Fitch Rates Idaho Housing & Finance Assoc's $60MM 2008D Bonds

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned the following ratings to Idaho Housing and Finance Association's (the association) single-family mortgage bonds, 2008 series D:

--$37.2 million class I fixed-rate 'AAA';

--$12 million class I variable-rate 'AAA/F1+';

--$3 million class II 'AA';

--$7.8 million class III 'A+'.

The $60 million 2008D bonds are the 18th offering issued under a general indenture of trust dated Sept. 1, 2006 (the general indenture). The bonds are expected to close on Oct. 8, 2008. The 2008D single-family mortgage bonds are being issued under a supplemental indenture that pledges mortgage revenues, investment earnings, reserves, and other trust funds to secure the bonds. Additionally, the class III bonds are secured by the association's general obligation (GO) pledge for payments of scheduled interest and principal at final maturity.

Bond proceeds will provide about $56.4 million in available lendable funds to continue the association's single-family, first-time homebuyer mortgage purchase program. The program permits loans to be insured by the Federal Housing Administration (FHA), guaranteed by the Department of Veterans Affairs (VA) or the Rural Housing and Community Development Service (RHCD), or insured by a qualified private mortgage insurance provider.

The 'AAA' and 'AA' ratings on the classes I and II bonds reflect the credit quality of the trust estate's collateral, the adequacy of projected revenues to pay debt service, the credit enhancement provided by the 21% debt subordination at time of issuance underlying the class I bonds, and the 14% debt subordination underlying the class II bonds. In addition, the classes I and II bonds have minimum asset requirements of 116% and 111%, respectively, directing revenues to be used to call bonds of that class prior to paying debt service of the next junior class.

The short-term 'F1+' rating assigned to the class I bonds is based on the liquidity support provided by a Standby Bond Purchase Agreement (SBPA) issued by BNP Paribas, acting through its New York Branch (rated 'AA/F1+' by Fitch as of Oct. 6, 2008). The SBPA provides for payment of the purchase price of tendered bonds and is sized to cover the principal portion of the purchase price and 186 days of interest at a rate of 12% based on a 360-day year. The short-term rating will expire on Oct. 7, 2009, the stated expiration date of the SBPA, unless such date is extended or upon any earlier expiration or termination. Fitch has also assigned a long-term rating of 'AAA' to the corresponding bank bonds.

The variable-rate bonds will be issued with an initial interest rate extending to Oct. 14, 2008. Thereafter, such bonds will be in a weekly interest rate mode but may be converted to a daily, monthly, quarterly, auction, semiannual, or fixed interest rate mode. During the daily and weekly rate modes, bondholders have the option to tender their bonds for purchase on any business day with prior notice. During the monthly, quarterly and semiannual rate modes, bondholders can tender bonds on the effective date of a new interest rate, following specified advance notice. The bonds are subject to mandatory tender upon conversion of the interest rate mode and on the fifth business day prior to the expiration or termination of the SBPA. Optional and mandatory redemption provisions also apply to the bonds, pursuant to the terms of the documents.

There are no portfolio percentage insurance requirements under the 2008D series indenture, allowing for demand to determine the percentage of privately insured mortgages compared with federally insured or guaranteed loans. Strong underwriting guidelines, a mortgage insurance requirement of 30% on the majority of the privately insured loans, a pool insurance policy to provide an additional 5% coverage on the outstanding balance of privately insured and uninsured mortgages, as well as the incorporation of a loan evaporation loss in the cash flows over the first seven years, all mitigate this risk. However, the portfolio remains exposed to the financial strength ratings of the primary and pool mortgage insurance providers that support the privately insured loans.

Risks include the potentially higher losses of privately insured mortgages compared with federally insured or guaranteed loans, and exposure to the financial strength ratings of the primary and pool insurance providers. Based on the 5,835 mortgage loans, with an outstanding balance of $781 million originated under the indenture as of Sept. 5, 2008, the portfolio insurance composition was 66% conventionally insured, 24% FHA-insured, 7% RHCD-guaranteed, and 3% VA-guaranteed. Additional risks center on unexpected higher delinquency and foreclosure rates on the indenture's relatively unseasoned loan portfolio as well as the fact that upon maturity of the class III bonds in 2029, the class II bonds may be exposed to potential program losses beyond available excess funds.

While the class III bonds are secured by the assets and revenues of the trust indenture, their rating reflects the 'A+' rating assigned to the creditworthiness of the association's GO pledge. The GO rating is based on favorable overall financial and portfolio performances, adequate levels of liquidity and excess reserves, a moderate debt-to-equity ratio when compared with other state housing finance agencies, and management's expertise in carrying out the association's public purpose mandate while protecting its long-term credit quality.

Including the 2008D issuance, 45% of the bonds outstanding under the indenture are in the variable-rate mode. Additionally, of the variable-rate bonds under the indenture, including this issuance, 86% are swapped to a synthetic fixed rate with one counterparty, Lehman Brothers Special Financing. (LBSF), an entity guaranteed by Lehman Brothers Holdings Inc. (LBHI; rated 'D' by Fitch as of Sept. 15, 2008). While LBSF is currently in liquidation, it is expected that the association will replace LBSF as the swap provider for the previous agreements on the series 2006E - 2008C bonds. The association has entered into an interest rate swap agreement with Barclays Bank PLC relating to $9 million of 2008D variable-rate bonds.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.