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

Housingwhether the project has a good chance to beextended and, if so, will analyze using rents whichare the lesser of rents affordable to tenants making60% of HUD median income or local HUD FairMarket Rents (assuming tenant pays 30% ofincome for rent). Standard & Poor’s will also usehigher cap rates and lower default thresholds thanunsubsidized affordable multifamily in determiningloss coverage.Standard & Poor’s may also be able to make theassumption that a certain portion of the expiringSection 8 projects can make a successful transitionto unsubsidized status. These may include propertiesthat, already have a significant portion ofunsubsidized units fully rented which demonstratetheir ability to attract unsubsidized tenants; or,properties that compare favorably to other affordablemultifamily projects in the area in location,amenities, unit size, curb appeal and physical condition(properties that rank 3 or better byStandard & Poor’s) and have strong ownership.These transactions will be analyzed using the unenhancedaffordable housing project debt criteriaassuming a successful transition. In order to determinethat a successful transition can be made,Standard & Poor’s would need to visit each site andstress the pro formas with a two-year transitionperiod from subsidized to unsubsidized statusassuming that unsubsidized rents would be at a significantdiscount to market. Section 8 transitiontransactions that are included in pools will needsufficient reserves to cover the transition period.Standard & Poor’s will determine recovery rates forSection 8 properties not assumed to transition tounsubsidized status, on a case-by-case basis.The low income housing tax credit program,allows corporations and individuals to receive adollar for dollar credit against federal income taxliability for 10 years, and requires the projects tocomply with the program rent restrictions throughthe 15 year compliance period. For LIHTC properties,Standard & Poor’s will review the overall poolto determine if there is a concentration of programtermination risk in any given year. Pools with a significantnumber of loans with maturities greaterthan 15 years may suffer unique stress if all, or anumber, of properties are required to be sold inyear 15. Sales of properties frequently result in adrop off in net operating income. Pools with significantproperties that are sold in the same periodmay see such a drop in average NOI (net operatingincome) affecting debt coverage levels.Subordination levels for such pools may need to beadjusted to reflect the fact that, in reality, the assetshave balloon maturities tied to a sale of the propertyrather than are fully-amortizing.Mortgage loan seasoning and mortgagepayment delinquency historyStandard & Poor’s will review pool statistics formortgage seasoning (the period since the originationof the mortgage) and the payment history of the borrowers.Mortgages with shorter seasoning periodsmay have the underlying property NOI’s haircut duringthe individual property review process. Poolswith significant delinquency histories may receivelower ratings, or need higher collateralization levelfor similar pools with better delinquency history.Determination Of Loss CoverageStandard & Poor’s will value the assets in the pooland determine loss coverage levels by rating category,by computing a DSC and LTV for each property.Based largely on the LTV or DSC, Standard &Poor’s will determine the aggregate credit risk associatedwith the loan portfolio and the resultingdefault rates that must be survived to obtain agiven rating level. Default rates are then adjustedfor recovery assumptions and a lost interest amountis added to account for anticipated failure to receiveinterest until recovery is complete. Loss coveragecan be provided through over-collateralization (typicallyused by HFA pools) or subordination of subordinatedebt tranches. Standard & Poor’s mayadjust computed loss coverage levels due to poolsize, property type, lack of significant geographicand owner diversification, lack of pool mortgageseasoning, and significant affordable housing programtermination risk.Under higher rating scenarios, higher defaultrates are assumed, as compared to default ratesunder lower rated scenarios. In addition, in termsof recovery of principal and years of lost interest,Standard & Poor’s applies higher stresses at thehigher rating categories, and less at the lower ratings.The severity of the loss incurred in connectionwith each default depends on analytical assumptionsabout expected default experience and thespecific characteristics of the loan in question. Theanalytic assumptions relate to the decline in themarket value of the underlying real estate and tothe number of months between default and receiptof liquidation proceeds. Here again assumptionsvary by property type and rating category. Forinstance, at the higher rating categories,Standard & Poor’s assumes that it will take the servicerlonger to resolve a default on the underlyingproperty, than in the lower rated categories.The number of months between the borrower’sdefault and the servicer’s receipt of liquidation proceedsis used in combination with the loan couponto estimate the amount of lost interest associatedwith a default. The other loan characteristic that has272 Standard & Poor’s Public Finance Criteria 2007