Fitch Ratings Upgrades Florida Housing Finance Corp's Guarantee Fund's IFS to 'A+'

Business Wire, Oct 19, 2007

NEW YORK -- Fitch Ratings upgrades Florida Housing Finance Corporation's (FHFC) affordable housing guarantee fund's (the guarantee fund) insurer financial strength rating to 'A ' from 'A'.

The upgrade reflects a low and declining risk-to-capital ratio and absence of construction risk as the guarantee program has entered an asset management mode. From July 31, 2005 to July 31, 2007, no new guarantees were added to the portfolio. During the same period, five guarantees were paid off and removed from the portfolio, thereby reducing the number of guarantees in the program. Additionally, there are currently no developments guaranteed by the fund undergoing construction, no new guarantees anticipated in the near term, and no multifamily claims paid to date.

The rating also reflects an adequate board-determined reserves requirement and high asset quality, liquidity of reserve fund investments, and effective management oversight. While the fund benefits from ongoing state support through its ability to replenish reserves by drawing on a portion of future documentary stamp tax allocations made to the State Housing Trust Fund (SHTF), Fitch recognizes the risk of a future legislative redirection of the SHTF's share of documentary stamp tax allocations. Risks continue to include: the multifamily (MF) portfolio's property owner and geographic concentrations; management's potential need to oversee claim payments if the portfolio experiences significant and simultaneous claim requests given concentration of portfolio and potential exposure to hurricane-related damage; and the program's limited profitability in the absence of new guarantees.

As of August 31, 2007, the corpus of the guarantee fund totaled $328.2 million, derived from the following: $257 million net proceeds from FHFC's issuance of $300 million in capitalization bonds, net investment and program earnings after payment of capitalization bond debt service, and transfers from the SHTF. The corpus is invested in investment agreements with variable maturities from high-quality providers as well as in U.S. treasury notes. Although not mandated by statute, the board has established a 20% reserve requirement for all outstanding guarantees; as such, the fund's capacity currently totals $1.64 billion, with $835 million of capacity outstanding. As of August 31, 2007, the fund had 107 guarantees outstanding with obligations totaling $814 million. The fund's resulting risk-to-capital ratio equals 2.5:1, a decrease from 3:1 in July 2005. Moreover, given the fact that all projects are completed and stabilized, management expects the fund to move into more of an asset management role. Additionally, a notable change from the last review of the guarantee fund is the fact that the fund currently has no exposure to construction risk.

In 2004 and 2005, several hurricanes caused damage to properties in certain areas in the state of Florida. None of the existing guarantee fund properties sustained major structural damage during these storms. There was, however, one project under construction that incurred enough damage to cause a several-month delay in the project's completion. That project is now completed and fully stabilized. Accordingly, Fitch will continue to monitor the credit implications, if any that storm damage may have on the guarantee fund portfolio.

The guarantee fund benefits from ongoing state support through legislation that allows for replenishment of its reserves by drawing on a portion of future documentary stamp taxes allocated to the SHTF to maintain the insurer financial strength rating of the fund at the third highest rating category. Transfers from the trust fund to the program for purposes of replenishing the corpus may not exceed 50% of the SHTF's prior year allocation, which totaled $135.4 million in the fiscal year ended June 30, 2007, and are subordinate to the program's requirement to restore the DSRF securing the capitalization bonds.

On May 26, 2005, this legislation was modified to set future appropriations to the SHTF, beginning on July 1, 2007, at a base amount of $70.5 million with a provision for increases, as of July 1, 2008, of 10% of the increase in future taxes collected over the base amount. The new legislation, however, also requires that such allocation amount will be: sufficient to cover DSRF and program transfers to the guarantee fund pursuant to the aforementioned legislation, and up to but not exceeding the transfer amount available based on the percentage distribution to the SHTF that was in effect during fiscal 2004-2005, the year the legislation was passed. Even with the new legislation in place, there is the risk of a future proposal to redirect the SHTF's share of stamp tax allocations. The SHTF is currently scheduled to sunset in 2008.

The guaranteed portfolio consists of 107 permanent loan guarantees on individual multifamily properties aggregating $814 million of risk in force, four single-family primary reinsurance arrangements aggregating $9.3 million of risk in force, and one guarantee for a single-family second-mortgage pool totaling $27,529. In slightly more than one-half (59 properties) of the guaranteed multifamily loans, FHFC is the insured lender, providing bond financing in conjunction with HUD's risk-sharing program, a positive credit feature after property endorsement. FHFC has provided loans on eight additional properties not covered by HUD's risk-sharing program. The remaining issuers and lender are local housing finance agencies (42) and a bank (one). Furthermore, the loans are highly concentrated among developers and within the geographic regions of southeastern and central Florida.