Fitch Ratings has affirmed the 'AA+' rating on approximately $3.2 billion in outstanding parity debt issued under Maryland Community Development Authority's (MCDA's) residential revenue bond (RRB) resolution.

The Rating Outlook is Stable.

RATING ACTIONS

Entity / Debt

Rating

Prior

Maryland Community Development Administration (MD) [Single Family Program]

Maryland Community Development Administration (MD) /Aug 1997 Indenture - SF Mortgages/1 LT

LT

AA+

Affirmed

AA+

Page

of 1

VIEW ADDITIONAL RATING DETAILS

The affirmation of the 'AA+' rating reflects the continued strengthening of the program's asset quality, as evidenced by the growing percentage of the mortgage-backed securities (MBS) portion of the portfolio; the program's continued financial strength demonstrated by cash flow asset parity levels; adequate profitability; and manageable leverage ratios. MCDA expects to continue financing single-family new issuance through the purchase of MBS, which should lead to a continued increase in the portfolio's MBS composition.

SECURITY

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

KEY RATING DRIVERS

Asset Quality 'Strong': The rating reflects the continued strengthening of the asset quality of the loan portfolio, with a significant increase in the MBS portion of the portfolio to $2.19 billion, or 85% of the portfolio as of December 2023, from 80% in June 2023, thereby establishing a trend of MBS representing more than 70% of the portfolio for the last two fiscal years. MCDA's current single-family origination program consists predominantly of the purchase of MBS, which continues to increase the share of MBS in the portfolio.

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 (AA+/Stable).

With the increase in the MBS portion of the portfolio, the single-family whole loan portfolio has correspondingly decreased and comprised 15% of the portfolio as of Dec. 31, 2023. The insurance breakdown of the single-family whole loans is: 45% privately insured (split among seven providers); 43% FHA-insured, 6% insured by other government providers and MHF; and 5% uninsured (with a loan-to-value ratio at or below 80%).

The single-family whole loans have exhibited strong performance, mitigating the potential for losses in the program. As of Dec. 31, 2023, the single-family whole loan delinquency rate was 7.2% (60+ days), which, although elevated, represents a decline from 11% in March 2021, and is also below the peak rate of 15.6% seen in December 2013. Only 1.28% of loans were in foreclosure as of Dec. 31, 2023. The elevated delinquency rates are mitigated by the program's robust overcollateralization and significant insurance coverage, which alleviate concerns over potential loan losses that could challenge the program's viability.

Cash Flow Asset Parity 'Strong': The rating also reflects the program's continued high levels of cash flow asset parity, with opening parity of 117%. After incorporating various stress assumptions, which include interest rate stresses, prepayment stresses and a 10% loan loss assumption, the program maintains a cash flow asset parity position of no less than 114% for the life of the bonds. Further, Fitch's current loan loss assumption for the portfolio has improved, declining to 8.7% in 2024 from 9.7% in 2023. The level of overcollateralization is sufficient to support the 'AA+' rating on the program given the current composition of the portfolio. MCDA has also maintained the strong credit quality of the program by keeping sufficient excess collateral in the program.

Financial Resources and Program Structure 'Midrange': The program remains financially solid as illustrated by recent financial performance. Although still sufficient to support the rating, the program's financial asset parity decreased to 111% in fiscal 2023 from 115% in fiscal 2022, reflecting a decline in net assets to $289 million from $314 million. This decline reflects reduced interest income on mortgage loans due to MCDA's shift to an MBS portfolio, the smaller gain on the sale of MBS, as well as a decline in the fair value of MBS.

Additionally, the program's debt to equity (DTE) ratio increased to 8.6x in fiscal 2023 from 6.4x in fiscal 2022, reflecting a strong year of debt issuance matched by similar growth in assets. The five-year average DTE ratio stands at 6.1x. In Fitch's view, this high leverage is mitigated to a large degree by the program's strong overcollateralization as demonstrated in stressed cash flow projections, along with the high level of mortgage insurance and federal guarantees.

Net operating margin was stable at 29.4% and net interest spread (NIS) remained adequate at 11% in fiscal 2023. Declining NIS also reflects the administration's shift to MBS, which generally provide lower spreads than whole loan programs. Fitch will continue to monitor the program's financial profile and ongoing trends in profitability and equity levels.

Indenture provisions restrict the release of excess funds, allowing for program funds to be withdrawn down to 102% asset parity.

Asymmetric Risk Factors 'Neutral': MCDA is governed by an experienced management team and active board of directors. MCDA 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 that allow for only full documentation loans. Underwriting standards include restrictions on mortgagor eligibility, income, and housing prices. Lastly, transfers to the state are transparent and predictable, allowing management to prepare and measure available resources.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

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

Deteriorating financial performance or loan performance that leads to declines in the program's 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

Should the program transition to a primarily MBS portfolio, a positive rating action on the U.S. sovereign rating could positively impact the rating on the bonds.

PROFILE

As of Dec. 31, 2023, there was $3.2 billion in outstanding parity debt, comprising 36 bond series, under the RRB resolution. The loan portfolio consisted of 4,457 single-family whole loans, with an outstanding principal balance of $376 million, plus MBS in the amount of $2.2 billion.

Since 2021 MCDA has issued bonds under the designation of 'Social Bonds' based on the intended use of proceeds, which is to finance mortgage loans for the purchase of owner-occupied single-family residences by persons or families of limited income. The designation reflects lending practices that consider project evaluation and selection, management of proceeds, and post-issuance reporting.

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 ratings in conjunction with other factors.

Maryland Community Development Administration (MD) [Single Family Program] has 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 ratings in conjunction with other factors.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores.

Additional information is available on www.fitchratings.com

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