OREANDA-NEWS. Fitch Ratings has affirmed the ratings on Utah Housing Corporation's (UHC) single-family mortgage bonds (May 2000 Indenture) as follows:

--\$382.1 million 2000 Class I bonds at 'AAA';
--\$16.8 million 2000 Class II bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY
The bonds are secured by all assets and revenues under the indenture which mainly comprise mortgage loans, investments, and reserve funds. The assets and revenues of the trust estate secure the Class I and II bonds on a senior basis to the Class III bonds which are also backed by the general obligation (GO) pledge of the issuer's assets (rated 'AA-'; Stable Outlook by Fitch).

KEY RATING DRIVERS

SUFFICIENT ASSET PARITY LEVELS: As of Dec. 31, 2014, the Class I and II bonds had asset parity levels of 117% and 112%, respectively.

STRONG PROGRAM PROVISIONS: The various supplemental indentures provide for strong asset parity requirements, and the average requirement for the Class I bonds is 116% and the Class II bonds is 111%.

FEDERALLY INSURED PORTFOLIO: The program's loan portfolio is 98% insured by FHA and 2% insured by the VA, mitigating concerns over potential loan losses.

SUCCESSFUL MANAGEMENT PERSONNEL: UHC has an experienced management team that has demonstrated their expertise in addressing market challenges that affected their bond programs.

WEAK DEBT STRUCTURE: UHC has been unable to economically redeem certain variable rate debt obligations within the program due to the high termination fees of existing hedging contracts tied to the debt. This has resulted in negative arbitrage, and operating losses, within the program as mortgages prepay and proceeds are invested in lower interest income-yielding investments.

AGENCY FINANCIAL SUPPORT: Over the last two fiscal years, UHC has made transfers of \$11.6 million and \$11.5 million, respectively, to help maintain asset parity ratios within the program. UHC reported net income of \$14.3 million and \$7.7 million in fiscal 2014 and fiscal 2013, respectively, and current interim financial statements show continued agency profitability despite program operating losses.

RATING SENSITIVITIES

HIGH LOAN PREPAYMENTS/LOW INTEREST RATES: Given the current debt structure and low interest rate environment, if UHC mortgage loans continue to experience accelerated prepayment speeds, the program may experience negative arbitrage and/or high termination fees which could increase program operating losses and put negative pressure on the Class I and II ratings.

INABILITY TO MAINTAIN PROGRAM PROVISIONS: The program has received on-going transfers from the agency to support the strong asset parity ratios, meeting the requirements of the indenture. Discontinuation of these transfers resulting in a failure to meet the asset parity requirements on the Class I and II bonds would be viewed as a credit negative and would most likely result in a downgrade of the program ratings.

CREDIT PROFILE

The affirmation of the Class I and II bonds reflects current asset parity ratios, the strong program provisions, and the UHC's on-going financial support for the program. As of Dec. 31, 2014, the Class I and II bonds had respective asset parity levels of 117% and 112%. The program's assets are primarily composed of \$184 million in program loans and \$262 million in investments, which are invested in various guaranteed investment certificates (GICs) and money market funds. As of Dec. 31, 2014, the loan portfolio had a delinquency rate of 8.13%, which is higher than state and national averages. Concerns over loan losses are mitigated by the insurance on the loan portfolio which is currently 98% FHA-insured and 2% VA-insured.

Credit concerns stem from the program's operating losses which are attributed to the debt structure, as approximately 85% of the debt under this program is variable-rate with all the variable-rate bonds being swapped to a synthetic fixed-rate. Approximately \$110.6 million of the variable-rate debt is in the form of variable-rate demand obligations (VRDOs) and the remaining \$269.6 million is LIBOR-based index bonds with no demand feature. UHC has been unable to economically redeem certain VRDOs due to high termination fees of existing hedging contracts tied to the debt. As mortgages prepay, proceeds are reinvested in highly rated, low interest-yielding instruments which has resulted in negative arbitrage within the program. The negative arbitrage has led to operating losses within the program of \$8 million and \$10.7 million, respectively, in the last two fiscal years.

Concerns over program operating losses are currently mitigated by UHC's management team, UHC's early termination optionality on certain swaps (starting in 2016), and the agency's on-going financial support to maintain asset parity provisions. UHC has made transfers of \$11.6 million and \$11.5 million in the last two fiscal years, respectively, to maintain asset parity ratios on the Class I and II bonds. Despite losses from the program, UHC has reported net income of \$14.3 million and \$7.7 million in the last two fiscal years. In addition, unaudited interim financial statements demonstrate continued agency profitability during the mid-point of fiscal 2015. Although remote, based on Fitch's view of current management personnel and agency financial statements, if the agency's support of the program ceases and asset parity requirements are not met on the Class I and II bonds, there will be negative pressure on the ratings which would most likely result in a downgrade of the bonds.