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

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Ginnie Mae, Fannie Mae, And Freddie Mac Multifamily SecuritiesGinnie Mae, Fannie Mae, AndFreddie Mac Multifamily SecuritiesStandard & Poor’s Ratings Services rates multifamilyhousing transactions supported by mortgagesguaranteed by Ginnie Mae and GovernmentSponsored Enterprises (GSEs), such as Fannie Maeand Freddie Mac. In these structures, Ginnie Mae,Fannie Mae, or Freddie Mac issue and deliver tothe trustee an MBS in exchange for the mortgageloan. Over the past few years, however, Fannie Maeand Freddie Mac have typically provided their supportin the form of standby and direct-pay creditfacilities rather than MBS. Ginnie Mae continues toissue MBS in the form of permanent loan certificates(PLCs) or construction loan certificates(CLCs) that convert to PLCs for substantial rehabilitationor new construction projects. Mortgage paymentson the MBS, or payments from the creditfacilities, are the principal source of credit protectionfor the bonds and pay debt service and all programexpenses.MBS ProgramsGinnie Mae, Fannie Mae, and Freddie Mac areobligated to make payments under the certificate orcredit facility to the trustee, regardless of whetherpayments are actually made on the underlyingmortgage loans or bonds. Ginnie Mae and FannieMae guarantee the timely remittance of principaland interest on the MBS and credit facilities.Freddie Mac only guarantees timely payment ofinterest and ultimate payment of principal on MBS,with the exception of the Freddie Mac Gold program.Generally, Freddie Mac guarantees that principalon the participation certificate will be receivedwithin approximately one year of the scheduled duedates. This one-year lag in principal must beaddressed by funding a reserve in the issue or laggingall bond maturities by one year. Other alternativesmay be discussed on a case-by-case basis.From a rating perspective, Freddie Mac andFannie Mae programs are very similar in manyrespects to the Ginnie Mae programs outlinedbelow, and the criteria should be used when structuringFreddie Mac and Fannie Mae transactions.With regard to payment receipt dates, Freddie MacMBS are assumed to be received on the 20th of themonth (the 16th if book entry form) and FannieMae securities on the 25th of the month. In GinnieMae programs, payments are assumed to bereceived on the 20th of the month, although GinnieMae pays on the 15th. Standard & Poor’s assumesan additional five-day lag in the cash flows forGinnie Mae MBS, because MBS payments are notmade directly by Ginnie Mae. This is not the casefor Fannie Mae and Freddie Mac, whose paymentsare made directly. <strong>The</strong>re is an additional 30-daypayment receipt delay at the onset of all FreddieMac programs, which must be addressed. Fundingfor these credit shortfalls should be clearly indicatedin the indenture and in the cash flows. (Note:Standard & Poor’s defines a lag as a delay in paymentthat is in addition to the normal arrearage—the time period encompassed from the date oforigination until the first scheduled payment.)Direct-Pay FacilitiesFannie Mae and Freddie Mac provide credit andliquidity support for fixed and floating-rate bonds.Fannie Mae and Freddie Mac cover for preferenceand stay provisions provided under the U.S.Bankruptcy code for funds paid by non-ratedsources. <strong>The</strong>se floating-rate transactions usuallyhave a seven-day variable rate, where bondholdershave the option to tender bonds upon seven days’notice. <strong>The</strong> GSEs are obligated to make paymentsunder their respective facilities to the trustee in theevent that the mortgage payment has not beenreceived by a certain date. Additionally, the GSEsare obligated to cover the purchase price of tenderedbonds in the event of a failed remarketing.With this bond structure, Fannie Mae or FreddieMac pay the bond debt service directly as if it werethe mortgage loan, much like a direct-pay LOC.Although not an LOC, this facility is similar to abond LOC transaction. In this instance, the trusteedraws monthly on the facility and uses the funds topay debt service on the bonds. Cash flows areunnecessary because payments are received by thetrustee prior to debt service payment dates.Fannie Mae has modified its direct-pay facility toinclude a bifurcation of credit and liquidity expirationdates so that the liquidity support providedunder the enhancement expires 10 years after theeffective date of the agreement.This change introduces the possibility for a tenderoption to occur without the necessary liquiditysupport in place to pay the purchase price of bonds.www.standardandpoors.com259

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