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

HousingFor pools with construction loans:■ Cash flows should be run in accordance with the“Cash Flow Considerations” and “CapitalizedInterest” sections of the Standard & Poor’sPublic Finance construction criteria. (See “PublicFinance Criteria: Assessing Construction Risk”).Credit migration scenariosFor pools with pro rata pay structures, additional cashflow runs may be requested assuming that the highestDSC/lowest LTV loans prepay at the earliest possibleprepayment date after any lockout period ends.Standard & Poor’s will then review the loss coveragelevels of the remaining loans to determine the impacton credit quality of the remaining debt obligations.Rating Pools With Variable Rate Assets Or LiabilitiesStandard & Poor’s will review assets in pools withvariable rate debt and determine an appropriatefixed rate at which to underwrite the pool loans fordebt service coverage purposes. Standard & Poor’swill determine this appropriate fixed rate by reviewingdata from our floating rate interest rate models.In pools where the variable rate on the assets is notpassed through to the debt holders, the rate whichStandard & Poor’s will use for individual loananalysis may be less than the highest interest rateover the pool life as derived from our interest ratevector model. In that case, in order for pool debt toreceive high investment grade ratings fromStandard & Poor’s, the pool may have to providereserves for periods when interest rates are projectedto be above Standard & Poor’s assumed rate.Standard & Poor’s will review pools with variablerate assets and variable rate liabilities to ensurethat there is no basis point risk between the twodebt instruments. Rated certificates/bonds for poolswith fixed rate assets and floating rate liabilitieswill have to have appropriate debt service coveragelevels at both the expected floating rate liability rateand at the maximum rate. If no maximum rate onthe liabilities is provided in the documents, thenStandard & Poor’s will use its interest rate vectormodels to determine an appropriate maximum rate.In addition, Standard & Poor’s will need to reviewstress cash flow runs assuming the various prepaymentscenarios listed above.Issuers of pool debt obligations with variable ratedemand obligations (VRDOs) that have associatedput features may have to obtain liquidity facilitiesor other comparable credit support to addressremarketing risk.Servicing And Liquidity IssuesStandard & Poor’s looks for experienced multifamilyservicers in rating pooled transactions. The experiencecan be evaluated in several different ways.Servicers other than those with Standard & Poor’sServicer Evaluations are certainly acceptable. Otherservicers who would be acceptable are HFAs thathave a proven track record in servicing multifamilyloan pools (as would other types of entities thathave proven track records in multifamily loan servicing).Standard & Poor’s acknowledges that servicingpools of bonds will not necessarily require thesame skill set as a commercial loan servicer due tothe fact that bond trustees usually handle the cashflow requirements of a bond issue. Determiningwhether the obligations’ servicer is qualified willrequire an analysis of reporting requirements, cashflow management in some transactions, specialservicing in default or workout situations andworking with trustees and issuers in bond transactions.In order for a pool to receive a rating,Standard & Poor’s must be assured that the servicermeets Standard & Poor’s guidelines and can effectivelyservice the pool.Standard & Poor’s always looks for liquidity ininvestment grade rated bond transactions and pooltransactions are no different. Liquidity is there toensure that there is timely payment of principal andinterest in the event of a temporary impairment ofcash flow. Liquidity in affordable housing pooledtransactions can be provided by debt service reservefunds on the individual bond level or by having arated entity agree to provide servicing advances.The required rating level on the entity providing theservicing advances will depend on the rating d ofthe pool debt obligations.State And Local AffordableMultifamily Housing Pool Open ResolutionsHousing finance agencies have been issuing bondsbacked by pools of affordable multifamily projectloans since the late 1960s. HFAs have historicallysupported their multifamily bond issues and similarto LIHTC projects, have avoided default situationsby utilizing their resources, including capital infusions.Standard & Poor’s rates some pool financingson the strength of the multifamily mortgage collateralalone; some are combined single family and multifamilypools. Some multifamily-pooled resolutionsare rated based on the general obligation pledge of arated HFA and not on the quality of the underlyingloans. Most of the HFA multifamily pool resolutionsare single tranche but some have multiple tranches.In the single tranche multifamily pools, loss coveragefor the rated bonds is typically provided byexcess mortgages or cash reserves. In resolutionswith subordinate tranches, credit support for thehigher rated tranches is provided by lower ratedtranches. Some HFAs pledge their general obligation274 Standard & Poor’s Public Finance Criteria 2007