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

HousingProgram ManagementStandard & Poor’s focuses on the responsibilitiesand capacity of the issuer, trustee and mortgage servicerin MRB transactions. All responsibilitiesshould be clearly identified in the financing documents.Standard & Poor’s will conduct administrativeand managerial reviews upfront and ongoing toaddress the capacity of issuers and servicers. Theability to execute routine administrative functionsand make more complicated business decisions isespecially important in MRB issues. HFAs are reliedon heavily for this function.Trustee responsibilitiesThe ultimate responsibility for the successful managementof an issue is the bond trustee. To ensurethat the trustee function is performed adequately,the following guidelines should be established in thebond documents:■ The trustee may not resign until a successortrustee is appointed;■ The trustee should hold dedicated assets in fundsand accounts designated for a particular transaction,in trust, for the benefit of the bondholders.These funds should not be commingled with anyother funds in the trust or commercial department;■ The trustee has primary responsibility for receivingpayments from servicers, relevant guarantors,and other third parties, and remitting thesereceipts to the bondholders in accordance withthe terms of the indenture;Multiple Mortgage Rate Prepayment RunsGenerally, for nonparity, stand-alone bond financings where mortgages are originatedat two or more different rates, cash flows should be run reflecting the prepaymentspreads expected according to the rating level and mortgage interest rate.Prepayments will occur for both voluntary and nonvoluntary reasons. Voluntaryreasons include sale of the home due to a job change or desire to be in a largerhome, as well as refinancing the mortgage at a lower rate of interest. Involuntaryreasons include default and foreclosure of the mortgage loan.At any given rating level, as the rate on the mortgage loan increases, the rate ofprepayment also increases. This reflects the fact that the voluntary prepaymentsare expected to rise. Holding the interest rate constant, prepayments will alsoincrease as the rating level increases. This reflects the higher level of delinquenciesand defaults associated with the higher rating level.The table outlines the expected prepayment rate quoted in PSA for each ratinglevel and mortgage rate combination. When the mortgage rate used in a bondfinancing falls between two numbers on the chart, the rate for the high rate loanshould be rounded up and the rate on the low rate loan should be rounded down.So, if an issuer plans to offer mortgages at both 6.35% and 7.25% and it is seekingan ‘AA’ rating, the issuer would use a prepayment speed of 466% PSA for the 7.25%mortgage loans and 196% for the 6.35% mortgage loans.■ The trustee receives periodic reports with respect toreceived mortgage payments and future projectionsand performs the bond administration function;■ The trustee assumes the responsibilities of themaster servicer for the mortgage loans upon theservicer’s removal or resignation;■ The trustee covenants in the indenture to provideStandard & Poor’s, on an annual basis or as reasonablyrequested, any information necessary tomaintain the assigned rating on the bonds unlessthe housing agency has agreed to provide theinformation. This includes information on theperiodic delinquency, foreclosure, and prepaymentexperience, as well as the issue’s financialstatus; and■ The trustee covenants in the indenture toapply for the cash advance (if applicable) ifthe servicer has failed to do so when appropriate,and to assume servicing if the servicer isunable to perform.Administration of mortgage assetsTo assess management capability in the administrationof mortgage assets, Standard & Poor’s generallyexamines the participating entity’s volume andexperience in the origination or servicing of mortgages.This capability is strengthened if all of thelender/servicers comply with Fannie Mae/FreddieMac and/or FHA/VA standards.In MRB issues with a large number of participatinglender/servicers, program administration is anespecially important rating concern. Although thetrustee is ultimately responsible for the operation ofthe program, for most local issuer transactions, amaster servicer, acceptable to Standard & Poor’s, isneeded. The master servicer monitors and evaluatesthe performance of each lender during the originationperiod. Following the underwriting of a mortgage,the master servicer monitors and evaluates theperformance of each servicer, and recommendsreplacement of servicers, if appropriate. Most HFAsperform this function for their issues.Administrator responsibilitiesOn a monthly basis, the administrator shouldreview each servicer’s escrow records to reconcileescrow balances, and should monitor delinquenciesand foreclosures. The administrator also shouldensure that all claims are filed in a timely and accuratemanner under the various insurance policies,including the advance claims endorsement.Finally, the administrator should collect informationfrom the servicers and submit reports to thetrustee pertaining to the mortgage loans, as well asto monies remitted to the trustee by the servicers.242 Standard & Poor’s Public Finance Criteria 2007