S&P - Public Finance Criteria (2007). - The Global Clearinghouse
S&P - Public Finance Criteria (2007). - The Global Clearinghouse
S&P - Public Finance Criteria (2007). - The Global Clearinghouse
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Single-Family Whole Loan ProgramsThis will ensure the immediate availability of fundsupon a mortgage default. As this coverage providesliquidity, it can be funded from bond proceeds.Loan to value. Evidence indicates that theamount of mortgagor equity invested has a directimpact on the foreclosure rates. As LTV increases,the FF and MVD increase as shown in the table,“Loss Coverage <strong>Criteria</strong>”.Small pool size. Standard & Poor’s applies asmall pool size factor to the credit loss coveragepercentage on pools of less than 300.Dwelling type. For mortgage revenue bonds thatpermit three-and four-family residences where theincome from the rental units is taken into accountin determining program eligibility, or include cooperativeapartments, condominiums, or other type ofhomes, Standard & Poor’s makes adjustments toMVD and FF. <strong>The</strong> reasoning behind the MVDadjustment is that the market for such properties isnarrower than for single-family or two-family residences.<strong>The</strong> higher FF assumption is based on theMVD of such residences and the risks associatedwith rental property vacancies.Mortgage type. Standard & Poor’s increases FFfor interest only mortgages, 40-year mortgages andpiggyback loans, all of which reduce the amount ofequity a buyer has in the property, either at thetime of purchase or during the term of the loan.Standard & Poor’s assumes that other loan productsthat are not as common such as graduatedpayment mortgages (GPMs), graduated equitymortgages (GEMs), or mortgages with buy-downswill also experience a higher FF.Foreclosure frequency cap. Standard & Poor’s recognizesthat it may be excessively conservative toassume a FF level above 75% at the ‘AAA’ ratinglevel and 60% at the ‘AA’ rating level for loans thatare not delinquent or are newly originated.<strong>The</strong>refore the FF is capped at these levels. This isgenerally only applicable to local whole loan issuers,which are very rare. In these cases the limited geographicdispersion would push FF beyond the caps,but experience from existing local programs indicatesthat they have never exceeded the capped FF.Minimum loss coverage. Even with very deepPMI, any loan portfolio will sustain additional losses.Generally, a minimum loss coverage of 2% isappropriate for investment grade ratings.Methods of providing loss coverageIssuers use several methods for coveringportfolio losses:Pool insurancePool insurance was once a widely used vehicle forproviding loss coverage. As the cost of insurancebecame prohibitive, HFAs developed many viablealternatives. Pool insurance is still available in somestates. To be acceptable, the pool insuranceprovider should have an FSR rating as high as therating on the bonds. Pool insurance covers losseson foreclosures in excess of primary mortgageinsurance. However, not all pool insurance policieswill cover losses on FHA-or RD-insured andVA-guaranteed loans. <strong>The</strong> policy must specificallyaddress coverage of such losses. Through advanceclaims provisions, pool insurance may provide liquidityprotection through periods of mortgagedelinquencies. Such payments will continue if theservicer and trustee diligently pursue foreclosure onthe mortgage. However, because of the relativelylow use of pool insurance policies in recent yearsand a scarcity of cash advance riders, issuers useliquid reserve funds more frequently to address theliquidity needs of particular loan pools.Self-insurance funds. Some HFAs that have foundthat the cost of pool insurance exceeds the amountof claims paid have used the self-insurance fund(SIF) alternative. For most agencies, Standard &Poor’s allows partial funding of the SIF under thebond resolution, with the remainder in set asidesand available fund balances (a leveraged SIF).Similar to pool insurance, the SIF would be drawndown to cover losses due to foreclosures and foradvance claims payments. Provided that a housingagency is eligible to establish and use the SIF, thefollowing minimum standards may apply, as consideredon a case-by-case basis:■ PMI covering at least the top quarter of everymortgage loan should be provided by a conventionalprimary insurer with a Standard & Poor’sFSR rating as high as the rating on the bonds.Alternatively, the SIF could be established tocover the reduced pool coverage requirements forFHA-insured, RD-insured, or VA-guaranteedloans.■ If leveraged, the SIF should be at a level of at least20% of the anticipated total loss coverage exposureavailable from excess assets in the bond program.A net worth maintenance reserve or agency generalfund set aside in an amount equal to 25% ofthe anticipated loss coverage amount is necessary,in addition to the amount held under the indenture.This reserve can be escrowed with the trusteeor an independent third party and pledged tobondholders, or it can be segregated in the agency’sgeneral fund balance and designated for replenishmentof the SIF requirement, as necessary. <strong>The</strong>methodology used and maintenance level should beoutlined in a board letter or officer certificate andpresented to Standard & Poor’s at the time of rating.<strong>The</strong> SIF reserve should be funded under theindenture at bond closing or as a condition tomortgage origination.www.standardandpoors.com233