Fitch Rates Maryland’s CDA’s Housing Rev Bonds Series 2022 C ‘AA+’; Outlook Stable

Fitch Ratings has assigned a ‘AA+’ rating to the following Maryland Community Development Administration (MCDA) Housing Revenue bonds (HRB).

$11,540,000 series 2022 C (Non-AMT) (Sustainability Bonds).

The loan is expected to have a credit enhancement under the FHA risk- sharing program.

Additionally, Fitch has affirmed the ‘AA+’ rating on approximately $398.3 million in outstanding HRB parity debt as of July 1, 2022. The Rating Outlook is Stable.

SECURITY

The HRB resolution pledges to the parity bonds all mortgages in the loan portfolio (other than those made or purchased from standalone bonds) consisting of multifamily and group homes, as well as additional funds pledged under the legal provisions of the resolution.

KEY RATING DRIVERS

Asset Quality (Strong): As of June 30, 2022, approximately 99% of the multifamily portfolio securing the parity bonds is insured under the FHA risk-sharing program or fully guaranteed by Fannie Mae or Ginnie Mae, mitigating the risk of losses on the underlying loans.

Cash Flow and Overcollateralization (Strong): On a cash flow basis, the assets under the resolution (assuming a withdrawal of $7 million of excess assets and excluding those assets securing stand-alone bonds) demonstrate a minimum stressed asset parity of approximately 112.8%. By practice, Maryland CDA continues to maintain sufficient asset parity in the resolution.

Financial Resources and Program Structure (Strong): The HRB portfolio maintains strong financial resources exhibited by the program’s financial asset parity of 114% as of June 30, 2022. Offsetting the program’s financial profiles is the slightly elevated debt-to equity of 7.2%. Overcollateralization and the program’s healthy profitability mitigate any concerns of overleveraging. Additionally, Maryland CDA has demonstrated strong oversight of the HRB portfolio and has had a long, successful history of administering multifamily programs. As of June 30, 2022, there were no delinquent loans in the portfolio.

Asymmetric Risk Factors (Neutral): The rating is constrained to its current level because of the issuer’s ability to withdraw excess assets from the resolution and to include various types of loans other than first lien mortgages. However, Maryland CDA has demonstrated strong oversight of the HRB portfolio and has had a long, successful history of administering multifamily programs.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Removal of assets without corresponding debt reduction, resulting in a decline in asset parity and reduction in available liquidity;

Material additions of uninsured loans coupled with a moderate increase in uninsured construction risk, prolonged delays and/or declines in financial performance;

A decline in asset parity that demonstrates insufficient assets under stressed scenarios to address debt service payments in a timely manner.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

The issuer’s ability to withdraw excess assets from the resolution and to include various types of loans other than first lien mortgages constrains the rating to its current level.

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA‘ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

PROFILE

The MCDA was created in 1970 by the State to meet the shortage of adequate, safe, and sanitary housing in Maryland, particularly for persons or families of limited income. MCDA is in the Division of Development Finance in the Department of Housing and Community Development (DHCD) of the State of Maryland. MCDA’s HRB Program was established to issue bonds to provide funds to finance or refinance loans for various types of housing. To date, the Housing Revenue Bonds have primarily financed multi-family projects.

The series 2022 C bonds are on parity with all bonds previously issued under the resolution except the $20.4 million series 2017 A and B bonds, which were issued as stand-alone series separately secured solely by the funds of the series. Fitch did not rate the series 2017 A and B bonds. MCDA is issuing series 2022C as sustainability bonds based on the intended use of proceeds of the bonds to finance a loan that is expected to provide affordable housing incorporating energy efficiency standards and features.

The series 2022 C bond ‘AA+’ rating and the affirmation of the existing HRB indenture rating reflect asset quality, sufficient overcollateralization, portfolio oversight and performance along with resolution and series legal provisions. The underlying loan portfolio securing the resolution’s bonds, excluding those under the series 2017 A and B, is primarily comprised of 68 multifamily mortgage loans, which, as of June 30, 2022, had an outstanding balance of $355.5 million. Additional loans that secure the parity bonds include 41 group home loans that account for $4.7 million of the portfolio. There is also an additional $20.4 million in loans that secures the stand-alone series 2017 A and B bonds.

Nearly the entire multi-family loan portfolio is insured, with only 0.4% of the loan portfolio uninsured. Approximately 99.6% of the multi- family loan portfolio is partially or fully insured by one of the following federally-backed agencies: FHA risk-share (90%), Ginnie Mae (8.7%) and Fannie Mae (0.9%).

Fitch’s ratings are forward-looking in nature, and Fitch will monitor developments in the sector and incorporate qualitative and quantitative inputs based on expectations for future performance and assessment of key risks. Delinquency rates for multi-family loans may increase due to financial pressures from inflation, the cessation of pandemic-related federal aid, and the impact from eviction moratoriums. Though the federal insurance and guarantees on the multifamily loans in the HRB indenture mitigate this concern, there is uncertainty regarding how the program’s balance sheet and financial ratios would be affected should there be increased transfers from the program and/or decreased debt issuance over an extended period of time. Fitch continues to monitor longer-term impacts to MCDA’s asset quality and financial position.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Maryland Community Development Administration (MD) [Multifamily Program] has an ESG Relevance Score of ‘4’ [+] for Customer Welfare – Fair Messaging, Privacy & Data Security due to the program’s focus on customer welfare and fair messaging. This contributes to enhanced loan performance and reduced expected losses in the rating analysis, which has a positive impact on the credit profile and is relevant to the rating in conjunction with other factors.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg.

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