Fitch Ratings has assigned a 'AA+' rating to the following Vermont Housing Finance Agency (VHFA) multiple purpose bonds.

$19.53 million 2023 series A (Non-AMT) (social bonds);

$5.0 million 2023 series B (Federally Taxable);

Additionally, Fitch has affirmed the 'AA+' rating on approximately $193.4 million (as of Nov. 30, 2022) in multiple purpose bonds outstanding parity debt.

The Rating Outlook is Stable.

The 'AA+' rating reflects the continued strengthening of the program's asset quality, as indicated in the growing percentage of the mortgage-backed securities (MBS) portion of the portfolio; the program's continued financial strength demonstrated by the FY 2022 results and cash flow asset parity levels; and the low percentage (3%) of variable rate debt exposure. VHFA expects to finance single-family new issuance through the purchase of MBS going forward, which will lead to a continued increase in the portfolio's MBS composition.

RATING ACTIONS

Entity / Debt

Rating

Prior

Vermont Housing Finance Agency (VT) [Single Family Program]

Vermont Housing Finance Agency (VT) /Housing Revenues/1 LT

LT

AA+

Affirmed

AA+

Page

of 1

VIEW ADDITIONAL RATING DETAILS

SECURITY

The bonds are general obligations of VHFA and are secured by: single-family whole loans; multifamily loans; MBS guaranteed by Government National Mortgage Association (Ginnie Mae), Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac); and certain cash and investments held under the resolution. The multiple purpose bond program rating does not rely on the general obligation pledge to maintain the 'AA+' rating currently assigned to the bonds.

KEY RATING DRIVERS

Asset Quality 'Strong': The rating reflects the continued strengthening of the asset quality of the loan portfolio, with the significant increase in the MBS portion of the portfolio to 72% as of Nov. 30, 2022 compared with 70% as of May 2022 (as of the last new issuance), 26% as of June 30, 2015 and 0% at program inception in 2007. VHFA's current single-family new origination program consists solely of the purchase of MBS, which will increase the MBS percentage of the portfolio to approximately 75% following the 2023 Series A and B issuance.

For the MBS portion of the portfolio, 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 Ginnie Mae, Fannie Mae and Freddie Mac are currently linked to the U.S. sovereign rating.

With the increase in the MBS portion of the portfolio, the single-family whole loan portfolio has correspondingly decreased and comprised 20% of the portfolio as of Nov. 30, 2022. The insurance breakdown of the single-family whole loans is: 84% uninsured (with an LTV of 80% or lower), 14% Rural Development guaranteed, and 2% insured by Mortgage Guaranty Insurance Corporation. The multifamily loans, which were 33% of the portfolio at program inception, have decreased to 8% of the portfolio.

Both the single-family whole loans and multifamily loans have exhibited strong performance, despite pandemic-related challenges, mitigating the potential for losses to the program. As of Nov. 30, 2022, the single-family whole loan delinquency rate was 5.66% (60+ days by loan count), a decline from 5.98% as of May 31, 2022 at the time of the last issuance, and also below the June 30, 2020 rate of 6.9%. There were 67 single family and two multifamily loans that requested forbearance since March 2020, with an aggregate forborne outstanding loan amount of $13,094.

There are currently no loans in forbearance and no multifamily delinquent loans. Actual loan losses for this program have been minimal over time, approximately $6.7 million in aggregate since program inception in July 2007.

Cash Flow Asset Parity 'Strong': The rating also reflects the program's continued high levels of cash flow asset parity. After incorporating Fitch stress assumptions, which include interest rate stresses, prepayment stresses, increased fees upon liquidity renewal, and loan loss assumptions, the program maintains a cash flow asset parity position above 130% for the life of the bonds. This level of overcollateralization is sufficient to support the 'AA+' rating on the program given the current composition of the portfolio. The stressed overcollateralization calculation excludes approximately $7.3 million of non-amortizing, non-interest-bearing multifamily loans, as repayments of such loans may not be available for the repayment of the bonds.

Financial Resources and Program Structure 'Strong': The program remains financially strong as illustrated in recent financial performance. As of FY 2022, the program's financial asset parity decreased marginally to 130% from 134% in FY 2021, still above the five-year average asset parity of 125%. The overall decline in net assets in FY 2022 reflected a $17.1 million change in the fair value of investments as well as a net transfer of $1.8 million. However, the program's profitability, as measured by the net interest spread and net operating revenues as a percentage of total revenues, both improved in FY 2022. The supplemental indentures provisions restrict the release of excess funds, allowing for program funds to be withdrawn to 102% asset parity.

Asymmetric Risk 'Neutral': The multiple purpose bond program is neutral to any asymmetric risks that would constrain the rating.

RATING SENSITIVITIES

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

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

Negative financial performance or loan performance that leads to declines in program retained earnings;

Withdrawal of program funds resulting in a stressed cash flow asset parity ratio that falls below 102%.

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

A transition to a primarily MBS portfolio, further strengthening the program asset quality such that the MBS can solely support the debt and/or the overcollateralization provided by the MBS and other 'AAA' stressed assets, supports a higher rating category.

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

VHFA works to: ensure that all Vermont residents have access to affordable homeownership and affordable rental housing; keep people in safe and healthy homes; and build livable and sustainable communities. The multiple purpose bond indenture was adopted in July 2007 for the purpose of financing mortgage loans on single-family residential housing units and multifamily residential units for persons and families of low and moderate income in Vermont. As of Nov. 30, 2022, there was $193.4 million in outstanding parity debt under the multiple purpose bond indenture.

As of the same date, the $224.1 million loan portfolio consisted of: 72% MBS certificates, 20% single-family whole loans, and 8% multifamily loans. An additional $32.1 million was held in reserve accounts in high credit quality investments. Following the 2023 Series A and B issuance, the MBS portion of the portfolio will increase to approximately 75%. Fitch's ongoing credit analysis will be driven by the indenture's portfolio composition and performance, asset parity position, financial results, and cash flow strength.

The 2023 Series A and B bond proceeds will be used: (i) to finance single family loans through the purchase of MBS; and (ii) to fund the revenue fund and cost of issuance amounts. The 2023 series A and B bonds are on parity with the outstanding multiple purpose bonds.

VHFA is designating the 2023 Series A as Social Bonds based on the intended use of proceeds to finance the purchase or improvement of single-family housing located in the state.

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

Vermont Housing Finance Agency (VT)'s multiple purpose bonds have an ESG Relevance Score of '4' [+] for Customer Welfare - Fair Messaging, Privacy & Data Security due to it being an HFA program focused on customer welfare and fair messaging, which contributes to reduced expected losses in the rating analysis.

The focus on customer welfare includes fair lending practices, homebuyer education and counselling, and loss mitigation strategies that, when combined, strengthen the program loan performance, which has a positive impact on the credit profile, and is relevant to the rating in conjunction with other factors.

Vermont Housing Finance Agency's multiple purpose bonds have an ESG Relevance Score of '4' [+] for Human Rights, Community Relations, Access & Affordability due to the GSE guarantee that addresses access and affordability while driving strong performance, 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.

Additional information is available on www.fitchratings.com

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