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

FHA Insured Multifamily Mortgagesdays after receipt. The servicer should invest allmonies held by it in accounts fully insured by theFDIC. Amounts in excess of the insurable amountshould be remitted immediately to the trustee.Under no circumstances should the servicer holdany receipt longer than three business days. Thislimits the exposure of lost interest income on themortgage revenues.Because of the increased responsibilities ofFHA-insured mortgagees, Standard & Poor’s looksfor evidence from the trustee or HFA concerningthe following:■ Experience and track record with FHA-insuredmortgage loans;■ Methodology in tracking the progress of theassignment process; and■ Consultation at the time of default with legalcounsel expert in the field of FHA-insured mortgageloans.Issuer and trustee familiarity with FHA regulationsand procedures and understanding of theindenture provisions relating to the trustee’s actionsin the event of a mortgage loan default are criticalto protecting bondholders’ interest in a mortgagedefault scenario.Standard & Poor’s has developed a questionnairefor reviewing the qualifications of trustees and HFAsparticipating in FHA-insured transactions. The questionnaireaddresses specific areas of concern thathave arisen in actual mortgage default cases.Fees and compensationOngoing ordinary fees and compensation (typicallythose of the trustee and servicer) are to be capped inthe indenture and subordinated to bond debt service.Gross monthly mortgage payments and investmentearnings on bond funds can support ongoing fees.Sufficient coverage of documented fees should beshown in the cash flows. All fees should be a percentageof outstanding mortgages or bonds, and theadequacy of all fees should be verified. Some issuersprefer to set fees at fixed dollar amounts. In thiscase, documents should provide that fees are ratablyreduced proportionate to a reduction in the principalamount of the mortgage note due to prepayments orother unscheduled reductions. In addition, extraordinarytrustee fees should be covered at all times, particularlyprior to releasing funds from the program,except for redemptions. They also should be coveredbefore reduction and release of all credit supports,except for negative arbitrage. Such fees should besufficient to cover for legal and administrative feesand expenses incurred during default proceedings.The documents should provide for the trustee’saccess to these fees in a mortgage default scenarioand cash flows should show the availability of suchfees in the carry forward balance.Redemption provisionsStandard & Poor’s will review redemption provisionsin the mortgage note and trust indenture forconsistency and to ensure that the mortgage noteand bond payment schedules remain in balance.Mandatory redemptions are needed to address cashinflows due to mortgage prepayments and insuranceproceeds. Standard & Poor’s looks forredemptions resulting from:■ Monies remaining in the construction fund, onfinal endorsement, to the extent that the mortgagenote is less than the initially endorsedmortgage;■ Proceeds received from casualty or hazard insuranceor a condemnation award not used by themortgagor to repay or restore the mortgagedproperty;■ FHA insurance proceeds received after filing aclaim on a mortgage note default, includingaccrued interest paid on the claim, and the principalamount of debentures on their maturity;■ Monies in any mandatory sinking fund;■ Monies available from the ratable reduction ofthe debt service reserve fund when applicable.If optional redemptions are permitted in themortgage note, the trust indenture should include acorresponding redemption. If redemptions areincluded for excess monies remaining in the revenuefund on each bond payment date, Standard &Poor’s will look to see that bond cash flows reflectthe redemption. The trust indenture should includecoverage of all shortfalls, including any mortgagepayment lags provided in the bond cash flows. Suchredemption should also provide that at least a$10,000 carry-forward amount ($5,000 for issuesof less than $1 million) remain in the revenue fundsubsequent to release of excess funds.In almost all cases, a proportional reduction indebt service (strip call) is necessary when thebond structure provides for more than one termbond, current interest serials, capital appreciationserials, or mandatory sinking fund term bonds.In all cases, the indenture should provide for aspecified redemption notice period. All redemptionsfrom prepayments and mortgage insuranceproceeds should be at the earliest date practicable.A possible exception is for optional prepayments,if provisions are made for coverage ofaccrued interest to the date of redemption. In anyevent, sufficient accrued interest to the date ofredemption should always be included in theredemption payment.www.standardandpoors.com255