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

Single-Family Whole Loan ProgramsA30-year loans prepaying at the appropriate rapidspeed in accordance with the rating, assuming thereare no prepayments on the 40-year loans. Thiswould indicate whether the indenture could maintaindebt service payments with the support of 40-year loans alone.Third-party verificationStandard & Poor’s may request that final cash flowanalysis be verified by an independent third party,Table 2 Loss Coverage Criteria (%) (continued)Small State/Large CountyLTV 100 97 95 90 80FF 38 35 32 16 11FC 22 22 22 22 22MVD 29 29 29 29 29BBBLTV 100 97 95 90 80FF 19 18 16 8 5FC 22 22 22 22 22MVD 25 25 25 25 25AAASmall County/CityLTV 100 97 95 90 80FF 75 75 67 22 22FC 22 22 22 22 22MVD 53 53 53 53 53AALTV 100 97 95 90 80FF 60 60 53 27 18FC 22 22 22 22 22MVD 47 47 47 47 47ALTV 100 97 95 90 80FF 50 47 43 21 14FC 22 22 22 22 22MVD 39 39 39 39 39BBBLTV 100 97 95 90 80FF 37 35 32 16 11FC 22 22 22 22 22MVD 34 34 34 34 34LTV—Loan to value. FF—Foreclosure frequency. FC—Foreclosure costs.MVD—Market value decline.such as a nationally recognized accounting firm,bond firm, or other expert in the field. This wouldoccur if the cash flow provider did not have a trackrecord of providing cash flows for a particular typeof transaction. Once a history of accurate cashflows has been established, third-party verificationwill not be requested.Variable rate bondsStandard & Poor’s assumes that many interest rateswaps and caps, or short-term assets are imperfecthedges for variable rate mortgage revenue bondsprincipally due to basis, amortization, androllover risk. Other risks, such as termination, taxevent and counterparty risk can also become risksin these structures, but are less common. For thesereasons, cash flow projections for mortgage revenuebonds should also incorporate appropriaterisks of variable rate debt, interest rate swaps, andinterest rate caps.All risks identified under swap and cap contractsby Standard & Poor’s should be incorporated intothe cash flow modeling projections as expenses or“additional” interest due on bonds. Reserve fundingor interest rate spread should be shown tocover any shortfalls produced as a result of themodeling. Alternatively, Standard & Poor’s canassess shortfalls to an agency’s capital adequacycalculation if the bonds benefit from a GO pledge.Variable rate bonds should be modeled as followsin cash flow projections. “Net” variable ratebond interest should be modeled at the lesser ofthe high stress interest rates forecast byStandard & Poor’s interest rate model, or themaximum interest rate as stated under the bonddocuments. Standard & Poor’s defines the netvariable rate bonds for mortgage revenue bonds asthose bonds with no synthetic hedge (swaps orcaps) or natural hedge (short term or variable rateassets) as well as the amount of “hedged” bondssubject to tax risk, amortization risk, and rolloverrisk. Hedged debt should include an additionalrun using the low stress interest rates fromStandard & Poor’s for the highest prepayment scenariothat applies to an indenture. This run wouldillustrate how well the cash flows perform whenthe swap counterparty makes the smallest paymentson swaps that are based on standard interestrate indices. Lower interest rates would resultin lower payments from swap counterparties, andhigh loan prepayments would accompany lowinterest rates. Standard & Poor’s may request lowinterest rate assumptions on different prepaymentruns for unique bond structures and to monitorthe strength of an indenture over time. For additionalinformation, please refer to “Public FinanceCriteria: Municipal Swaps.”www.standardandpoors.com237