NEW YORK--(BUSINESS WIRE)--Fitch Ratings upgrades the rating on Florida Housing Finance Corporation's (FHFC) affordable housing guarantee fund (GF) to 'A+' from 'A-'. The Rating Outlook is Stable.
SECURITY
The security for the rating is the GF's corpus, which is available for claim payments on the guaranteed portfolio of multifamily and single-family mortgage loans. The guarantee fund also benefits from limited ongoing state support through legislation that allows for drawing on a portion of future documentary stamp taxes allocated to the State Housing Trust Fund (SHTF).
KEY RATING DRIVERS
LOW RISK-TO-CAPITAL RATIO: The upgrade reflects the fact that the GF's risk-to-capital ratio, now at its lowest level, improved to 1.67:1 in 2014 from 3.0:1 in 2012. Fitch factors into its rating the fact that the FHFC board-directed risk-to-capital level is 5:1, which limits the rating given the potential for the risk-to-capital to increase to a higher level. However, there is no history of withdrawing corpus funds except to repay outstanding debt.
CITIBANK LOAN REPAYMENT: The upgrade also reflects the fact that the Citibank loan that funded part of the corpus was repaid in full on Dec. 21, 2012 and there is no longer any outstanding debt affiliated with the GF.
SMALL PORTFOLIO IN RUN-OFF MODE: The GF is currently in run-off mode as there are no new commitments, which has been factored into the current rating. Following further decreases in the size of the portfolio, in the future, Fitch may analyze the program on a project-by-project basis to reflect the risk inherent in a small portfolio, including any adverse selection of remaining loans in the portfolio as well as developer and geographic concentration.
HISTORICAL PERFORMANCE: After loan defaults in prior years, the GF recovered significant amounts for the properties and actual losses were small. Currently the GF has no delinquencies or claims pending, and occupancy rates are stable overall.
ONGOING STATE SUPPORT: The GF benefits from ongoing limited state support, albeit at a reduced amount over the last several fiscal years, through the fund's ability to replenish the corpus by drawing on an amount up to 50% of the prior year's documentary stamp tax allocation to the SHTF in order to maintain ratings at the third highest rating category.
RATING SENSITIVITIES
CAPITAL SUFFICIENCY: Should the reserve amounts decline due to withdrawal of corpus funds or a change in the program from run-off mode to active issuance of new commitments, there could be negative pressure on the rating.
SMALL PORTFOLIO WITH INCREASING DELINQUENCIES: Given the decreasing size of the portfolio, continued loan refinancing, coupled with poor performance of existing properties, could also put negative pressure on the rating.
RATING CRITERIA
Fitch's rating approach for a state housing finance agency (SHFA) mortgage insurance or guarantee fund program involves: a qualitative analysis of management and program provisions, a detailed analysis of the insurer's risk portfolio, and a quantitative assessment of the fund's debt obligations and financial resources.
The effectiveness of governance and management oversight is an important factor in assessing a mortgage insurance fund's creditworthiness. Fitch evaluates the following areas when reviewing a mortgage insurance fund's management capabilities: history of successful financial operations, staff personnel experience and continuity, historical program oversight abilities, disclosure abilities, and the level of SHFA board participation within the program. Additionally, Fitch reviews program provisions for: any cap on risk-to-capital ratios, any investments guidelines for reserve funds, underwriting standards for insured projects, and any ability for reserve funds to be transferred out of the program.
Fitch views a mortgage insurance fund's risk portfolio and the quality of the insured mortgages as a key credit component in the analysis. Fitch uses the risk-to-capital ratio (the total commitment amount divided by the amount held in reserves) as one of the ways to compare the risk portfolio among various mortgage insurance funds. Fitch's analysis also takes into account: the program's underwriting standards for insured projects, the types of projects being insured, developer and geographic concentration within the risk portfolio, and the direction of state economic trends.
Fitch generally views a decreasing risk portfolio, or a portfolio that is in 'run-off' mode, as a riskier portfolio than an active portfolio which continues to include new insured loans given the adverse selection of insured projects remaining in the portfolio. Once there are a minimal amount of projects remaining in a risk portfolio, Fitch may no longer analyze the program as a mortgage insurance fund and may analyze the program on a project-by-project basis.
Another component in Fitch's analysis is an assessment of a mortgage insurance fund's financial resources and the availability of capital to cover potential claims and an expanding risk portfolio. Fitch reviews the following three areas: the mortgage insurance fund's financial statements, debt obligations, and the type and quality of the insurance funds' investments. Fitch views the presence of debt as a credit negative as debt payments may impede an insurance fund's ability to increase reserves on an annual basis. The availability of adequate financial resources is essential in providing the mortgage insurance fund with the tools and flexibility to handle any potential claims from their risk portfolio.
