OHCS Single Family Bond Program Likely Impacted by Moody's Drop of MGIC Credit Rating to Junk Level.

The latest bond report from OHCS HERE (pg 7) shows that about 20% ($219 Million) of the principal balance of their SF revenue bond loans had private mortgage insurance from Mortgage Guaranty Insurance Corp.

Yesterday Moody's cut the rating of that company from A 1 to Ba2. As the story HERE indicates, that is a cut to a junk bond rating level. (Ratings of several other private mortgage insurance companies were also cut; total private mortgage insurance is 25% of the principal balance of OHCS SF revenue bond loans).

Moody's published in December 2008 an explanation of how it evaluates the strength of private mortgage insurance on HFA bonds , titled Methodology Update: Incorporating Private Mortgage Insurance in Housing Finance Agency Single Family Housing Program Bond Ratings. (Available from Moodys.com, with a free subscription).

In that explanation the assumed support level (claims paying abiility) of a A 1 rated private mortgage insurance company ranged from 60% for a Aaa HFA rated SF bond to a 100% assumed support level for a Baa rated bond.

IF the private mortgage insurance rating dropped below Baa3 this would drop the assumed private mortgage insurance support level (claims paying ability) to ZERO, regardless of the bond rating.

I am not sure what options are available to OHCS in the near term, but unless I find some new information, my assumption is that this downgrade could have a very significant impact not only here in Oregon, but around the country.

At a minimum this will accelerate the flight to FHA insured loans and their greater protection against possible loss. ( I wish I were more confident in the institutional ability of FHA to propertly scale their operations and control loan underwriting in this challenging environment).