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

Ginnie Mae, Fannie Mae, And Freddie Mac Multifamily Securitiesincludes principal; premium, if any; and interestaccrued through the last day of the month in whichthe prepayment is made.Ginnie Mae has the option of curtailing orreamortizing the mortgage, although the latter ismore common. For this reason, documents shouldinstruct the trustee to notify Standard & Poor’s of aprepayment so that the rating impact, if any, maybe determined. The financing agreement shouldinstruct the lender to notify the trustee as early aspossible in the month in which prepayment is to bereceived by the trustee. The lender’s notificationenables the trustee to send notice of redemption sothat bonds can be redeemed at the earliest possibledate to avoid any undue reinvestment exposure.The trustee should redeem the bonds in the shortestnotice period provided under the indenture. Thisreduces the amount of time that the trustee has tohold prepayment monies that are not earningenough interest to cover the accruing bonds. Thecash flows should demonstrate sufficient asset coverageduring this time frame.Concerning optional prepayments, the prepaymentpenalty on the mortgage should be seasoned91 days to avoid recapture as a preferential payment.Ginnie Mae may not cover the premium portionto be paid on the bonds in the event that itwould be obligated to pass through the prepayment.This seasoning problem can be eliminatedthrough an issue-specific letter from Ginnie Maestating that it will guarantee the premium portionof the payment on the mortgage. Notice of redemptionon all prepayments should not be made untilthe premium is seasoned.Additionally, prepayment terms on the bondsneed to match the prepayment terms on the mortgage.This avoids the mortgagor making a prepaymentthat cannot be used immediately to callbonds. Redemptions resulting from prepaymentsshould provide that the resulting decrease in debtservice on the bonds is proportional, as nearly as ispracticable, to the decrease in the payments on theGinnie Mae securities during such period. Thismethod ensures that even if a curtailment occursinstead of a ratable reduction of future mortgagepayments, debt service will still be met, as it will bestructured around the prepaid mortgage terms. Thetrust indenture must state that the Ginnie Mae MBSis to be held by the trustee or in the trustee’s nameby the Federal Reserve and that the trustee has afirst perfected security interest in the MBS.MBS Cash FlowsWorst-case assumptions are used when structuringthe cash flows for this program. For constructionfinancing programs, worst case should indicate theleast favorable time from a revenue-generatingstandpoint for drawing on the acquisition fund toacquire the MBS. For example, if the acquisitionfund investment agreement earns less than theMBS, the acquisition scenario should assume deliveryon the latest possible date provided under theindenture. For each day that the MBS is notacquired, more negative arbitrage is created. Themaximum amount of this shortfall should be coveredin one of the following ways:■ Providing an unsecured LOC or cash;■ Selling the bonds at a premium; or■ Using another ratable credit enhancement.The method employed should be defined clearlyin the acquisition section of the indenture and thefinancing agreement.The submitted cash flow simulations should berun using appropriate lags and are expected to havesufficient excess assets to cover for reinvestmentrisk. All fees should be capped and paid from revenuesor interest income, and expensed in the cashflows. If fees are expressed as a fixed dollar amountand not as a percentage reduced over time,Standard & Poor’s will request a 90% immediateprepayment run. This is to ensure that the fixedfees could be paid in the event of a large prepayment.Alternatively, the fees specified in the legaldocuments can be ratably reduced with any prepayments.Expenses for MBS include Ginnie Mae,Fannie Mae, or Freddie Mac fees and lender fees.For a trustee to perform its duties adequately,Standard & Poor’s assumes a minimum fee of threebasis points. A portion of the trustee fees may bepaid outside of the trust estate, however, to theextent the trustee agrees in the bond documents tocontinue to perform regardless of compensation. Ifapplicable, a rebate calculation fee should beincluded at a level consistent with industry standards.Reinvestment exposure is determined by calculatingthe reinvestment shortfall, if any, for theredemption notice period on a full prepayment ofthe mortgage portfolio. This calculation assumesthat the mortgage prepays and is reinvested at thefloat contract rate or Standard & Poor’s reinvestmentassumption, and that the bonds are earning attheir stated interest rate.Commencement of amortization of the mortgageshould be a stated date in the documents and reflectedin the cash flows. Monies may be released onlyafter acquisition of the MBS, debt service and feesare paid, reinvestment is covered, and revenues tomeet the next debt service payment are captured.This release should be demonstrated through anopen flow of funds in the indenture. There should bea minimum carry forward balance in each period ofat least $10,000. A cash flow release test may benecessary on certain issues to ensure that the releaseswill not negatively affect future payment on thewww.standardandpoors.com261