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

Single-Family Mortgage-Backed Securities ProgramsTherefore, loss severity for second loans is 100%,resulting in foreclosure frequency percentages,which are rating specific, as the determinant forreserve funding. Foreclosure frequency levels willbe adjusted from rating-specific levels based on theloan type, dwelling type, loan to value ratio, borrowerquality, servicing method, or other potentialstrengths or weaknesses of the mortgage pool.Once loss coverage is established as indicatedabove, cash flows must show that the transactioncan withstand such losses through bond maturity.Reserves can be funded in various forms, such asthrough over-collateralization, capital reservefunds, pool insurance policies, or evaporation ofassets as demonstrated in cash flow scenarios.Further explanation of these methods is found inthe single-family whole loan criteria.Legal ProvisionsStandard & Poor’s will focus primarily on the followinglegal provisions:Flow of fundsIn evaluating an issue’s flow of funds, two concernsshould be addressed: The release of funds and theuse of surpluses. With some exceptions, the flow offunds should be closed for all local issuer transactions,with all surpluses being used to call bonds.State agencies may use an open flow of funds ifstructured properly, and a cash flow certificate(requiring the same scenarios as were originallyprovided at the time of initial issuance) is providedeach time funds are released. In both cases, a 2%liquid reserve should be replenished through theflow of funds prior to any release of funds. In addition,legal provisions should give first priority tothe payment of debt service, then to payment ofinsurance premiums, with all other expenses subordinatedand capped.Second lienThe pledge of the second mortgage and revenuesfrom the loan to bondholders should be clearly statedand described in the bond documents. The purposeof the second mortgage is to establish anenforceable right to cash flows and any otherpledged property, in the event of a default.Standard & Poor’s will review second mortgagedocuments to ensure the creation of the second lien.Cash FlowCash flows should meet the same standards as firstloans. Please refer to the criteria on single-familywhole loans for cash flow guidelines. ■Single-Family Mortgage-BackedSecurities ProgramsIssuers use Ginnie Mae, Fannie Mae, and FreddieMac single-family mortgage-backed securities(MBS) in housing bond structures to securitizepools of single-family mortgages. These transactionsare eligible for a ‘AAA’ rating, based on theguarantee on the MBS by Fannie Mae, Ginnie Mae,and Freddie Mac, which have direct or implied supportof the U.S. government.The loans in the MBS pools carry insurance fromprivate mortgage insurers or the Federal HousingAdministration (FHA), USDA Rural Development(RD), or Veteran’s Administration (VA) governmentguarantee programs. While Freddie Mac andFannie Mae securitize all four types of loans, theGinnie Mae program limits the mortgages it securesto FHA, RD, and VA. However, much of the ratingcriteria for each MBS program are the same. Often,bond issues incorporate the use of at least two andsometimes all of these securitization programs.For new money issues, it is typical for bondproceeds to be deposited with the trustee in anacquisition fund. Then, various lenders originatesingle-family mortgages according to programorigination guidelines established in the financingdocuments. These mortgages are “warehoused”by a master lender. When the master lender hassufficient mortgages, Ginnie Mae, Fannie Mae,or Freddie Mac MBS are issued by the lender.The trustee gives the lender the correspondingamount of bond proceeds from the acquisitionfund in exchange for the MBS. Accrued interestmay be paid to the lender in one of two ways.The trustee can return the accrued interest to thelender on the first date after the security’s issuedate that the trustee receives a principal andinterest payment on the security. Alternatively,the accrued interest may be paid from the acquisitionfund or other trust fund monies on thedate that the security is acquired. The trusteemay hold the MBS in physical possession or inbook-entry form. Ginnie Mae securities typicallyare held in book-entry form.www.standardandpoors.com245