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

Housingprovides an additional 30 days’ coverage during theFHA’s grace period. Although the loan is in defaultonce the payment is missed, the FHA requires a 30-day grace period before a claim can be filed. Thesereserve levels assume that the agencies file a claimat the latest date permissible under the HUD regulations(unless an extension is granted), which is 75days after default.Additional reserves that may be called for wouldbe for reinvestment of insurance proceeds duringthe call notice period under the bond documents.Also, for bond issues where the DSRF is fundedwith bond proceeds, if the reserve is called on, theexpended portion is no longer earning expectedinvestment income. Depending on when the drawdownoccurs, Standard & Poor’s has found that ashortfall may be created. The shortfall may be offsetby the interest component of the FHA insuranceproceeds. However, since the interest component isbased on the mortgage rate under the risk-shareprogram and not the FHA debenture rate,Standard & Poor’s has found this shortfall morecommon than under the regular FHA insuranceprograms. Sufficient funds need to be available topay bondholders in full assuming that the entirereserve fund is hit. The shortfall can be covered byfunding at bond closing or by review of a full set ofcash flow runs depicting a mortgage note default atspecified dates. Two base cases should be run. Bothcases should default the issue immediately afterfinal endorsement. However, the first case shouldshow receipt of the HUD payment two weeks afterthe default. The second should show HUD’s paymentsix months after the default. The weaker basecase should be expanded by simulating a default onthe first of each month for a one-year period.Additional default runs may be requested for theworst possible time in the life of the bonds, usuallyindicated by low or declining parity. Such defaultsimulations should show the ability to redeem allbonds in full, assuming bond redemption 30 daysafter receipt of benefits.Under the program, HUD permits extensions ofup to 180 days from default upon request.Additional extensions are possible in situationswhere the HFA certifies that a bond refunding ormortgage refinancing is in the works, as well as achange in ownership that will result in a mortgagecure. The simplified claims payment proceduresclearly allow agencies more flexibility in pursuingthese options while keeping bonds current.However, Standard & Poor’s cannot anticipate thata six-month reserve will always be sufficient inthese cases. Therefore, agencies desiring more flexibilityin filing claims should include conditions tofiling extensions in the bond documents. Suggestedconditions should include:■ Determination of the latest date for filing theclaim;■ Verification that reserves or additional depositsare sufficient to pay bonds, assuming that paymentfrom the FHA is received 180 days after thedate of default plus the number of days in theextension period; and■ Receipt of the FHA approval in writing.Assignment processThe assignment process is as follows:■ Notice of default status on multifamily projectsmust be filed within 10 calendar days after dateof default;■ Above form must be submitted monthly untilapplication for initial claim has been filed orHUD waives requirement;■ Application for initial claim payment and paymentinformation form must be submitted within75 calendar days of the date of default;■ Standard & Poor’s should be copied on all formssubmitted to and received from HUD;■ Before accepting partial payment of claim, majoritybondholder approval should be received andnotice sent to Standard & Poor’s;■ Provision for claim payment to be used to redeembonds within 30 calendar days of receipt, withwire transfer of excess funds to HUD 30 daysthereafter; and■ The HFA debenture must be issued within 30days of initial claim payment, or such other dateas approved by HUD.Cash flowsStandard no default cash funds should be providedconsistent with the fully insured FHA program. Inaddition, a default scenario should be provideddemonstrating that bonds can be redeemed in fullshould a mortgage loan default occur on the firstpayment date, assuming a six-month period toreceive insurance proceeds, investing funds forredemption during the notice period, and redeemingbonds on the date set forth in the bond documents. ■258 Standard & Poor’s Public Finance Criteria 2007