Fitch Rates Vermont Housing Finance Agency's $102MM 2009A Escrow Bonds 'AAA'

NEW YORK--()--Fitch Ratings has assigned a rating of 'AAA' to the $102,000,000 Vermont Housing Finance Agency (VHFA) mortgage revenue bonds (Mortgage Backed Securities Program), series 2009A (escrow bonds). The Rating Outlook for the bonds is Stable.

The $102 million series 2009A bonds will be the first offering issued under a new general indenture of trust dated Dec. 1, 2009 (the Trust Indenture). The 2009A mortgage revenue escrow bonds are being issued under a Supplemental Indenture. The bond proceeds will initially be held in an escrow fund and will be secured solely by amounts on deposit in the escrow account and investment earnings from the account. VHFA will provide an upfront contribution for the cost of issuance. VHFA may cause funds to be released from the escrow account up to three times during 2010. Any bonds with respect to which a release date has not occurred prior to Jan. 1, 2011 are subject to mandatory redemption on Feb. 1, 2011 (or an earlier date selected by VHFA). The bonds will initially bear interest at a short-term rate, but will be converted to fixed-rate once released from escrow. The bonds are expected to close on Dec. 23, 2009.

Once the bonds are released from escrow, the proceeds will be used for the financing of single family mortgage loans in the State of Vermont through the purchase of GNMA Certificates, Fannie Mae Certificates, and Freddie Mac Certificates (collectively Federal Agency Certificates), as well as to make deposits in various funds and accounts. The Trust Indenture pledges revenues of the Indenture, Federal Agency Certificates deposited in the Indenture, and funds and accounts created in the Indenture to secure the bonds (other than the escrow fund where deposits are secured solely for the payment of bonds related to the proceeds in the escrow account).

The 'AAA' rating reflects the legal document provisions for the anticipated single family program upon release of the escrow bonds. The Trust Indenture requires that, once funds are released from escrow, mortgage loans be pooled and financed through the purchase of guaranteed mortgage pass-through Federal Agency Certificates, which are fully guaranteed for timely payment regardless of the actual performance of underlying loans. GNMA mortgage-backed securities are guaranteed by the U.S. government; Fitch rates Fannie Mae and Freddie Mac mortgage-backed securities 'AAA'. The rating also reflects the Trust Indenture requirement that the program's minimum asset parity be maintained at 100% (net of cash flow stress test scenarios). In addition, the rating accounts for VHFA's successful history of administering its single family programs. Fitch will review the bond documents, stressed cash flow runs, and other pertinent documentation each time funds are released from the escrow account.

The 2009 Trust Indenture was created, in part, so that VHFA can take advantage of the New Issue Bond Program (NIBP) established by the United States Treasury with the assistance of Fannie Mae and Freddie Mac. Under the terms of the program, Treasury will purchase up to 60% of the Program Bonds sold by state and local housing finance agencies with the remaining 40% to be sold to private investors as Market Bonds. The interest rate for bonds sold to Treasury will be based on the investment earnings of the escrow fund for the pre-conversion period, and for the remainder of the period, will be based on the 10-year Constant Maturity Treasury (CMT) plus a defined spread based on rating category of bond program.

Because Treasury's authority to complete these transactions under the Housing Economic Recovery Act of 2008 expires on Dec. 31, 2009, all NIBP related transactions must be completed prior to year end. As a result, the program allows issuers to close prior to the Dec. 31, 2009 deadline and place funds in escrow until they are converted to long-term bonds, in conjunction with the sale of Market Bonds, over the course of 2010. The funds may be held in escrow up until Dec. 31, 2010 and can be drawn upon and converted to long-term bonds up to three times during 2010.

Additional information is available at www.fitchratings.com.

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Contacts

Fitch Ratings, New York
Charles Giordano, +1-212-908-0607
Maura McGuigan, +1-212-908-0591
or
Cindy Stoller, +1-212-908-0526 (Media Relations)
cindy.stoller@fitchratings.com

Contacts

Fitch Ratings, New York
Charles Giordano, +1-212-908-0607
Maura McGuigan, +1-212-908-0591
or
Cindy Stoller, +1-212-908-0526 (Media Relations)
cindy.stoller@fitchratings.com