Fitch Rates Massachusetts HFA $28MM Housing Bonds 2009 D 'AA-'; Outlook Stable.

NEW YORK -- Fitch Ratings assigns an 'AA-' rating to Massachusetts Housing Finance Agency's (MassHousing) $28 million housing bonds, 2009 series D. Fitch also affirms the 'AA-' rating on the $1.6 billion of housing bonds outstanding under the parity resolution as of June 30, 2009. Fitch assigns a Stable Rating Outlook to the 2009 series D bonds and all outstanding MassHousing housing bonds under the general resolution dated Dec. 10, 2002. The Stable Outlook reflects the substantial asset parity for the bonds, the historically strong operating performance of MassHousing and the program's demonstrated ability to withstand bank bond stress scenarios. The 2009 series D bonds are expected to be sold through negotiation the week of Oct. 26, 2009. The 2009 series D bonds are expected to close on or about Nov. 10, 2009.

The 'AA-' rating reflects the sound credit quality of the loan portfolio and the overcollateralization (OC) of the bonds currently at 113% asset parity as of June 30, 2009, as well as cash flow surpluses sufficient to offset potential cash flow interruptions from future loan payment delinquencies, adequate legal provisions of the resolution, and MassHousing's strong programmatic oversight capabilities. The 2009 series D bonds are the 25th issuance under a general resolution adopted by MassHousing on Dec. 10, 2002. The 2009 series D bond proceeds will be used to fund the purchase and redemption of prior bonds under the resolution.

The 2009 series D bonds will be issued in the fixed rate mode. At June 30, 2009, approximately 28% of the bonds under the housing bond program were issued in the variable-rate mode, with 98% of the principal amount of the bonds swapped to a synthetic fixed rate with three counterparties, UBS AG (rated 'A+/F1+' by Fitch), Bank of America (rated 'A+/F1+') and JP Morgan (rated 'AA-'/F1+'). Dexia (rated 'A+/F1+') serves as the sole liquidity provider for variable-rate demand bonds under the program.

The portfolio consists of approximately 371 mortgages on residential developments that were previously financed or anticipated to be financed under the resolution. The aggregate outstanding mortgage balance is approximately $1.5 billion, with an additional $148.5 million in loans for which permanent commitments have been issued but the funds have not yet been advanced. MassHousing reports that approximately $36 million (representing 0.03% of the outstanding mortgage balance) in loans are in construction.

Of the 60% of the portfolio (by outstanding loan balance) that does not contain insured or guaranteed developments; approximately 87% receive federal subsidy payments or receive commonwealth subsidy (13A) payments. The remaining 40% of the portfolio included the following insured properties: 59 FHA-insured risk-sharing properties, with an aggregate outstanding balance of $471 million; 12 properties, aggregating $47 million, insured by FHA under its regular insurance program; and one development with a balance of $12 million, secured by a Fannie Mae mortgage-backed security (MBS) development. The portfolio has performed very well since inception and represents some of MassHousing's best performing loans. Currently, MassHousing reports that there are only two developments (of the 371), with total outstanding loan balance of $3.5 million, that are experiencing mortgage payment, escrow, or replacement reserve delinquencies.

Overall, the portfolio has performed favorably. Credit concerns center on risks associated with cyclical economic pressure on the regional housing market and the ability of MassHousing to transfer surplus funds out of the resolution if minimal asset parity requirements are met. Additionally, in the 2010 budget and in fiscal year 2009 the commonwealth completely eliminated the 13A subsidy amount. This follows fiscal year 2008 when only $4.5 million of the $7.3 million of the subsidy requested for the portfolio was received. However, the contractual obligation amount for 13A has declined significantly over the past several fiscal years and program cash flows assume that no future 13A subsidies are received.

The most recent consolidated cash flow statement, which reflects transactions through the 2009 series D bonds, demonstrates that the program's asset parity position, in different prepayment speed and bank bond stress scenarios, is projected to stay above 109%. This projected asset parity position is well above the 101% required by the general resolution and reflects an OC level sufficient to support the rating based on the composition of the portfolio.

The nature of the portfolio has the potential to change significantly as new loans are added to the program. The general resolution permits various types of loan financings, including both new and existing single-family and multifamily mortgages. Fitch's ongoing credit analysis will be driven by the resolution's actual asset parity position, portfolio composition and performance, financial results, and cash-flow strength.

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

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