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

Housingbonds. As a condition of bond closing, cash flowsshould be verified by an independent third party. Thethird party can be a nationally recognized accountingfirm; an expert in the field; or, in some cases, a qualifiedofficer of the state housing agency if applicable.On issues with multiple securities collateralizingseveral multifamily dwellings, the least desirablecash flow scenario should be provided. For example,if the underlying mortgages have varying rates,the mortgage with the lowest rate should be able tosupport the bonds, assuming that all the othermortgages prepay immediately. Lastly, it is crucialthat cash flow projections are consistent with representationsmade in the financing documents.A nondelivery run should be provided. If the securityis not delivered by the last possible acquisitiondate, cash flows must show sufficient funds toredeem the bonds in whole. The redemption fromnonorigination is usually on the date that is 30 daysafter the final acquisition date. To allow flexibilityin the acquisition of the MBS, extensions may beprovided for in the indenture. To ensure that anextension can be completed properly, Standard &Poor’s should receive 30 days’ written notification ofthe anticipated extension. Along with this extensionnotice, updated cash flows should be supplied alongwith supplemental documents, including the investmentagreement. The documents should indicate theextended call date 30 days after the new deliverydate in the event that a nondelivery is to take place.The same criteria for note amortization extensionsin FHA programs apply to all the MBS programs.To avoid the final payment being passed throughto the trustee after maturity of the bonds, themortgage should mature at least one month priorto the final bond maturity. Lastly, if a premium ispaid on the bonds to fund any shortfalls createdthrough the acquisition period, and if any partieshave a residual interest in that premium, the properlegal opinions may be necessary. For cash contributionsand LOCs, Standard & Poor’s may requestlegal opinions. ■Unenhanced AffordableHousing Project DebtStandard & Poor’s Ratings Services defines unenhancedaffordable housing projects (AHPs) as public-purposereal estate supported by below-marketrents. While many AHP transactions are structuredwith credit enhancements, unenhanced AHPs arestructured and rated based on the strength of the realestate to support debt service on the bonds. AHPtransactions may receive a variety of public supportand may have varying rent and residency restrictions.These include Federal subsidies, such as Section 8 andSection 236, as well as military housing allowances inprivatized military housing transactions.Many public purpose properties are economicallyviable even without Federal subsidies through theLow-income Housing Tax Credit Program, taxexemptbonds, exemption from real estate taxesand creative financing techniques. The unenhancedaffordable housing project debt criteria, does notapply to projects that will only be partially publicpurpose, or can convert to market rate during thelife of the bond issue. Transactions with these latterattributes are typically rated by Standard & Poor’sCommercial Real Estate Group. The analysis ofbonds backed by real estate focuses on real estatequality, legal structure, bond structure and reserves,and construction and lease up risk.Real Estate QualityStandard & Poor’s assesses the quality of the realestate to judge its ability to attract targeted tenancy,compete with nearby properties, maintain structuralsoundness and remain financially feasible. Theanalysis is based on:■ A site review;■ Measures of financial feasibility;■ Depth and strength of subsidies, if any;■ Market Analysis■ Property management;■ Ownership;■ Insurance, and environmental concerns.Site reviewThe site review focuses on the attractiveness andcondition of the property, and its comparabilityand competitiveness within the market. Based on asite visit, Standard & Poor’s assigns a rankingfrom “1” to “5”, with “1” indicating new highendmarket rate housing quality, and “5” indicatinghousing in bad physical condition, withphysical obsolescence. A ranking of at least “3” istypically necessary for investment grade ratings.The review consists of the following:262 Standard & Poor’s Public Finance Criteria 2007