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

HousingCash Flow AnalysisStandard & Poor’s analysis of cash flow projectionsfor FHA-insured financings addresses two issues:cash flow sufficiency and consistency of documentedrepresentations with those made in the cash flowprojections. The cash flow runs demonstrate thatthe mortgage revenues and interest earnings generatedby the transaction are sufficient to meet scheduleddebt service payments on the bonds and fees.Cash flow analysis should include information onthe expected revenue stream and the anticipatedbond structure. This information comes from severalstatements and schedules, as follows:Assumptions statementThe assumptions statement should include the datesfor the initial FHA endorsement, commencement ofmortgage note amortization, and the first principaland interest payments on the bonds. It also shouldinclude relevant interest rates for the bonds (includingthe true interest cost), investments, the mortgagenote, and the applicable FHA debenture ratefor the property. The amount of one month’s principaland interest on the mortgage note and whetherthe cash flows are lagged.The last piece of information on the assumptionsstatement should be a table of sources and uses offunds as of the closing date. All sources of funds,including bond proceeds, accrued interest, premiums,and cash contributions, should be itemized.This table also should outline the amounts depositedto the construction fund, the debt service reservefund, the mortgage reserve fund, and the revenuefund at bond closing.Cash flow schedulesAfter reviewing all of the input assumptions,Standard & Poor’s analyzes the “base case” cashflow run, which assumes the mortgages and bondsreach scheduled maturity without any prepayments.The bond debt service schedule should clearlydefine maximum annual debt service, consisting ofthe total of the highest two consecutive semiannualperiods, so that Standard & Poor’s can computedebt service reserve fund sufficiency.A mortgage amortization schedule should be included,which demonstrates the monthly payment schedulefrom commencement of amortization to maturity.The revenue schedule is a compilation of informationpreviously generated in other schedules.Total revenues add up mortgage revenues, constructionfund earnings, investment earnings on allfunds, and other contributions.The cash flow summary and the asset-to-liabilityparity schedule also consist of information generatedin prior schedules. The cash flow summary istotal revenues minus total fees and expenses minusdebt service payments for each semiannual period.If documents provide for fees set at a fixed dollaramount, which are not proportionately reduced forprepayments, Standard & Poor’s will request astress run. The run must demonstrate that if a prepaymentof 90% of the mortgage note occurred,debt service on the bonds and the full set dollaramount of the fees are paid in full from remainingrevenues. In evaluating the cash flow simulations,Standard & Poor’s ensures full coverage of debtservice and fees. If a positive balance exists at theend of each period, then there is sufficient cashflow coverage. Some issues provide for release ofexcess monies at the end of each payment period.In such an open flow of funds, these monies mustbe shown in the cash flow summary as leaving theissue or not carried forward and counted as revenuesin the subsequent period. Extraordinarytrustee fees must be provided for as described earlier.In addition, a carry forward balance of $5,000-$10,000 should be provided.The asset-to-liability parity schedule divides totalassets (the outstanding mortgage balance, reservefunds, plus all excess fund balances) by total liabilities(the dollar value of all outstanding bonds).Unless the 1% assignment fee is covered separately,the issue always should be at 101% or greater parity,if 100% of the outstanding mortgage balance isused in this calculation. If 99% of the mortgagebalance is used, 100% or greater parity is acceptable.Assets used to cover other shortfalls, such asthe one-month’s interest not covered by the FHA ina default situation and extraordinary trustee’s fees,should not be included as assets.Cash flow simulationsIn new construction or substantial rehabilitationtransactions, cash flow simulations should simulatea worst-case draw scenario, in other words, theleast favorable time for drawing on the constructionfund to originate the mortgage. The interestrate earned on the construction fund is comparedwith the mortgage rate during construction. If theconstruction fund rate is less than the mortgage rateduring this period, cash flows should show themortgage being funded at the latest possible date.This is referred to as a slow draw. The drawdowndate under a slow draw is one month before thecommencement of note amortization. A slow-drawscenario allows Standard & Poor’s to verify that,should construction delays occur, the trustee hassufficient monies to pay regularly scheduled bondpayments and to redeem all bonds in the event of anonorigination of the mortgage note.If the relationship between the rates werereversed, with the construction fund rate beinggreater than the mortgage rate during construction,256 Standard & Poor’s Public Finance Criteria 2007