State housing finance agencies are increasingly willing to comply with bond insurers' requests that the agencies take on more risk, according to a report issued yesterday by Standard & Poor's Corp.
"In the multifamily area in particular, state housing finance agencies have started providing general obligation pledges as additional security for insured deals," the rating agency's report says. "It is also not unusual for insurers to enter reimbursement agreements with state agencies to offset the risks of new programs."
These agreements, however, do not affect the bond insurers' irrevocable guaranty of timely payment of principal and interest, the report notes. But they do increase the agencies' exposure, the report says.
The insurers' primary motivation behind the pledges and reimbursement agreements is that the agreements could take the capital charge on the deal out of the realm of commercial real estate and into the moral obligation sector, according to Robert E. Green, director of Standard & Poor's financial guaranty insurance/mortgage banking group.
Multifamily state agency issues are considered commercial real estate because any issue that relies on repayment from assets that are in excess of four units is considered commercial real estate, Green said.
By mitigating the risk to insurers, the additional security provided by the agreements could result in lower premiums for the agencies. In addition, the structure could raise the underlying credit from the non-investment grade range to investment grade, making them acceptable to insurers, he said.
"They're looking at how HFAs can broaden the scope of business and how the bond insurers can contain risks," Green said. "There has been no watershed event. It's more of a slow evolution of the dialogue between HFAs and bond insurers."
In one case cited in the report, the Massachusetts Housing Finance Agency entered into an agreement with Financial Security Assurance Inc. on a housing revenue bond issue that stipulates the agency will reimburse the insurer for all amounts expended to pay debt service.
Paul Burbine, financial director for the Massachusetts agency, said a shift in credit enhancement providers is responsible for the trend. The agency has over $400 million of insured multifamily issues outstanding.
"In the past, it was just MBIA and sometimes AMBAC. Now we deal with FSA, and that was part of the deal." he said. "We do underwriting on the mortgages, so we thought we could take the risk."
The agency acquiesced to the insurer's request despite the increased exposure because "it is very difficult to do uninsured multifamily housing deals nowadays, [and] we wanted a triple-A," Burbine said.
The additional backing has not been required on single-family deals, he said.
Through the second quarter of 1993, AMBAC Indemnity Corp. was the leading enhancer of state housing finance agency debt, according to Securities Data Corp. AMBAC has insured three issues with a principal amount of $470.7 million so far in 1993. Municipal Bond Investors Assurance Corp. has backed ten deals with principal amount of $93.1 million, and FSA has insured one $10.7 million issue, according to Securities Data.
Financial Guaranty Insurance Co. has not insured any state housing finance agency deals to date in 1993, but a spokesman for the insurer said the firm does consider such issues on a limited basis.
