Fitch Affirms SONYMA MIF Proj Ins at 'AA-' / SF Ins at 'AA+'; Proj Ins Outlook Remains Negative

Fitch Ratings affirms the ratings of the State of New York Mortgage Agency (SONYMA) mortgage insurance fund's (MIF) insurance accounts as follows:

--$3.6 billion in risk in force (RIF) and commitments in the project pool account (project account) at 'AA-';

--$512.4 million in RIF and commitments in the single-family insurance account (single-family account) at 'AA+'.

Additionally, Fitch affirms the following Dormitory Authority of the State of New York (DASNY) bonds supported by MIF's project pool account:

--$24.6 million DASNY Buena Vida Nursing Home revenue bonds, series 2013 A at 'AA-';

--$5.4 million DASNY Ryan/Chelsea-Clinton Community Health Center Inc. revenue bonds, series 2012 A at 'AA-'.

The Rating Outlook for the project account and the DASNY bonds is Negative.

The Rating Outlook for the single-family account is Stable.

SECURITY

The MIF is secured by all the reserves in the SONYMA MIF. Both the project and single-family accounts maintain individual reserve accounts.

KEY RATING DRIVERS

ADEQUATE RISK-TO-CAPITAL RATIOS: The project and single-family accounts still maintain relatively low risk-to-capital ratios (based on original loan balances) which are commensurate for their respective ratings. The Negative Outlook on the project account reflects a rapidly increasing risk-to-capital ratio which has risen to 2.65x in FY 2014 from 2.24x in FY 2012.

REDUCED FINANCIAL SUPPORT/INCREASED COMMITMENTS: The state continued its financial support in the form of mortgage recording tax surcharge receipts (surtax receipts) of $139.3 million in FY 2014; however, it required SONYMA to transfer $136 million from the project account's reserves. The Negative Outlook on the project account reflects the reduced financial support from the state in the last two years, the increasing demand for project account insurance, and the increased reliance on surtax receipts.

SOUND RESERVES/LOAN PERFORMANCE: All reserves are invested in highly-rated, liquid assets. Additionally, loan losses have historically been low relative to the amount of risk insured.

DECREASED SNF RISK: Special needs facilities (SNFs) present the greatest risk to the portfolio; this portion of the portfolio has decreased to 4.5% in 2014 from 20% in 2007.

RATING SENSITIVITIES

INCREASED RISK TO CAPITAL RATIO: As the risk-to-capital ratio on the project account continues to increase, it may increase to a level such that it may no longer be appropriate for the 'AA-' rating and could result in a downgrade.

STATE TRANSFERS: Surtax receipts have been increasing in recent years and SONYMA has transferred large lump sums out of project account reserves. Continued transfers may drain reserve accounts and could put negative pressure on the project account's rating.

INCREASED COMMITMENTS/LOAN LOSSES: Increases in commitments or loan losses could increase risk-to-capital ratios and put negative pressure on the respective account's rating.

RATING CRITERIA

Fitch's rating approach for a state housing finance agency (SHFA) mortgage insurance or guarantee fund program involves: a quantitative assessment of the fund's financial profile, an assessment of operating cash flows, a detailed analysis of the insurer's risk portfolio, and a qualitative analysis of management and program provisions.

A major credit component in the Fitch analysis of a mortgage insurance fund is an assessment of a MIF's financial resources with respect to the fund's overall operations and the availability of capital to cover potential claims. As part of its review of financial resources, Fitch reviews the following: the mortgage insurance fund's financial performance, established reserve levels, capital adequacy ratios, claims payment history and the insurance funds' investments. Fitch views the primary driver of a MIF to be the program's risk-to-capital ratio which measures total potential claims risk of an insured loan portfolio to the insurance fund's dedicated reserves and available capital for claim payments.

Fitch analysis considers a MIF's ability to generate cash flow from operations and its sufficiency to cover operating costs, potential claim payments, additional risk from the addition of newly insured loans, and debt payments (if any).

Fitch views a MIF's risk portfolio and the quality of the insured mortgages as a key credit component in the analysis. Fitch's analysis focuses on several major areas in determining the quality of the insured portfolio and the degree of risk within the portfolio: the program's underwriting standards for insured loans/projects, the type of loans/projects being insured, concentration within the risk portfolio, and state economic indicators.

The effectiveness of governance and management oversight is an important factor in assessing a MIF's creditworthiness. Fitch evaluates the following areas when reviewing a MIF's management capabilities: history of successful financial operations, staff personnel experience and continuity, historical program oversight abilities, disclosure abilities, and the level of SHFA board participation within the program. Additionally, Fitch reviews program provisions for: any cap on risk-to-capital ratios, any investment guidelines for reserve funds, underwriting standards for insured projects, and any ability for reserve funds to be transferred out of the program.

