Fitch Rates Massachusetts HFA's $78.1 MM Housing Bonds 2016 H & I 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AA-' rating to the following Massachusetts Housing Finance Agency's (MHFA or MassHousing) Housing Bonds:

--$53.1 million 2016 series H (Non-AMT);

--$25.0 million 2016 series I (Variable Rate) (Non-AMT).

The 2016 series H bonds are expected to be sold this week and the 2016 series I bonds will be purchased directly by an institutional investor. The bonds will close on or about Dec. 15, 2016.

The Rating Outlook on the 2016 series H and I bonds is Stable.

SECURITY

The 2016 series H and I 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. The insured portion of the portfolio mitigates risk over potential loan losses. Approximately 67% of the multifamily loans (based on outstanding loan balance) are FHA insured, primarily under the FHA risk share program. Of the remaining 33%, approximately two thirds of the properties receive federal or commonwealth subsidies.

SUFFICIENT ASSET PARITY: As of fiscal year (FY) 2016 audited financial statements, the program had an asset parity ratio of 119%, a net interest spread of 25%, and a net operating margin of 0.3% (a decline from 18% in FY 2015 due to an additional $18.4 million provision for loan losses, resulting primarily from a change in methodology for determining loan loss provisions). The most recent consolidated third party cash flow statements, which incorporate various Fitch interest-rate and bank bond stress scenarios, demonstrate a minimum asset parity ratio of 114% for the remaining life of the bonds.

SOUND LOAN PORTFOLIO: There are approximately 400 loans for 291 multifamily developments, with an outstanding loan balance of approximately $1.66 billion. The projects 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% 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 Fitch views their management oversight as a credit strength.

RATING SENSITIVITIES

REMOVAL OF EXCESS ASSETS: The housing bond program's asset parity requirement per the general resolution is 101% and, if met, MassHousing can remove funds, which could present negative rating pressure. However, Fitch considers the risk of removal of assets beyond amounts sufficient to cover Fitch stress assumptions to be remote given management's history of leaving sufficient funds within the resolution.

CHANGES IN PORTFOLIO COMPOSITION: The program currently has limited flexibility to take on additional construction risk; therefore, substantial additions of new construction projects and/or material additions of uninsured projects could put negative pressure on the rating.

CREDIT PROFILE

The 2016 series H & I is the 47th issuance under the general resolution and the bonds are issued on parity with approximately $1.7 billion in outstanding bonds as of June 30, 2016. The 2016 Series I bonds will be issued in a variable rate mode and the interest rate will be calculated monthly; however, there is no optional tender feature. The bonds will be hedged with an interest rate swap agreement. The 2016 Series I bonds are subject to mandatory tender on Dec. 1, 2026, and are subject to an accelerated tender date for certain events related to the credit of MassHousing's Housing Bonds under the general resolution. Of the currently outstanding debt under the Housing Bond resolution, approximately 92% is fixed rate, and the remainder variable rate. Of the variable rate debt, 75% is unhedged and 25% is hedged with interest rate swaps.

The 2016 series H & I bond proceeds, along with other funds, will be used to provide financing for certain multifamily residential developments. The five proposed new loans to be funded with the bond proceeds will be for the construction/ rehabilitation of existing and occupied developments. The permanent loans for the five developments are expected to be insured under the FHA Risk Share program at the 50/50 risk sharing tier.

The underlying portfolio consists of approximately 400 loans for 286 multifamily developments that were previously financed under or transferred into the resolution. The aggregate outstanding mortgage balance is approximately $1.66 billion.

The portfolio has a strong presence of insurance as approximately 67% of the portfolio is insured, primarily under the FHA risk-share program. Of the remaining 33%, approximately 64% receive federal or commonwealth subsidy payments.

The housing bond program has been the main source of funding for MHFA's multi-family loans over the last few years. The portfolio of loans is well-seasoned and its distribution aligns with the population density throughout the state of Massachusetts. Approximately 26% of the uninsured portion of the portfolio is located in Boston. Fitch views a portfolio with 40% or more in one market area as being highly concentrated. Any potential concerns over this portfolio's geographic concentration are currently mitigated by the program's overcollateralization levels.

As of FY 2016 audited financial statements, the program had an asset parity ratio of 119%, a net interest spread of 25%, and a net operating margin of 0.3%. Additionally, the most recent consolidated third party cash flow statements which incorporate various Fitch interest-rate and bank bond stress scenarios, demonstrate a minimum asset parity ratio of 114% for the remaining life of the bonds.

This asset parity ratio demonstrates that the program overcollateralization position is sufficient to address Fitch stress scenarios for the current rating level. The portfolio has a strong history of performance and currently has only one delinquent mortgage, which represents less than 0.1% 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 bond program, which Fitch continues to monitor. Mass Housing's ability to withdraw assets down to the general resolution's requirement of 101% asset parity ratio could potentially present a concern if exercised. These areas of potential concern, however, are mitigated by the program's strong financial position and Mass Housing's history of leaving sufficient excess assets within the resolution.

Relevant Committee Date: March 14, 2016

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Rating Criteria for Pooled Multifamily Housing Bonds (pub. 03 Mar 2016)

https://www.fitchratings.com/site/re/875481

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015482

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https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Kasia Reed
Analytical Consultant
+1-646-582-4864
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Ronald McGovern
Senior Director
+1-212-908-0513
or
Committee Chairperson
Mario Civico
Senior Director
+1-212-908-0796
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Kasia Reed
Analytical Consultant
+1-646-582-4864
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Ronald McGovern
Senior Director
+1-212-908-0513
or
Committee Chairperson
Mario Civico
Senior Director
+1-212-908-0796
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com