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

Single-Family Whole Loan Programsthat reduce the amount of equity a borrower hasin the property will have an impact in the assessmentof overall losses.Portfolio sizeEach portfolio must have sufficient size and geographicaldispersion to perform in a statisticallypredictable manner. Therefore, Standard & Poor’sloss coverage model assigns higher risk factors topools fewer than 300 loans and pools of loans withlimited dispersion.Economy of the lending areaThe economy of a particular area provides indicationsof the potential severity of mortgage defaultsthat could occur over the term of the bonds.Standard & Poor’s assesses the lending area to estimatethe level of delinquencies, foreclosures, andexpected prepayments to determine whether thevalue of the mortgaged properties is likely to bemaintained over the life of the bonds.Anti-predatory lending legislationStandard & Poor’s must review the potential forfinancial liability due to anti-predatory lending legislationon all single-family whole loan programs.Many states have adopted legislation with assigneeliability that can result in fines levied against loanpurchasers should predatory lending practices beidentified. In some instances, housing finance agencieshave been specifically excluded from theselaws. If that is the case, the HFA should provide anofficer’s certificate to that effect. If not, issuers mustbe able to provide appropriate representations andwarranties to cover this risk and, in some instances,additional credit enhancement may be needed. Theneed for credit enhancement may be waived if theissuer has a long-term rating equal to the rating onthe bonds, although the risk must still be quantifiedand taken into account in the issuer’s credit rating.Insurance And Insurance AlternativesStandard & Poor’s analyzes the level of primarymortgage insurance (PMI), mortgage pool insurance,cash advance coverage, standard hazardinsurance, special hazard insurance, title insurance,and any other loss coverage credit enhancementsprovided. Standard & Poor’s also may look foradditional insurance coverage, such as flood and/orearthquake insurance, depending on the geographiclocation of the mortgaged properties. In recentyears, many HFAs have sought alternatives to traditionalmortgage pool insurance, as escalating premiumsand deteriorating insurance company ratingshave become prevalent.Calculation of loss coverageLoss coverage must be sufficient to provide creditand liquidity protection under Standard & Poor’s“worst-case” scenarios. In determining total losscoverage needed, Standard & Poor’s looks for coverageof credit losses and liquidity shortfalls.The credit coverage offsets any shortfalls occurringsubsequent to the foreclosure sale and afterreceipt of PMI. Liquidity coverage is an estimate ofshortfalls due to mortgage cash flow delinquenciesprior to foreclosure and receipt of insurance recoveriesor credit enhancement payoff.As a starting point, Standard & Poor’s approachto loss coverage assumptions begins with an evaluationof the portfolio’s origination area. The categoriesare large state, small state/large county, andsmall county/city. Large states are those with populationsabove six million. The small state/largecounty category includes states with populationsbelow six million, and counties that have populationsabove one million. Areas in the smallcounty/city category have a population of less thanone million. Geographic and socioeconomic issuesalso affect the evaluation.Standard & Poor’s loss coverage tables identifythe FF, FC, and MVD assumptions for each ratingcategory and area classification. Modification ofthese assumptions may occur, depending on aspectsparticular to a pool of mortgage loans. The categorydistinctions are reflected primarily in the FF. Thehigher the portfolio concentration, the higher therisk of severe housing price declines in the event ofa substantial economic slowdown or housing marketdisruption. Therefore, the small county/city categoryalso reflects higher MVD assumptions thanthe other two categories.Two important assumptions are critical to determinethe level of loss coverage: The percentage ofloans in the portfolio that will go into foreclosureover the life of the bond issue, or the foreclosurefrequency (FF); and the expected average loss foreach foreclosed loan, or the loss severity (LS). Thecalculation of loss coverage is simply the multiplicationof the assumed FF of a portfolio by theassumed LS. There are many factors that influenceStandard & Poor’s FF and LS assumptions. Theseinclude the bond rating, portfolio dispersion, currenteconomy, type and level of PMI, market valuedecline (MVD), dwelling type, mortgage type, servicingcapability of the participants, foreclosure costs(FC), and LTV ratios. The historical delinquencyand foreclosure performance of an existing portfolioalso will factor into the FF and LS assumptions.Standard & Poor’s considers the following factorswhen calculating loss coverage:www.standardandpoors.com231