DALLAS - Standard & Poor's last week downgraded to default status $53.5 million of bonds issued by the Texas State Affordable Housing Corp. on behalf of the American Opportunity for Housing program, following the cancellation of an insurance policy on the debt and an insufficient debt service payment.

Analysts downgraded the long-term rating on the Series 2002A multifamily housing revenue bonds 18 notches from AA-minus - based on insurance from MBIA Insurance Corp. - to D because the March 4 debt service payment was about 30% short, constituting a default. Only $900,000 of the necessary $1.3 million was remitted, according to analysts. Standard & Poor's also suspended its C underling rating for the bonds after learning of the cancellation of the insurance policy.

The bonds were insured by MBIA until late December when the policy was cancelled, analysts said.

"The rating should've been dropped to C in December when the insurance policy was terminated," said Standard & Poor's analyst Renee Berson. But analysts weren't immediately made aware of the cancellation. "You don't normally see a bond insurance policy cancelled like this," she said.

Moody's Investors Service downgraded its rating on the bonds to Baa1 last month. Last summer, Fitch Ratings withdrew all of its ratings on outstanding debt insured by MBIA following a request from the company to do so.

A spokesman for MBIA, who declined to be identified, confirmed the policy was cancelled late last year. He agreed that it's rare for policies to be cancelled, as you need all the bondholders to consent. In this case, one entity owns nearly 100% of the bonds, easing the ability for the cancellation, according to the MBIA spokesman.

The spokesman would not comment as to why the policy was cancelled and it was not clear why the majority investor agreed to cancel the policy.

In the official statement for the bond offering, David Starr was listed as president of the American Opportunity for Housing, which is a Kansas-based, nonprofit "state of Texas certified community housing development organization."

Phone calls to David Starr & Associates, a real estate investment firm based in San Antonio, were not returned by press time.

"AOH has always focused on providing affordable multifamily housing in markets where it is most needed," according to the group's Web site. "Use of tax-exempt bonds and availability of tax exemption are integral factors in AOH being able to acquire quality multifamily units that are crucial to the neighborhoods' workforce housing needs."

Proceeds from the Series 2002A bonds were used to acquire five multifamily housing developments, three of which are in Spring, about 25 miles north of Houston, while the others are in the Dallas suburbs of Arlington and Grand Prairie.

The bonds are secured through "a first lien on and pledge and assignment of a security interest in the property," the official statement says.

Of the $53.5 million of multifamily revenue bonds sold in March 2002, about $49.4 million remain outstanding.

Newman & Associates Inc. was the underwriter of four term bonds, two of which have matured. A $15.1 million term bond set to mature in 2022 and another $29.3 million term scheduled to mature in 2032 remain outstanding.

The bonds last traded in November, when $29.3 million was sold at 70 cents on the dollar yielding 8.535% with a 5.55% coupon, according to Thomson Muncipal Market Monitor.

The Texas Affordable Housing Corp. issues debt as a conduit for numerous programs that provide mortgage loans to qualified buyers across Texas. Proceeds from single-family and multifamily housing revenue bonds are used to finance mortgage loans, usually for first-time home buyers, either directly or through a third-party lender.

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