Fitch Ratings has assigned a 'AA+' rating to the following Maryland Community Development Administration (MCDA) residential revenue bonds (RRB).

$100,000,000 series 2022 D (Non-AMT) (Social Bonds).

The Rating Outlook is Stable.

Analytic Conclusion

The 'AA+' rating reflects the program's strong asset quality, a key driver, reflected by the increase in the MBS portion of the portfolio, as well as the program's continued financial strength demonstrated by the fiscal 2022 results and 2022 cash flow asset parity levels. The administration continues to finance single-family new issuance through the purchase of MBS, which has led to a continued increase in the portfolio's MBS composition. Ginnie Mae, Freddie Mac and Fannie Mae guarantee the full and timely payment of principal and interest on the respective MBS regardless of actual performance of the underlying loans.

As government sponsored entities (GSEs), the ratings of Fannie Mae, Ginnie Mae and Freddie Mac are currently linked to the U.S. sovereign rating. Therefore, the program's strengthened loan profile demonstrated by an uptrend of over 70% MBS, and the resulting decrease in risk of loan losses, is considered a credit positive in combination with the program's credit attributes.

SECURITY

The bonds are special obligations of the issuer, payable from the revenues and assets pledged under the bond resolution. The assets currently include single-family whole loans, mortgage-backed securities guaranteed by the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (hereinafter MBS) and certain cash and investments held under the resolution.

KEY RATING DRIVERS

Strengthened Asset Quality (Strong): The strong assessment reflects the significant increase in the MBS portion of the portfolio to $1.2 billion, or 74% of the portfolio, as of June 30, 2022, establishing a trend of MBS above 65% for the last two fiscal years. The administration's current single-family origination program consists predominantly of the purchase of MBS, which continues to increase the MBS percentage and strengthen the asset quality of the program.

The single-family whole loan portion of the portfolio has correspondingly decreased to $448 million, or 26% of the portfolio, as of the same date. Of the whole loan portfolio, approximately 46% of the loans are government insured (43% FHA, 1% VA, and 2% RD) and 4% of the portfolio is insured through CDA's insurance program (Maryland Housing Fund [MHF]). The remaining whole loan portfolio is made up of 45% private mortgage insurance (PMI) loans and 5% uninsured loans.

Strong Cash Flow Asset Parity (Strong): The RRB program has demonstrated strong asset parity, even when Fitch stress scenarios are assumed. The cash flow projections, which incorporate various prepayment speeds, interest rate stresses, and a loan loss assumption, show a starting parity of 119% after adjusting for non-cash items and maintain a minimum of 116% asset parity for the remaining term of the bonds. MCDA's management team has continued to maintain the credit quality of the program by keeping sufficient excess collateral in the program.

Financial Resources and Program Structure (Midrange): The program remains financially stable as illustrated in recent financial performance. The program's financial asset parity has reported a decrease to 115% in 2022 from 121% in fiscal 2021 and a decline in net position to $314 million in fiscal 2022 compared with $415 million in fiscal 2021. This decline reflects the decreased interest income on mortgage loans given the shift to an MBS portfolio, the smaller gain on sale of MBS, as well as the decline in the fair value of the MBS.

The parity is sufficient for the rating. Net operating margin remains strong and net interest spread (NIS), a key profitability metric, remained stable in fiscal 2022 at 21%. Fitch will continue to monitor the NIS given the MBS spreads and the impact on program profitability. Indenture provisions restrict the release of excess funds, allowing for program funds to be withdrawn to 102% asset parity.

The delinquency rate (60+ days) of the whole loan portfolio reported a decrease to 9% as of June 30, 2022, which is high but has improved from 11% in 2021 and remains below peak levels of 14.5% as of 2013. Of the loans outstanding, 2.5% are in forbearance (60+ days) and are treated as delinquent. Despite the delinquency rates, RRB's high overcollateralization and strong presence of insurance mitigate many of the concerns over potential loan losses.

Asymmetric Risk Factors (Neutral): The program is governed by an experienced managerial staff and active board of directors. The Community Development Administration is a unit of the Division of Development Finance of the Department of Housing and Community Development, a principal department of the State of Maryland. MCDA has strict underwriting standards which allow for only full documentation loans. The underwriting standards include restrictions in mortgagor eligibility, income, and housing prices.

RATING SENSITIVITIES

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

A transition towards a 100% MBS portfolio, further strengthening the program's asset quality. With the current issuance additional Mortgage-backed Securities (MBS) are expected to be financed in 2022 and 2023. A continuation of this trend, along with stable delinquency rates could strengthen the portfolio's asset quality and lead to a positive rating action.

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

Weakening asset quality with significant increases to the multifamily or whole loan portion of the portfolio, which could also lead to higher delinquencies and loan losses;

Increasing forborne loans and delinquency rates will pressure the rating leading to declines in program retained earnings;

Current cash flow asset parity of over 116% provides sufficient excess assets to withstand stress scenarios. Removal of excess assets could result in negative rating pressure;

Issuer management decisions regarding the bond program that diminish the credit quality that lead to higher loan losses, negative financial performance, and/or a stressed cash flow asset parity ratio that falls below 102%;

Fitch considers the authority to be bankruptcy remote based on its public purposes, predominantly limited recourse debt and its inability under current law to commence a voluntary proceeding under Chapter 9 without legislative or executive approval. A change in this status could lead to a rating change and limit the rating on the single-family program to that of the authority's general obligation debt.

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.

CREDIT PROFILE

The 2022 series D bonds will be the 129th series of bonds issued under the RRB program. As of July 1, 2022, there was $2,044,705 outstanding in parity debt comprising 29 series.

The 2022 series D bond proceeds will be used for the following purposes: to finance certain previously purchased or expected to be purchased Mortgage-Backed Securities or participations therein.

Date of Relevant Committee

19 August 2022

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) [Single Family Program] has an ESG Relevance Score of '4' [+] for Customer Welfare - Fair Messaging, Privacy & Data Security due to program 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[s] 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.

(C) 2022 Electronic News Publishing, source ENP Newswire