WASHINGTON - Moody's Investors Service has placed $2.2 billion of the Maryland Community Development Administration's Aa2-rated residential revenue bonds on watch for a possible downgrade.

The action is mostly due to an "increase in the program's loan-loss exposure" because of the recent rating downgrades of private mortgage insurance companies, which insured many of the MCDA's loans, Moody's said in a July 2 release.

The bonds are backed by revenues and assets, mostly interest on first-lien mortgages, investments, and reserves, according to the rating agency.

The insurer downgrades were factored into a "stress scenario that we run, that assumes a stress level on delinquencies and foreclosures," said Florence Zeman, an analyst and head of the housing team for Moody's public finance group.

Mortgage insurance is a "significant factor in the ratings of state housing finance agency single-family, whole-loan programs," Moody's said in the release. The insurance tempers a housing revenue program's exposure to loss from delinquencies and foreclosures in its loan portfolio. As a result, an insurer rated A1 and below by Moody's can provide only "partial credit" in determining the level of losses that must be absorbed, the agency said.

Because of the insurer downgrades, bond insurance provided the MCDA's residential revenue bonds less of a benefit - or no benefit at all in some cases - when the bonds were put through the stress scenario, according to Zeman.

She said that about 61% of the loans in the MCDA's residential revenue bond program are currently insured by private mortgage insurance companies. Most of the insurance comes from Mortgage Guaranty Insurance Corp., with a smaller amount from United Guaranty and Republic Mortgage, Zeman said.

However, the rating agency said it believes the MCDA is working toward "a quick resolution" of the factors that led to the downgrade watch.

"They told us they're working on it," Zeman said.

The administration is considering transferring assets from other trust indentures into the bond program, among other options to increase the program's asset base, according to Moody's. As long as the MCDA finds a way to buttress its program to the Aa2 level, its Aa2 rating is "likely to be confirmed," the agency said. Otherwise, if it maintains its current financial strength but cannot find additional assets or support, the program could be downgraded by one notch, but probably not more than that, Moody's said.

The rating agency also considered the MCDA's debt structure - including its variable-rate debt exposure - and counterparty exposure, as well as cash flow and management, according to Moody's analysts.

"We always look at their financial performance," Zeman said. Revenues going into the MCDA's residential revenue bond program have been "fairly steady" over the past few years and were not responsible for the negative watch, she said.

The program has mostly fixed-rate debt; only about 16% of its debt is variable rate, Zeman said.

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