S&P - Public Finance Criteria (2007). - The Global Clearinghouse

HousingIntroduction ToTax-Exempt Housing BondsRatings on tax-exempt housing bonds rely on thefollowing factors:■ Credit quality of mortgage collateral, includingcredit quality of mortgage insurers and guarantors,property insurers, and rent subsidyproviders;■ Credit quality of other income streams, such asfederal, state and local funding sources.■ Adequacy of reserve levels needed to provide asafety net for interruptions in debt service attributableto delinquency, default, and foreclosure;■■■■Credit quality of investments of all funds held forthe benefit of bondholders;Sufficiency of cash flow to make bond paymentsunder expected, as well as stress, scenarios;Ability of legal provisions to protect the flow offunds to bondholders under all circumstances;andThe ability of an issuer, obligor and trustee toadministrate its programs effectively. ■Single-Family Whole Loan ProgramsStandard & Poor’s Ratings Services rates singlefamilymortgage revenue bonds backed by wholeloans or loans securitized by the GovernmentNational Mortgage Association (Ginnie Mae), theFederal National Mortgage Association (FannieMae), and the Federal Home Loan Mortgage Corp.(Freddie Mac). Please refer to, “Public FinanceCriteria: Single-Family Mortgage-Backed SecuritiesPrograms,” for criteria specific to these MBS programs.Standard & Poor’s approach to rating wholeloan MRBs focuses on six areas of analyses: qualityof mortgage loans, insurance, cash flow analyses,reserves and investments, legal provisions, and programmanagement.Quality Of Mortgage LoansThe primary factors used to assess asset qualityinclude property type, type of loan, loan-to-value(LTV) ratio, portfolio size, and economic conditionswithin the lending area. These factors indicate aportfolio’s vulnerability to delinquencies, defaults,and possible deterioration in market values. In addition,due to anti-predatory lending legislation nowin place in many states, Standard & Poor’s will lookfor possible risk exposure in the loan portfoliobased on the specific issuer’s potential liability.Property typeHistorically, MRB issuers have restricted their portfoliosto single-family, owner-occupied detacheddwelling units. The targeting of money for othertypes of homes such as two-to-four unit homes, coops,and condominiums may occur to address thespecific housing needs. Standard & Poor’s ratinganalysis factors in the increased risks associatedwith these product types.Types of loansThe standard high quality, least risky loan portfolioconsists of 30-year level-pay, fixed-rate, first-lien,fully amortizing mortgages on single-family residentialproperties. Standard & Poor’s considers rehabilitationloans, construction loans, second-orthird-lien mortgages, bought-down mortgages, andtiered-payment mortgages to be significantly riskier.More recent product lines such as interest-onlyloans, 40-year mortgages, second loans and piggybackloans also have a higher risk profile.LTV ratioLTV ratios are an important determinant of thelikelihood of default. Higher LTV loans will havea higher assumed foreclosure frequency (FF)—acritical determinant of loss coverage. Programs230 Standard & Poor’s Public Finance Criteria 2007