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

Housing■ The trustee submits documentation as describedin the procedure outlined above.■ If 30 days prior to any interest payment date onthe bonds the trustee determines that sufficientmoney will not be available to make the payment,it notifies HUD and requests immediatepayment of mortgage insurance benefits in cash.■ If at any time during the extension period thetrustee determines that a workout is infeasible, itimmediately requests HUD to make such a determinationand submits notification of intentionand election to assign the mortgage to the HUDcentral office.■ In no event does the trustee consent to any workoutagreement or any adjustment or revision ofthe mortgage insurance contract without priorwritten confirmation of the rating fromStandard & Poor’s.■ The trustee does not request an extension of theinitial period unless the trustee receives writtenconfirmation of the rating from Standard &Poor’s. If the conditions for further extension arenot met, the trustee immediately submits notificationof intention and election to assign the mortgageto the HUD central office. If the above stepsare followed, the trustee should be in a positionto record the assignment of the note.The financing documents should be clear thatfull processing be pursued in all workout situations.Another example of a workout is pursuantto Section 207.258(b) of the HUD Regulations,under which mortgagees have the option ofaccepting a partial claim payment in lieu ofassignment. Under this program, the FHA recaststhe mortgage into two loans: a first mortgage loaninsured by the FHA, and a second uninsuredmortgage loan held by the FHA. The FHA areaoffice determines the amount of the first mortgageloan, based on the debt service that the project’sestimated net operating income can support. Thesecond mortgage, negotiated between the projectowner and the FHA, is the difference between theoutstanding balance of the original mortgage loanand the recast first mortgage loan. HUD regulationsallow that pursuing the partial claim optionwill not prejudice the mortgagee’s right to file forfull insurance benefits and allow extension of thetime to file for full insurance.Procedures for processing of claims for projectssubject to the 87-9 letter should be followed, withone exception. Extensions to file a claim notexceeding three months (or such shorter periodrequired by the FHA) should be requested only onthe trustee’s decision to pursue a partial claim paymentor other workout option. FHA regulationsallow for a mortgage note cure to take place upuntil the date of assignment. To ensure that bondcash flow is not jeopardized, the indenture shouldcontain language providing for full payment of alldelinquent accounts and lost investment earnings,and verifying the ongoing financial feasibility of thebond issue.Following commencement of the assignmentprocess, the trustee should draw on the reserves onthe next bond debt service payment date in anamount sufficient, together with mortgage revenuesreceived prior to the default, to pay debt servicedue on that date. Funds covering the 1% assignmentfee should be used to redeem bonds no laterthan on assignment. Documents should clearly statethat a mortgage default should in no event trigger adefault on the bonds.Standard & Poor’s assumes that, within 12months of the default, the trustee will receive: mortgageinsurance benefits equal to 99% of the principalbalance of the mortgage note as of the date ofdefault, and accrued interest on the mortgage principalfrom the date of default to the date of paymentat the applicable FHA debenture rate. Asdescribed above, the FHA may pay mortgage insuranceproceeds in two installments.Immediately after receiving payment from theFHA, the trustee uses the mortgage insurance proceedsto redeem bonds. The trustee must carry outthe redemption at the earliest practicable dateallowed by the “Notice of Redemption” section ofthe indenture. Once in receipt of full mortgageinsurance benefits, the trustee uses these funds plusthose remaining in the DSRF to redeem bonds.Trustee and servicerTo help ensure that FHA procedures are pursueddiligently, the indenture and servicing agreementshould require the trustee and the servicer to beFHA-approved mortgagees. Such status should bemaintained throughout the life of the issue. In addition,the indenture should state that the trustee cannotresign without the appointment of a qualifiedsuccessor trustee, and that the trustee will assumeservicing responsibilities temporarily if the serviceris removed, resigns, or is unable to perform hisduties as servicer. Standard & Poor’s should benotified in the event that a successor trustee or serviceris appointed. The trustee or issuer should useits best efforts to put a successor servicer in place assoon as possible.Standard & Poor’s recommends that the servicerand the trustee be unaffiliated so that there is noproblem in allocating responsibility.The servicing agreement should state that the servicerwould forward the mortgage revenues to thetrustee immediately, but no later than three business254 Standard & Poor’s Public Finance Criteria 2007