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

HousingCombined loan to value (CLTV)ratios in excess of 100%Second mortgages add debt associated with a residence,frequently bringing the CLTV above 100%.The financial pressure resulting from the additionalleverage leads to mortgage delinquency and foreclosuremore frequently.A lack of underlying collateral or mortgage insuranceBonds supported by first mortgages have numerousassets behind them. The value of the residenceitself, mortgage insurance or guarantees, mortgagebackedsecurities, and first priority in the event ofdefault and foreclosure provide security to bondholders.Second mortgages generally have only thevalue of the physical residence for support, but ifthat value does not surpass the amount outstandingon the first mortgage, the second mortgage is essentiallyan unsecured loan.Rating MethodologyStandard & Poor’s rating criteria for second mortgageloan bonds focuses on the credit characteristicsof the total mortgage loan program. Since loss severityfor second loans is assumed at 100%, Standard &Poor’s criteria for first mortgage loans is used todetermine foreclosure frequency rates, given suchfactors as the property type and loan (fixed,adjustable rate, among others), geographic dispersionof the loan pool, and the CLTV. In addition,Standard & Poor’s analyzes historical delinquencyand foreclosure rates, management oversight capabilities,and underwriting and servicing standards.Standard & Poor’s will not necessarily distinguishbetween state and local programs, as many local programsmay be similar to statewide programs.The strongest second mortgage programs will beissued in large and heavily populated areas that willhave greater geographic and economic diversification,will benefit from experienced loan and programoversight, use approved HFAs as servicers orservicers evaluated by Standard & Poor’s, and haveCLTV around 100%. As CLTV increases or any ofthe other elements deviates from the above, thetransaction exposes bondholders to increasing risk,resulting in higher loss coverage. For example, a115% CLTV pool in a small state could have a losscoverage level of 45% for an ‘A’ rating and 56%for a ‘AA’ rating. A 103% CLTV pool in a largestate could have loss coverage of 27% for an ‘A’rating and 33% for ‘AA’.OriginationThe standard high quality, least risky first mortgageportfolio consists of 30-year level-pay, fixed-rate,first-lien, fully amortizing mortgages on single-family,owner-occupied detached residential properties.Standard & Poor’s considers rehabilitation loans,construction loans, second-or third-lien mortgages,bought-down mortgages, and tiered-payment mortgagesto be significantly riskier than 30-year levelpayloans.As with first mortgage programs, the portfolio’sorigination area is crucial to determining loss coverage.Origination areas may be categorized as largestate, small state/large county, and smallcounty/city. Many of the issuers of second mortgageloans are local or regional entities. For them toachieve an origination designation above smallcounty/city, they must provide evidence of the numberof and likely dispersion of those loans.ServicingStandard & Poor’s will evaluate servicer responsibilitiesand capacity as reflected in provisions inbond and loan documents. The strength of servicersmay be assessed through several channels, includingdesignation through Standard & Poor’s ServicerEvaluation. Standard & Poor’s will consider anorganization’s background, internal controls, lossmitigation techniques, staffing, systems, key administrativefunctions, financial profile, and compliancewith applicable laws, regulations and industry standards.Optimally servicing of the first and secondloans is done concurrently, with one payment fromthe borrower covering both mortgages.Standard & Poor’s will not look for higher loanloss protection on programs that have separatelyserviced first and second mortgages in contrast tothose where the servicing and billing combine thefirst and second mortgage as long as both servicersare acceptable.Management and oversight of programSupporting the previous item is the issuer’s abilityto properly administer and manage a second mortgageprogram. In assessing the organizationalcapacity, Standard & Poor’s will review an issuer’sexperience with single-family mortgage programsand familiarity with second mortgages. State HFAstypically have more expertise with whole loan programs,of which second mortgage structures are onetype, so Standard & Poor’s may give more weightto a state agency than to a local issuer. State HFAsoften have their own servicing departments andexperience working through lenders and directlywith borrowers. The added oversight, technology,and experience that some state HFAs possess can bea factor in establishing loss coverage.Reserve CriteriaReserve funding for second mortgage loan bonds isused to cover potential loan losses and liquidityneeds. Standard & Poor’s assumes no foreclosureproceeds are available for the second lien holder.244 Standard & Poor’s Public Finance Criteria 2007