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

HousingThe trustee may purchase an MBS with monies inthe acquisition fund only after verifying the following:■ After acquisition, the sum of the outstanding balanceof the securities plus all fund balances(excluding the rebate and expense funds) equalsor exceeds the amount of bonds outstanding;■ The security bears interest at the pass-throughrate specified in the bond documents and maturesby the date specified; and■ The trustee will have a first perfected securityinterest in the security after purchase.Such verification guarantees that sufficient revenueswill be available to meet future debt serviceand expenses and that asset coverage will be maintained.The process of converting single-familywhole loans into MBS continues throughout theacquisition period. Any monies remaining in theacquisition fund at the end of the period are used toredeem bonds, unless the issuer seeks an extensionwith prior written notification to Standard &Poor’s Ratings Services.Cash FlowsAll mortgage payments shown in the cash flowsshould reflect the pass-through rate of the respectiveMBS, which is the mortgage loan rate net ofservicing and guarantee fees. In addition, fees to bepaid for trustee and rebate analyst services, issuerfees or any other fees as outlined in the trust indenturemust be reflected. Cash flows should show thatassets under the program are at least equal to liabilitiesuntil bond maturity or earlier redemption.Revenues must be sufficient to meet all scheduleddebt service payments on a timely basis.Cash flow runs must assume full delivery of theMBS on the least desirable origination date permittedunder the bond documents. This origination dateis determined by comparing the MBS pass-throughrate to the investment rate to be received on theTable 1 Rapid Prepayment Stress Run For ‘AAA’ Rated Issues—Years until full redemption of bonds —State HFALocal HFA or stateInterest rate (%) parity program HFA non-parity program6.50 or lower 5.0 4.06.51 to 7.00 4.5 3.57.01 to 7.50 4.0 3.07.51 to 8.00 3.5 2.58.01 to 8.50 3.0 2.08.51 to 9.00 2.5 2.09.01 and higher 2.0 2.0acquisition fund. If the pass-through rate exceeds theacquisition fund rate, last-day origination isassumed. If the acquisition fund rate exceeds thepass-through rate, first-day origination is assumed.The cash flow scenarios that should be providedare full origination of mortgage loans with 0% prepayment,rapid prepayment, and non-origination ofall mortgages. The non-origination run shouldassume a full redemption of bonds on the date specifiedin the bond documents in the event originationof mortgages does not occur. A rapid prepaymentrun is necessary for all ‘AAA’ rated single-familybond issues, including MBS transactions. The rapidprepayment scenario should be prepared at a prepaymentspeed sufficient to redeem all bonds withintwo years after origination; however, depending onthe mortgage loan interest rate, the issuer, andwhether or not the bonds are part of a parity program,this scenario may be run at slower prepaymentspeeds that redeem all bonds within a longerperiod of time after origination, as shown:Depending on the structure of each transaction,other cash flow scenarios may be needed. For adescription of some of the more common amongthese as well as additional detail with regard tocash flows, please refer to the criteria, “Single-Family Whole Loan Programs.” The cash flow discussionin this article includes information ontreatment of variable rate debt and swaps.The assumptions for all cash flows run shouldinclude appropriate mortgage payment lags reflectingthe actual expected receipt date of MBS payments.The Ginnie Mae I program guarantees payments onthe 15th day of the month; Ginnie Mae II on the20th; Freddie Mac on the 15th, and Fannie Mae onthe 25th. The form and source of coverage for creditshortfalls should be outlined in the indenture. Theseshortfalls may be funded in a variety of ways, includinguse of a bond premium, buying the MBS at a discountor an issuer contribution. Any monetarycontributions must be made with funds consideredpreference-proof pursuant to Sections 362(a), 547,and 550 of the Bankruptcy Code.Legal DocumentsThe criteria for MBS program documents closelycoincide with the criteria for single-family wholeloan issues with key analytical focus on all trusteeresponsibilities, additional bonds, eligible investments,redemptions, events of default, contributionsfor credit shortfalls, and flow of funds. Proper notificationshould be given to Standard & Poor’s forvarious events including, but not limited to, extensionof the acquisition period, any change to thebond or mortgage documents, or any change in thetrustee or investment agreement provider.246 Standard & Poor’s Public Finance Criteria 2007