CREDIT PROFILE
BACKGROUND AND DEBT
The guarantee fund was created in 1992 by the Florida Legislature to provide credit enhancement in order to enable the production of affordable housing in the State of Florida. It was initially capitalized with proceeds from an FHFC bond sale in 1993, and then later funded with a direct loan by Citibank. The bonds that funded the corpus have all been redeemed and the loan from Citibank was paid off in full on Dec. 21, 2012. There is currently no debt outstanding, which Fitch views as a credit positive and is part of the reason for the upgrade.
PORTFOLIO COMPOSITION
The guaranteed portfolio, as of April 15, 2014, consisted of 42 permanent loan guarantees on individual multifamily properties aggregating $260 million of risk-in-force and four single-family primary reinsurance arrangements aggregating $9.2 million of risk-in-force. This is a significant decline from two years prior when the multifamily loan guarantees aggregated $553M of risk-in-force (as of April 30, 2012).
The Guarantee Fund operates under a board-directed, but not required by statute, max 5:1 risk-to-capital ratio. The GF's risk-to-capital ratio, now at its lowest level, improved to 1.67:1 in 2014 from 3.0:1 in 2012, which is an additional reason for the upgrade of the rating. The net balance of the corpus is $161.1 M, all of which is invested in the highly liquid State Treasury Special Purpose Investment Accounts (SPIA). The SPIA is a special investment program operated by the Florida State Treasury for Florida public entities.
As of February 2014, the four-month average occupancy rate for multifamily projects in the portfolio was 92.3%, similar to two years prior, however, a significant improvement from July 31, 2009 when the rate was 85%. Since 2005, no new guarantees have been added to the portfolio. Additionally, there are currently no developments guaranteed by the fund undergoing construction, and the board has suspended issuance of future guarantees.
A portion of the outstanding multifamily mortgages are guaranteed under the Department of Housing and Urban Development (HUD) Risk Sharing program. According to this agreement, HUD assumes 50% of the Guarantee Program's post-construction obligation. Therefore, for those developments, the guarantee fund obligation is half of the total risk amount. As of April 15, 2014, there are 30 guarantees with a total risk amount of $147 million in the fund's portfolio under the Risk Sharing program.
MINIMAL SINGLE-FAMILY CLAIMS AND MULTIFAMILY LOSSES
Claims related to the single-family guarantees have been minimal. Since the program's establishment, claims totaling $198,215 have been paid on risk-sharing arrangements with private pool policy providers in the single-family bond program. The pools are well-seasoned and represent a very minor portion of the Guarantee Fund's overall portfolio risk.
Fiscal year 2008 was the first time the GF paid a claim on a multifamily property. To date, eight claims have been paid. For risk-sharing agreements with HUD, HUD makes the initial claim payments in full, then after the property has been disposed, the GF reimburses HUD for its share of the claim amount plus interest. The final net losses to the GF corpus for the eight properties totaled $5.1 million.
POTENTIAL FOR ADVERSE SELECTION IN MULTIFAMILY PORTFOLIO
Due to the availability of HUD and other refinancing options over the past several years, many of the properties that were financially able have refinanced out of the GF portfolio, which has cut the total commitment amount in half over a period of two years. In some cases, it is the properties that were not in a financial position to refinance that now remain in the GF portfolio. Any adverse selection, combined with the dwindling size of the portfolio given that it is in run-off mode, adds risk and, as the portfolio continues to decline, Fitch may begin a project-by-project analysis of the remaining commitments in the portfolio.
An ongoing concern, given the small size of the remaining portfolio, is the inherent geographic and developer concentration among the remaining loans. One property owner oversees developments that aggregate 39% of the GF portfolio's exposure. From a geographic perspective, 48% properties are in three counties in southeastern Florida as follows: 24% in Miami-Dade County; 13% in Palm Beach County; and 11% in Broward County.
ONGOING STATE SUPPORT
The guarantee fund benefits from limited ongoing state support through legislation that allows for drawing on a portion of future documentary stamp taxes allocated to the SHTF. The doc stamp taxes may be used for claims if payment of the obligations from amounts in the corpus would result in a downgrade in the fund's rating below the third highest rating category. Transfers from the trust fund to the program may not exceed 50% of the SHTF's prior year allocation, which is estimated to be $60 million in the state's fiscal year ended June 30, 2014. State projections for the next three fiscal years yield average allocations of approximately $75 million.
RECENT STEADY OPERATING PERFORMANCE
Having shown positive operating results since 1998, fiscal 2008 and 2009 marked a significant turn in financial performance for the guarantee fund. The fund reported a loss in net income before transfers into the program of negative $18.3 million in fiscal 2008 and negative $8.6 million in fiscal 2009. The guarantee fund has performed more favorably since then, though income is limited due to the lack of new commitments in the portfolio and the majority of revenues are from premiums on existing commitments. The GF reported net income of $2.8 million in fiscal year ended Dec. 31, 2013 (unaudited).
Fitch is currently in the process of reviewing the ratings on the individual multifamily project bonds supported by the Guarantee Fund. Fitch expects to conclude the review and release the ratings within the next several weeks.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Ratings Criteria' (June 3, 2013).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=831349
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