OFFICE OF FISCAL ANALYSIS
Legislative Office Building, Room 5200
Hartford, CT 06106 ¯ (860) 240-0200
http: //www. cga. ct. gov/ofa
sSB-437
AN ACT INCREASING THE CONNECTICUT HOUSING FINANCE AUTHORITY'S UNINSURED PERMANENT MORTGAGE CAP.
OFA Fiscal Note
Agency Affected |
Fund-Effect |
CHFA |
See Below |
Explanation
Under current law, The Connecticut Housing Finance Authority (CHFA) is permitted to hold up to $750 million in uninsured mortgages1 in its loan portfolio. The agency currently holds a total of about $4. 2 billion in loans, of which about $700 million is uninsured (about 17% of the portfolio. ) The bill increases the statutory limit on uninsured mortgages to $1. 0 billion (about 24% of the portfolio), which is closer to the historic limit of 30% that the General Assembly previously set for CHFA on this type of asset.
Increasing the amount of uninsured mortgages that CHFA can hold increases the level of default risk in its mortgage portfolio. CHFA uses the loan repayments from this portfolio to make debt service payments on bonds that are backed by a special capital reserve fund2 (SCRF). If a large number of these uninsured mortgages went into default, it could potentially affect the agency's ability to meet its debt service liability. In such a situation, the debt service payments would be made from the reserve account3 for the SCRF-backed bonds. If the reserve account fell below a certain level, the state would be obligated to appropriate money from the General Fund to refill the account. It appears very unlikely that this scenario would occur because CHFA is rated as AAA by the ratings agencies, which is higher than the State of Connecticut's rating4. CHFA's high rating indicates that the overall quality of the assets in its $4. 2 billion portfolio is considered to be very high and the overall level of default risk is low. Thus, in the unlikely event that a large number of uninsured mortgages went into default, CHFA would in all likelihood still be able to meet its debt service obligations with loan repayments from the remainder of its portfolio.
As of 1/1/05, CHFA had $2. 7 billion in outstanding SCRF-backed bonds under its Housing Mortgage Finance Program and $45. 0 million under its Special Needs Housing Mortgage Finance Program.
The Out Years
The ongoing fiscal impact of this bill is that CHFA will continue to be able to provide financing for uninsured mortgages.
1 Mortgage loans in which the borrower provides a down payment of less than 20% require insurance from sources such as the Veterans Administration, Federal Housing Administration or private mortgage insurance (PMI. ) An uninsured loan is one in which the borrower provides more than a 20% down payment.
2 CHFA issues bonds under its own authority that are backed by a special capital reserve fund (SCRF). A SCRF extends the state's credit for bonds issued by various quasi-public state bond-issuing authorities such as CHFA. SCRF-backed bonds are a contingent liability or potential financial responsibility of the state that may become a real financial responsibility at some point if the quasi-public agency fails to pay the debt service for SCRF-backed bonds it has issued.
3 CHFA is currently required to maintain a balance of about $250 million in the reserve account for the SCRF-backed bonds. The actual value of CHFA's reserve account is over $600 million, giving the agency more than twice the coverage required.
4 The State of Connecticut's General Obligation bond rating is AA from Standard & Poor's and Fitches and Aa3 from Moody's.