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

Single-Family Whole Loan ProgramsRecycling runs include, but are not necessarilylimited to:■ Full origination based on worst-case draw/threeyearaverage life prepayment experience/hold prepaymentproceeds for longest time stated indocuments/recycle all loans on worst-case delivery/then0% prepayments on recycled loans.■ Full origination based on worst-casedraw/three-year average life prepayment experience/holdprepayment proceeds for longest timestated in documents/then non-delivery of allprepayment proceeds.(Note: Recycling runs should include recycling ofsurpluses if required under the program.)Second mortgage loansStandard & Poor’s has developed specific criteriafor second mortgage loans, which are done primarilyfor down payment assistance. Please refer to thecriteria, “Single-Family Second Mortgage Loans.”Legal Provisions, Reserves And InvestmentsIn analyzing the strengths of an MRB issue’s legalstructure, Standard & Poor’s primarily, but not exclusively,focuses on seven sets of legal provisions:■ The debt service schedule, including the redemptionprovisions;■ The level of reserve fund requirements;■ The flow of funds;■ The permitted investments;■ The provisions for additional bonds;■ Trustee and servicer responsibilities; and■ Event of default and taxability provisions.Redemptions, reserves, flow of fundsDebt service should be structured assuming thatmortgage revenues will be received in their regularlyscheduled amount with no prepayments.Redemption provisions must clearly state howbonds will be called in the case of all partialredemptions. Unless sufficient stress runs are providedduring the rating process, all redemptions shouldbe done on a pro rata or strip-call basis unless adetailed cash flow certificate using the original cashflow assumptions demonstrates that future debtservice and payment of fees are not impaired underall cash flow scenarios. In evaluating an issue’s flowof funds, two concerns should be addressed: therelease of funds and the use of surpluses.With some exceptions, the flow of funds shouldbe closed for all local issuer transactions, with allsurpluses being used to call bonds. State agenciesmay use an open flow of funds if structured properly,and a cash flow certificate (requiring the samescenarios as were originally provided at the time ofinitial issuance) is provided each time funds arereleased. In both cases, the 2% liquid reserve shouldbe replenished through the flow of funds prior toany release of funds. In addition, legal provisionsshould give first priority to the payment of debtservice, then to payment of insurance premiums,with all other expenses subordinated and capped.Liquid reservesA liquid reserve of at least 2% of outstanding mortgagesshould be funded at closing and alwaysshould equal or exceed 2% of outstanding mortgagesduring the bond term. This reserve can beused to the extent that there are deficiencies in thecash flow stream needed to pay debt servicebetween the time that the loan is delinquent and theinsurance is received.Investments and additional bondsUsually, MRB issuers restrict their investments torisk-free or minimal risk investments, or to investmentagreements with banks whose unsecured debtis rated as high as the rating on the bonds. On acase-by-case basis, other investments may be considered,depending on the desired rating and theoverall strength of the program. Please see “PublicFinance Criteria: Investment Guidelines” for a fulldiscussion of acceptable investments for HFA programs.Housing agencies issuing bonds under openindentures should notify Standard & Poor’s in atimely manner of any intention to issue additionalparity bonds. The agencies also should provideStandard & Poor’s with the necessary informationto assess any potential rating impact on the bondsstill outstanding.Trustee and servicer responsibilitiesThe trustee and the servicer play an important rolein the success of a bond issue. Legally, they areobligated to perform a variety of duties under thefinancing documents. In some instances,Standard & Poor’s will review the trustee and servicercapabilities to carry out these responsibilities.Event of default and taxability provisionsThe only event of default that should trigger anacceleration of bonds on rated issues is the failure topay principal or interest on the bonds. Covenantdefaults should provide for remedies other thanacceleration unless bondholder approval to accelerateis obtained from a majority of bondholders.Standard & Poor’s ratings on single-and multifamilytransactions do not address the likelihood of taxability.Redemptions for a determination of taxabilityare not permitted unless the trustee has enoughmonies on hand to redeem the bonds in full.www.standardandpoors.com241