately three-quarters of the properties receive federal or commonwealth subsidies.

Sufficient Program Overcollateralization: The program has an asset parity ratio of 119 percent based on 2013 FY audited financial statements. Additionally, Fitch-stressed cash flows demonstrate sufficient asset parity throughout the term of the bonds as well as sufficient reserves to handle any cash flow interruptions from potential loan delinquencies.

Sound Loan Portfolio: The 368 multifamily developments, with an outstanding loan balance of approximately $1.9 billion, are well- seasoned and relatively dispersed throughout the state of Massachusetts. The portfolio has a strong history of performance and currently has only one delinquent mortgage which represents less than 0.1 percent of the portfolio. Additionally, current levels of construction risk are mitigated by the strong levels of overcollateralization within the program.

Strong Management Oversight: MHFA has a strong history of administering multifamily programs and is viewed as a credit strength.

Rating Sensitivities

Removal of Assets: The program's asset parity requirement per the general resolution is only 101 percent and, if met, MHFA can remove funds which could present negative rating pressure. However, Fitch feels this is remote given management's history of leaving funds within the resolution.

Bankruptcy Remote: Fitch considers the authority to be bankruptcy remote based on its public purposes, predominantly limited recourse debt and its inability under current law to commence a voluntary proceeding under Chapter 9 without legislative or executive action. A change in this status could lead to a change to the rating and constrain it to that of Fitch's assessment of the authority's general obligation creditworthiness.

Credit Profile

The 2013 E bonds are the 36th issuance under the general resolution and are issued on parity with approximately $1.7 billion in outstanding bonds. The 2013 E bond proceeds will be used to finance three loans for constructing three multifamily developments: Central Annex Apartments, Middlebury Arms, and Historic South End Apartments. Mass Housing is expected to make a contribution of $1.4 million to pay cost of issuance and to fund debt service reserves.

Central Annex Apartments is a 101-unit elderly and disabled household project located in Pittsfield that was converted to its current use in 1979. The project is 100 percent Section 8 subsidized and is expected to be insured through the FHA risk-share program once construction is complete. Middlebury Arms is an existing 64- unit family rental development which is located in Middleborough. The project is 100 percent Section 236 subsidized and is expected to be insured through the FHA-risk share program once construction is complete. The Historic South End Apartment project will consolidate and rehabilitate five separate properties into a single new scattered development located in Boston. The project will provide 146 units for affordable housing and 100 percent of the units are Section 8 subsidized. Approximately $22.9 million of the bond proceeds will go to providing a construction and permanent loan to this project. Mass Housing will seek risk share approval for the construction and permanent loan from HUD with a 50/50 split.

The underlying portfolio consists of 368 multifamily developments that were previously financed under or transferred into the resolution. The aggregate outstanding mortgage balance is approximately $1.9 billion. The portfolio has a strong presence of insurance as approximately 62 percent of the portfolio is insured, primarily under the FHA risk share program. Of the remaining 38 percent, approximately three-fourth receive federal or commonwealth subsidy payments. On a loan balance basis, approximately 8 percent of the portfolio is both uninsured and unsubsidized. The portfolio is well-seasoned and is relatively dispersed throughout the state of Massachusetts, with approximately one-third of the portfolio located in Boston. Fitch views a portfolio with 40 percent or more in one market area as being excessive and concerns over geographic concentration are currently mitigated by the program's overcollateralization levels.

As of FY 2013 audited financial statements, the program has an asset parity ratio of 119 percent. Additionally, the most recent consolidated cash flow statements which incorporate various interest- rate and bank-bond stress scenarios, demonstrate a minimum asset parity ratio of 112.5 percent for the life of the bonds. This overcollateralization position is adequate for its current rating level and provides sufficient cushion for any disruption in cash flow from potential loan losses. The portfolio has a strong history of performance and currently has only one delinquent mortgage which represents less than 0.1 percent of the portfolio.

The general resolution permits various types of loan financings, including both new and existing single-family and multifamily mortgages. The potential for unexpected changes in the portfolio's loan composition is mitigated by MHFA's ongoing disclosure for the portfolio, which Fitch will continue to monitor. Other concerns center on the general resolution's requirement of 101 percent asset parity ratio and Mass Housing's ability to withdraw assets down to that level. Concerns are mitigated by the program's strong financial position and Mass Housing's history of leaving excess assets within the resolution.

Additional information is available at 'fitchratings.com'.

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