CREDIT PROFILE

BACKGROUND

The MIF was created in 1978 as a separate operating unit of SONYMA and is made up of two accounts: the project pool account and the single-family account. The project pool account primarily insures mortgages on multi-family housing, cooperative housing, and housing for the elderly. To a smaller extent, the project pool account insures mortgages on SNFs, elderly assisted-living residences, and retail and community service projects. The single-family account provides primary and pool insurance for single-family houses throughout the state of New York. Current reserve policies require the MIF to maintain reserves at a minimum of 20% of insured risk on all policies in force and commitments outstanding, with SNF projects requiring 40% of risk. Additionally, the MIF must reserve 100% of a project's liability on any project filing a claim.

RISK-TO-CAPITAL RATIOS

As of March 31, 2014, the project account's risk-to-capital ratio was 2.65x, which was an increase from 2.24x in 2012. The single-family account's risk-to-capital ratio decreased to 2.01x in 2014 from 2.03x in 2013. The increase in the project account's risk-to-capital ratio is mainly attributed to the state's required transfer of $136 million out of the project account's reserves in FY 2014. The state's ability to redirect the MIF's reserve funds is an on-going credit concern.

Continuous transfers out of the project account reserve funds could potentially drain excess reserve accounts, increase risk-to-capital ratios, and put negative pressure on the project account's rating. The Negative Outlook on the project account reflects its increasing risk-to-capital ratio and the reduced support from the state in the form of increased transfers out of the project account's reserves. As the risk-to-capital ratio continues to increase, this ratio may no longer be appropriate for the 'AA-' rating and could result in a downgrade.

REVENUES

The MIF's sources of revenues are in the form of surtax receipts, investment earnings, fees, and premiums. MIF's main source of revenue is the mortgage surtax receipts, which were $139 million as of fiscal year ending March 31, 2014. The mortgage surtax receipts are collected by the county and then appropriately distributed to the MIF on a monthly basis. The amount of mortgage recording surtax receipts received has fluctuated in recent years, yielding a high of $198 million in 2008 and a low of $65 million in 2001. The $139 million for 2014 is a 22% increase from the $114 million received in 2013.

Given the increasing demand for SONYMA MIF project account insurance in recent years, there is an increased reliance on surtax revenues to cover the additional insured risk that the surge of new commitments will bring. While surtax revenues have increased in the last couple of years, the state has required transfers which has minimized or negated the benefit of incoming revenue support. Continued transfers from the project account could further strain reserve accounts relative to insured risk and may put negative pressure on the rating. Credit concerns continue to revolve around the state's ability to redirect MIF reserve funds.

PROJECT POOL ACCOUNT

As of March 31, 2014, the project account had 986 policies in force (PIF) covering $2.6 billion in risk. Additionally, the project account had 227 commitments outstanding which totalled $963 million in risk, giving the project account a total risk of $3.6 billion in 2014. This is an increase from the $3.3 billion in risk insured as of March 31, 2013. The increase in risk is attributable to the recent increase in demand for SONYMA insurance. With increased volumes expected to continue, more pressure is put on the MIF to increase reserves and rely on mortgage surtax receipts. The project account currently has $1.36 billion in reserves which includes required reserves for PIF and commitments as well as excess reserves containing cumulative retained earnings. The account has a risk-to-capital ratio of 2.65x when factoring in all reserves. The project account has relatively low historical losses which total $125 million in aggregate claims paid since inception. This $125 million represents only 4% of PIF and commitment risk outstanding as of March 31, 2014.

In addition, a positive credit factor has been the decrease in risk of SNFs as a percentage of the project account's portfolio in comparison to previous years. SNFs are the riskiest form of project due to their heavy reliance upon New York's Medicaid reimbursement system for funds. Within the current policies in force, there are 12 SNF facilities. Furthermore, insured amounts are $160 million, which is 4.5% of RIF and commitments. This is a significant decrease from 2007 when SNFs accounted for 20% of total risk. Overall, the credit concerns over SNFs are somewhat mitigated by the 40% reserve requirements on SNFs, their decreased proportion to total risk in comparison to previous years, and the lack of any additional SNFs in commitments.

SINGLE-FAMILY ACCOUNT

As of March 31, 2014, the single-family account had a combined risk insured of $512.4 million. This account consists of primary insurance and pool insurance. The pool insurance account consists of 35 pool insurance policies covering 29,262 loans, covering an aggregate mortgage amount of $2.9 billion, with an aggregate loss limit set at $455 million. The primary insurance account has 1,440 policies in force covering $54.6 million in risk as of March 31, 2014. In addition, the primary insurance account has 44 commitments totalling $1.8 million in risk. The single-family account currently has a combined $255 million in reserves which includes required reserves for both primary and pool accounts as well as excess reserves containing cumulative retained earnings. The single-family account has a risk-to-capital ratio of 2.01x when factoring in all reserves, which is a decrease from 2.03x in March 31, 2013. The single-family account has also had low historical losses, totalling $30.4 million in aggregate claims paid. This $30.4 million represents only 6.4% of PIF and commitment risk outstanding as of March 31, 2014.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Relevant Research:

--'Revenue-Supported Rating Criteria,' June 16, 2014.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=843394

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