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

Property Improvement Loansunder a stress scenario for similar loans and FHAdefault statistics. Standard & Poor’s StructuredFinance group conducted a study indicating thatTitle I delinquencies and foreclosures may warrantreserve levels for ratings of ‘A’ to ‘AAA’ closer to26.5%-45%. These reserves apply generally to conduitprograms. The nature of programs administeredby state and local HFAs lends itself to lessonerous reserve levels.However, Standard & Poor’s will look for thehigher reserve levels if an individual program’s lossesand foreclosures support the study. The FHAreserve can be counted when meeting this guidelineunder certain circumstances: the lender’s entireFHA reserve must be dedicated to the loans madeunder the trust estate; the lender states the intentionto file a claim on default as opposed to proceedingagainst the loan security; and other reserves mustbe available to supplement the 10% not covered byFHA. Reserve requirements may be met with cashwith over-collateralization or contributions, LOCs,or over-collateralization. If over-collateralization isin the form of mortgages, Standard & Poor’s willassume that 15%—24% (or if warranted, 26.5%-45%) of the mortgage assets will be unavailable,based on default.A minimum liquidity reserve of 2% of loans alsoshould be maintained so that bond debt service canbe paid during the months between default andclaims payment.FHA Title I Program AdministrationThe quality of underwriting and servicing underthe FHA Title I program is integral to credit quality.Standard & Poor’s will review the lenders’underwriting, quality control, collections, and servicingand claims denial rate to assess the health ofthe portfolio and the probability of successful andtimely claims payment. Standard & Poor’s generallylooks for underwriting procedures that are consistentwith FHA regulations. Failure to complywith FHA regulations can result in loans beingrejected for insurance; therefore, compliance proceduresare reviewed carefully. Servicing and collectionprocedures are subject to the same guidelinesas other single-family programs. Loan paymentsshould be held in fully insured accounts and immediatelytransferred to the trustee should theyexceed the insured amount. Systems should be inplace to monitor loan payments on a monthlybasis, and exception reports should be generatedmonthly to pinpoint delinquent loans. Once a loanis delinquent, procedures should be in place thatare consistent with FHA regulations. Claimsshould be filed at the earliest possible date permittedunder the program. Since claims cannot be filedafter the loan has been in default for nine months,the system should have a built-in trigger toannounce this final deadline. Selected loan files willbe reviewed for completeness of documentationand evidence of loan compliance. This is especiallyimportant, since only on default will HUD reviewa loan file for compliance. The historical claimsdenial rate should be low. To the extent that thedenial rates are excessive, less credit will be givento the FHA reserve.A master servicer, such as a state HFA or stronglocal HFA, is considered a necessity in a nonrecourseor recourse program with unrated or noninvestment-gradelenders. Standard & Poor’s expectsthe HFA to monitor the performance of the lendersand have procedures in place to remove lenders forpoor performance. Prior to the rating, and ongoing,Standard & Poor’s will meet with the lender ormaster servicer to review its procedures, the statusof reserves, and portfolio quality.PIL Revenue Bond Cash FlowsThe cash flow simulations for PIL revenue bondissues are the same as those for single-family issues.All loans are assumed to have a 15-to 20-year term,unless documents clearly restrict the percentage ofshorter-term loans to the amounts reflected in thecash flows. If loan payment deferments, as definedin the regulations, are to be allowed, the maximumamount of such deferments should be reflected inthe cash flows. If a portion of the loans to be originatedwill have a lower mortgage rate than the restof the portfolio, the source of the subsidy, and howit will be used to buy up the rate, must be reflectedclearly in cash flows and documents. If no subsidyexists, cash flows should be run assuming that onlythe lower interest-rate loans are originated.Finally, if any program assets are to be used toprovide lenders participating in a recourse FHATitle I program with a repurchase credit, theseassets should not be reflected in the cash flows. Arepurchase credit is a feature of certain older Title Iprograms that allows a lender to repurchase a givenamount of defaulted loans for less than the outstandingbalance of the loan. A reserve usually isestablished to provide sufficient liquid funds tocompensate for the credit. Standard & Poor’sassumes that the full amount of repurchase creditsavailable will be used, thus fully drawing down thereserve. Therefore, inclusion of the reserve in thecash flows would overstate revenues and assets inthe worst-case scenario. ■www.standardandpoors.com249