Fitch Rates Maryland CDA's 2009 C Residential Revenue Bonds 'AA'; Outlook Stable.

NEW YORK -- Fitch Ratings has assigned an 'AA' rating to the Maryland Community Development Administration's (CDA) $15.99 million residential revenue bonds, 2009 series C. Additionally, Fitch has affirmed the 'AA' rating on CDA's outstanding residential revenue bonds. The 2009 series C bonds are expected to be available for delivery on or about Oct. 27, 2009. CDA is also remarketing $46.49 million of 2007 series F variable-rate debt with this issuance. Subsequently, Fitch has assigned a Stable Outlook to the 2009 series C bonds and all outstanding debt under the residential revenue bond program (RRB program).

The long-term 'AA' rating on the 2009 series C bonds reflects the current coverage levels within the portfolio, inclusion of a significant level of fully insured or guaranteed loans, strong reserves levels, as well as the administration's successful management track record and established program-oversight abilities. The rating is based on cash flow projections which demonstrate a very strong 1.069 times (x) starting asset parity in stressed prepayment scenarios, including the incorporation of a high loan loss and the removal of unpledged or conditionally pledged funds that are currently within the indenture. The rating also takes into consideration a loan portfolio consisting of 39% government-guaranteed and 60% of privately-insured mortgages, which mitigates potential loss exposure.

Additionally, CDA plans to maintain the general bond resolution at a minimum asset-to-debt parity ratio of 102% and has a long and successful history of administering single-family programs; current delinquency levels under the indenture have risen sharply but management maintains significant flexibility in its ability to work with delinquent borrowers in an effort to limit losses on the portfolio. Key rating drivers include:

-- The impact of liquidity provider ratings on increased interest costs or potential accelerated amortization of variable-rate bonds should they go into a term-out mode;

-- Further deterioration of the mortgage insurance providers' credit quality which supports the privately insured mortgages and/or evidence which suggests strain on RRB program funds to cover losses.

The Stable Outlook reflects management's commitment to maintaining the credit quality of the RRB program, highlighted by the recent transfers of assets into the indenture. To date, roughly $53 million has been transferred into a collateral reserve account, and $51 million in various loans has been transferred to support coverage levels within the portfolio. As a result of the transferred assets, the portfolio is provided with more flexibility and is capable of withstanding additional costs and losses on its loan portfolio than would be the case with lower coverage levels. While delinquencies within the portfolio have increased and interest-only loans originated from 2005-2007 have yet to reach a point where borrowers are paying stepped-up payments, the fixed-rate nature of the loans, along with management's efforts to inform borrowers of the increased costs associated with the end of the interest-only period mitigate some of the risks and provide stability to the program.

The current offering is the 42nd sale of bonds to be issued under a flexible general bond resolution adopted in August 1997 and amended in July 2005. Proceeds from the 2009 series C bonds will be used to purchase new mortgage loans to continue CDA's single-family, first-time homebuyer program and to fund a reserve. All the loans purchased under this issuance will be for single-family homes insured by the Federal Housing Administration (FHA), guaranteed by the U.S. Department of Veterans Affairs (VA) or the United States Department of Agriculture/Rural Development (RD), or insured by private mortgage insurers. In the past, the Maryland Housing Fund (MHF) would also insure certain loans originated by the residential RRB program but has ceased insuring new loans for the foreseeable future.

Along with the 2009 series C issuance, CDA is remarketing $46.49 million of 2007 series F variable-rate debt. The short-term 'F1' rating on the series M bonds continues to be based upon the liquidity support provided in the form of a standby bond purchase agreement (SBPA) provided by KBC Bank, N.V., acting through its New York Branch. The SBPA provides for the payment of the purchase price of tendered bonds during all variable interest rate modes and is sized to cover the principal portion of the purchase price and 187 days of interest at the maximum rate of 12%. The SBPA will expire on June 19, 2012, unless such date is extended or upon the occurrence of other events of termination, as specified in the SBPA. The short-term rating on the bonds will expire upon any expiration or termination of the SBPA.

As of April 1, 2009, $2.23 billion in bonds was outstanding from the 1998 series A through the 2008 series F transactions. Of the total amount of debt outstanding under the indenture, not including this issuance, $388.2 million (or 17.4%) is in the variable-rate mode, $308.2 million of which is swapped to a synthetic fixed rate with three counterparties - Merrill Lynch Derivatives Products AG (Issuer Default Rating [IDR] 'AAA' by Fitch), Bear Stearns Financial Products, Inc., and UBS AG (IDR 'A+/F1+' by Fitch).

There were 13,247 loans with an aggregate principal balance of $2.1 billion outstanding under the RRB program as of March 31, 2009, compared with 8,142 loans totaling $992.4 million as of Dec. 31, 2006, demonstrating the recent rapid growth in the program. As of March 31, 2009, the breakdown of insurance providers was as follows: FHA, 34%; VA, 3%; RD, 2%; private insurers, 60%; and the remaining 1% uninsured. Of the privately insured loans, Mortgage Guaranty Insurance Corp. (Insurer Financial Strength [IFS] rated 'BBB-'; on Rating Watch Negative by Fitch) and United Guaranty Residential Insurance Corp. (IFS rated 'BBB' with a Negative Outlook by Fitch) constitute the highest percentage of the insurance providers at 50% and 22% of the privately insured loans, respectively.

Risks continue to include the portfolio's lack of seasoning and high percentage of interest only loans; changes to the credit quality of the mortgage insurance providers that support the privately-insured loans; the geographic concentration of loans; and the permitted financing of various loan products. CDA is a division of the state's department of housing and community development.

Additional information is available at www.fitchratings.com.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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.