OREANDA-NEWS. Fitch Ratings affirms the rating on Florida Housing Finance Corporation's (FHFC) affordable housing guarantee fund (GF) at 'A+'. The Rating Outlook is Stable.

Fitch affirms the following FHFC bonds supported by the GF:

--$10,290,000 Broward County Housing Finance Authority (FL) (Pembroke Villas Project) multifamily housing revenue bonds series 2001A;
--$10,425,000 Florida Housing Finance Corp. (FL) (Peacock Run Apartments) multifamily mortgage revenue bonds series 2002 H-1 & H-2;
--$5,875,000 Florida Housing Finance Corp. (FL) (Woods of Vero Beach Apartments Project) housing revenue bonds series 1999N-1;
--$5,655,000 Lee County Housing Finance Authority (FL) (Andros Isle Apartments Project) multifamily housing revenue bonds series 2001 A & B;
--$11,900,000 Miami-Dade County Housing Finance Authority (FL) (Alhambra Cove Apartments) multifamily mortgage revenue bonds series 2003-4A;
--$10,995,000 Miami-Dade County Housing Finance Authority (FL) (Golden Lakes Apartments Project) multi-family mortgage revenue bonds series 1997 cls A&B;
--$7,470,000 Pasco County Housing Finance Authority (FL) (Pasco Woods Apartments Project) multifamily housing revenue bonds series 1999A.

The Rating Outlook on all of the bonds 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 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 affirmation reflects the fact that the GF's risk-to-capital ratio, now at its lowest level, improved to 0.6:1 in 2016 from 1.7:1 in 2014. Fitch factors into its rating the fact that the FHFC board-directed risk-to-capital level is 5:1, which leaves the potential for the risk-to-capital to increase to a higher level.

NO OUTSTANDING DEBT: The bonds that originally funded the corpus and the Citibank loan that later funded part of the corpus were redeemed and repaid, 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 with only nine projects in the portfolio, which has been factored into the rating. At the current risk-to-capital ratio of less than 1:1, Fitch is not reviewing the portfolio on a project-by-project basis. However, if the risk-to-capital were to increase, Fitch would review each project to reflect the risk inherent in a small portfolio, including any adverse selection of remaining loans in the portfolio and developer 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 of the insured properties are overall stable.

LIMITED STATE SUPPORT: The GF benefits from limited potential state support 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.

RATING SENSITIVITIES

CAPITAL SUFFICIENCY: Should the reserve amounts decline due to withdrawal of corpus funds there could be negative pressure on the rating. Fitch would need to review the portfolio on a project-by-project basis at higher risk-to-capital ratios in order to determine capital sufficiency.

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.

PORTFOLIO COMPOSITION
The guaranteed portfolio, as of Feb. 29, 2016, consisted of nine permanent loan guarantees on individual multifamily properties aggregating $59 million of risk-in-force. This is a significant decline from two years prior when the 42 multifamily loan guarantees aggregated $260 million of risk-in-force (as of April 15, 2014). The first and second single-family mortgage pools originally insured by the Guarantee Fund have been removed from the single family portfolio as of Nov. 18, 2015.

The Guarantee Fund operates under a board-directed, but not required by statute, maximum 5:1 risk-to-capital ratio. The GF's risk-to-capital ratio, now at its lowest level, improved to 0.6:1 in 2016 from 1.7:1 in 2014. The net balance of the corpus is $97.9 million, 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 Jan. 31, 2016, the four-month average occupancy rate for multifamily projects in the portfolio was 95%, an improvement from two years prior when the rate was 92%. 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.

Four of the outstanding nine 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 Feb. 29, 2016, there was $19 million in risk amount for the four guarantees in the fund's portfolio under the Risk Sharing program.

MINIMAL MULTIFAMILY LOSSES
Claims related to the multi-family guarantees have been minimal, and restricted to a two year period following the housing downturn of 2008. During that period, eight claims were paid with recovery rates ranging from 66% to 114% and a net loss amount of $5.1 million. All of the claims were for properties with HUD risk-sharing agreements. For the risk-share properties, HUD makes the initial claim payments in full, then after the property has been disposed, the GF reimbursed HUD for its share of the claim amount plus interest.

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 dramatically over the past four years. In some cases, it is the properties that were not in a financial position to refinance that now remain in the GF portfolio. Mitigating this risk is the current risk-to-capital ratio. At the current risk-to-capital ratio, it is not necessary to review the portfolio on a project-by-project basis. However, if the risk-to-capital ratio were to increase above 1:1, Fitch would review each project to reflect the risk inherent in a small portfolio, including adverse selection of the remaining properties.

Given the small size of the remaining portfolio, there is inherent geographic and developer concentration among the remaining loans. One property owner oversees developments that aggregate 28% of the GF portfolio's exposure. From a geographic perspective, 45% of properties are in two counties in southeastern Florida: 28% in Miami-Dade County and 17% in Broward County. The current risk-to-capital ratio mitigates concern over the portfolio's concentration risk.

LIMITED STATE SUPPORT

The guarantee fund benefits from limited potential state support through legislation that allows for drawing on a portion of future documentary stamp taxes allocated to the SHTF. Under certain limited circumstances, the doc stamp taxes may be used for claim payments. Transfers from the trust fund to the program may not exceed 50% of the SHTF's prior year allocation, which was $68.5 million in the state's fiscal year ended June 30, 2015. State projections for the next three fiscal years yield average allocations of approximately $85 million.

STEADY OPERATING PERFORMANCE

The guarantee fund has performed steadily since 2010, though income is limited due to the lack of new commitments in the portfolio. The majority of revenues are from investment earnings, with a small amount from premiums on the dwindling number of existing commitments. The GF reported net income of $5.3 million in fiscal 2014, an increase from $2.8 million in fiscal 2014. The GF's net position, however, was impacted by a $13.8 million transfer out of the program in fiscal 2014, reulting in a ($8.5) million change in net position.