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

HousingAffordable MultifamilyHousing Pooled Financings■Pooling of affordable multifamily housing assetsgives issuers the benefits of economies of scaleand diversification, which can increase credit qualitywhen compared to single-asset transactions.Pooling is an efficient way for housing financeagencies (HFAs), banks, mutual funds, low-incomehousing tax credit (LIHTC) investors/sponsors andconduit issuers to get higher ratings for affordablemultifamily transactions than would be possible forsingle-asset transactions.Affordable multifamily pool transactions dependon the collective performance of multiple propertieslocated in a variety of markets and controlled byseparate borrowers. The ratings of pool transactionsare predicated on the notion that it is highlyunlikely that all of the properties will experiencedeclines in cash flow and value simultaneously, butthat, over the life of the transaction, some loans canbe expected to default, with resulting losses to thecollateral pool. Standard & Poor’s Ratings Servicesdetermination of credit enhancement levels for pooltransactions is designed to estimate the frequency ofdefault with respect to the underlying assets and theseverity of the loss that is expected to be incurred inconjunction with each default, given the characteristicsof the loans in the pool.For each rating level, Standard & Poor’s uses aninternal model, to determine the minimum loss coveragenecessary by rating category. Potential lossesin a pool are typically covered in two ways. One isthrough over-collateralization, whereby the poolhas sufficient assets over liabilities to cover potentiallosses. The other is through subordination,whereby the higher rated debt is supported by debtissued at the lower rated levels all the way down tononinvestment-grade. Examples of other types ofcoverage, include, a general obligation pledge forHFA pools, or credit enhancement for other pools.For the purposes of this article the three terms, losscoverage, over-collateralization and subordinationare used interchangeably in describing the losses apool has to cover at different rating levels.Pools of affordable multifamily housing debtobligations are typically issued following one ofthree basic structures:■ Bonds issued by municipal issuers such as HFAssecured by affordable multifamily mortgagesunder closed or open resolutions,■ Taxable debt obligations secured by pools ofaffordable multifamily mortgages issued by nontaxexempt issuers using a REMIC (Real EstateMortgage Investment Conduit) structure, andTax-exempt pass through debt obligations securedby pools of affordable housing tax exempt bondsissued by non-tax exempt issuers using someother form of pass through legal structure.Qualifying For Affordable Multifamily PoolTreatment In Rating Debt ObligationsIn order to obtain large pool treatment for a pooledtransaction, the pool must contain at least 20 debtobligations with 10 separate obligors. These transactionstypically, do not have one obligor representingmore than 10% of the cutoff principal balanceof the mortgages or bonds in the pool. For applicationof pool concentration rules, Standard & Poor’sdefines obligor as the ultimate borrower on thedebt obligation and not the tax-exempt issuer (inthe event that the issuer is a municipal tax-exemptconduit issuer issuing the debt obligation on behalfof a third party borrower.) As illustration, considerthe situation where a not-for-profit or public housingauthority or tax credit limited partnership is thelegal owner of a project and the borrower under aloan agreement or financing agreement.The issuer of the tax-exempt bonds is a taxexemptmunicipal entity issuing the bonds as a conduitissuer and has no legal binding obligation to useits own credit to pay debt service on the bonds. Inthis situation, Standard & Poor’s considers the legalowner of the project to be the borrower for concentrationrules and not the issuer. In certain tax-exemptbond transactions, a municipal entity is the legalowner of the multifamily property, as well as theissuer of the bonds, and leases the property on along-term lease to a not-for-profit entity in order toqualify the property for real estate tax exemption. Inthese situations, Standard & Poor’s would still considerthe not-for-profit to be the borrower for applicationof pool concentration eligibility.Individual Property ReviewsStandard & Poor’s will review the operating historyof properties in the pool. This review will consist ofan analysis of three years of audited financial statements,which will be used to derive net cash flow,and to assign an appropriate valuation to the properties.Property income will be reviewed for historicaltrends, and Standard & Poor’s will assume avacancy rate that is the greater of the actual vacancy270 Standard & Poor’s Public Finance Criteria 2007