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

Affordable Multifamily Housing Pooled Financingsan influence on loss severity is the extent of amortization.In the case of interest only loans, it makes nodifference whatever defaults occur shortly after theloans are securitized or when the loans mature: ineither case there will have been no amortization ofprincipal to help to absorb the loan losses. In thecase of amortizing loans, the later the default occursin the life of the loan, the less severe the loss isassumed to be as a result of the amortization.This criterion applies except for one notableexception. For LIHTC pools, the analysis focusesmuch more on years of lost interest and less ondefaults and recoveries. This is as a result of theimpressive history of the program since it’s inceptionin 1986, whereby defaults are very uncommon.A foreclosure on these properties would trigger aloss or recapture of the tax credit benefits. The historyhas shown that there are a percentage of propertiesthat don’t cash flow sufficiently to cover debtservice, and are supplemented by either reserves orsome other forms of capital infusions until theproperties can once again cover debt service fromoperations. As a result, the analysis emulates thisphenomenon and assumes a certain percentage ofthe properties in these pools will need capital infusions,and that the infusions depending on the ratinglevel will potentially be for a significant periodof time. As in the regular pool scenarios, the higherthe rating level the more stressful the assumptions,and therefore higher level of reserves will be necessaryat higher rating levels, than at lower levels.It should be noted that the basic variables onwhich the model operates for all property types, arestabilized net cash flow and market values for eachof the underlying properties as estimated byStandard & Poor’s and as based on the criteria outlinedabove. Although these estimates are derivedfrom information provided by the issuer or thesponsor, the Standard & Poor’s adjustments in connectionwith its analysis may cause the estimatesthemselves to look different from the numbersreported by third parties.Standard & Poor’s will review the pool legal documentation,both on the individual bond/mortgagelevel and on the trust/partnership/REMIC level. SeeStandard & Poor’s U.S. CMBS Legal andStructured Finance Criteria located on www.standardandpoors.com.Individual mortgages and bondindentures will be reviewed to ensure that the loandocuments properly reflect the cash flow assumptionsof the pool.Cash Flow AnalysisOnce Standard & Poor’s determines the credit supportnecessary at different rating levels, then ananalysis is needed for the rating of the actual pooldebt obligations assuming certain prepaymentassumptions. Where the pool structure is a passthrough entity (REMIC, partnership or trust), theinterest rate of the debt obligations is based off theweighted average coupon of the trust, and thestructure uses a “fast pay-slow pay” payment structure,the rating of the debt obligations is relativelysimple: the debt obligations get the rating based onthe subordination levels from Standard & Poor’sinternal model as adjusted.The analysis is more complicated for pools withloans which have various different coupon rates ormaturities, with pools with variable rate debt obligationswhose rate is pegged off an index differentthan that of the certificates/bonds secured by thepool (such is in common in HFA pools) or poolsthat use a “pro rata pay” structure. In these cases,Standard & Poor’s will review cash flow projectionsto ensure that, the debt obligations can bepaid on a timely basis under various scenarios; and,that there is no overall degradation in pool creditquality in the event that better performing loansprepay and the resulting principal payments areallocated to all pool classes, on a pro rata basis. Inthese cases, additional cash flow runs may be necessaryand stress cash flow models may be requested.The requested cash flow runs can vary dependingon the composition and characteristics of the pool,and are also applicable for State Housing FinanceAgency multifamily parity resolutions.Cash flow coverage scenariosAt the minimum, the following base case and stresscash flow runs must be prepared:Base case:■ All loans pay at stated interest rate and loanswith balloon maturities pay at balloon maturitydate with a 30-day lag in cash flows.Stress cases:■ Selective low LTV loans prepay-all loans belowthe average pool LTV with coupons above theaverage pool coupon prepay at the end of the ofthe loan prepayment lockout period.■ Selective high DSC loans prepay-all loans abovethe pool average DSC with coupons above theaverage pool coupon prepay at the end of theloan prepayment lockout period.■ All LIHTC prepay scenario-all LIHTC transactionsprepay loans in the 15th year after beingplaced in service.■ Massive prepayment scenario-all loans prepay atthe end of the individual loan lockout periods.■ High coupon prepay scenario-all mortgage loanswith coupons above the pool average loancoupon prepay at the end of the loan prepaymentlockout periods.www.standardandpoors.com273