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

Single-Family Second Mortgage LoansMortgage servicer responsibilitiesIn the typical MRB structure, mortgage servicersare required only to remit mortgage revenues to theextent that they are collected. If a mortgagor’s paymentremains delinquent, the servicer is required toundertake further steps to collect. The servicer alsomust apply for advance claims payments under theappropriate insurance policy or proceed towardforeclosure if applicable.Standard & Poor’s reviews the track record ofeach servicer as it pertains to originations, delinquencies,foreclosures, insurance claims processing,and claims denials upon the rating of a new resolution.Generally major servicers have sound proceduresto track loans and process claims. Servicerswith negative track records in one or more of theseareas may be requested not to participate in theprogram, although this is uncommon.FDIC regulations concerning the payment ofinsurance benefits limit the $100,000 FDIC benefiton a mortgage servicing account to $100,000 perinvestor, rather than $100,000 per account. Thishas an impact on all single-family, whole-loandeals. If an investor has an interest in one or moreservicing accounts or has another account at theservicing institution, then all of these accountswould be aggregated in calculating the insurancebenefit for that investor. Standard & Poor’s cannotbe assured that immediate remittance to the trusteeof amounts in excess of $100,000 will still leave theservicing account whole in the event of a servicerfailure. This concern needs to be addressed by theissuer on all single-family, whole-loan financings.Cash flow administrationOperation of an MRB issue’s cash flow depends onadequate cash flow administration. This functionincludes executing investment transactions andinvestment agreements, managing cash to maximizeinterest income, and identifying prepayments andappropriate bonds to be called from prepayments.This function should be carried out by the agencyor capable third party overseen by the issuer. ■Single-Family Second Mortgage LoansBonds secured by second mortgage loans originatedto low-and moderate-income persons areeligible to receive ratings as high as ‘AAA’, dependingon the credit supports and levels of over-collateralizationused to back the bonds. Rated secondmortgage bonds typically would be used for downpayment assistance and closing costs as opposed tocash out mortgages for consumer purposes. Bondsbacked by second mortgages need higher loan losscoverage than first mortgages because of the higherprobability of foreclosure and the lack of recoverableassets in the event of foreclosure. For example,loan loss coverage for second mortgage bonds ratedat the ‘A’ rating level would start at 25% and couldclimb beyond 48%, depending on characteristics ofthe loans and other factors.Standard & Poor’s Ratings Services will apply thesame standards when determining loan loss coveragefor second mortgages whether rating programssupported by only second mortgages or programswith first and second mortgage collateral. The evaluationis derived from Standard & Poor’s firstmortgage criteria and includes:■ Credit characteristics of the mortgage loan pool;■■■Reserve funding;Bond and legal structure; andCash flow sufficiency.Credit CharacteristicsThe higher credit coverage for second loan bondsresults from key elements that increase the risk of foreclosureof second mortgages, including the following:The subordinate nature ofthe second mortgage pledgeSecond mortgage lenders have a subordinate lien onthe assets pledged for repayment of the first andsecond mortgages. Default on the second mortgagedoes not affect payment of the first mortgage,whereas default or foreclosure on the first mortgageresults in the same on the second mortgage. In theevent of foreclosure, the order of priority requiresthat any proceeds generated from a sale go first tothe first mortgage lender. This could leave the holderof the second mortgage with no funds for recovery,resulting in a loss severity of 100%.Furthermore, payment interruption on the firstmortgage must be remedied before payment can gotoward the second mortgage.www.standardandpoors.com243