California Housing Finance Agency Stops Lending, Variable Rate Credit and Private Mortgage Insurance Downgrades Contribute to Problem.

Bond Buyer has story HERE.

"The problem is the frozen credit market, particularly the dislocation in the variable-rate muni bond market. CalHFA has about $4 billion of variable-rate bonds in its $8.4 billion portfolio of outstanding debt. The agency has seen hundreds of millions of dollars worth of bonds put back to liquidity banks because investors are worried about the banks' credit. It had $567 million of bank bonds as of Dec. 11. Variable-rate demand obligation holders have the right to demand repayment for their bonds on short notice, and municipal issuers use bank standby bond purchase agreements or letters of credit to provide the liquidity in case of such puts.

When investors fear a liquidity bank or insurer is in trouble, they can put their bonds, forcing bond issuers to pay penalty rates and to repay debt on an accelerated schedule. CalHFA's bank bond inventory was down by about half from mid-October, but still represented about 14% of its variable rate portfolio.

As of early December, the problem bonds broke down into two categories - the agency had $902 million of VRDOs insured by MBIA Insurance Corp., Financial Security Assurance Inc., or Ambac Assurance Corp. It also had $924 million with liquidity from Dexia Credit Local or Depfa Bank NA. The three insurers and the two liquidity banks have been downgraded this year, reducing investor appetite for securities with their backing. Some of the debt falls into both categories.

The vast majority of CalHFA's bank bonds carry liquidity from Dexia or Depfa. Its insured debt tends to remarket successfully, but the agency has been forced to pay a premium to convince investors to buy it. The agency paid an average interest rate of 2.5% on its variable-rate debt in the month before Dec.11. That's roughly twice the Securities Industry and Financial Markets Association swap index's average over the same period.

The stresses buffeting the agency convinced Moody's to put the agency's Aa3 general obligation bond rating under review for possible downgrade in late September. The rating agency said Dec. 28 that the bonds remain under review."