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

Affordable Multifamily Housing Pooled FinancingsInformation Requirementson subordinate multifamily pool tranches, in whichcase the rating on that tranche would be the creditrating of the rated HFA.Standard & Poor’s uses the same methodologyfor analyzing credit support levels for HFA affordablemultifamily housing pools as for conduitpools. Because many HFAs have a long track recordof excellent underwriting and asset managementcapabilities, Standard & Poor’s will rely to a certainextent on the issuer’s representations regarding calculationsof DSC and LTV, property quality andcondition, and strength of ownership and management.Standard & Poor’s will also give managementcredit to HFA’s with strong asset managementdepartments that can identify financial and managementproblems early, seek rent increases and subsidyextensions, and work out troubled loans.Construction Risk InAffordable Multifamily Housing PoolsHousing Finance Agency poolsMany HFAs have parity bond indentures or guaranteefunds that finance new construction ofaffordable multifamily housing projects. HFAs haveincurred minimal credit losses on these transactions,either during the construction/lease up phase orAs part of the rating process, Standard & Poor’s will perform a detailed review ofthe individual properties in the pool, based on the following information:■ Project name and address■ Project owner/sponsor■ Type of affordable housing project: e.g. LIHTC, project-based Section 8,tenant-based Section 8, 80/20, Section 236, Section 202, 501c3, military housing,student housing, assisted living, etc.,■ Number of units■ Age of property■ Original principal balance of loan/bond■ Current principal balance of loan/bond at cutoff date■ Interest rate on loan/bond■ Amortization period of loan/bond■ Maturity date of loan/bond and balloon payment, if any■ Prepayment terms for the bonds, if any■ Amount and investment of debt service reserve funds, if applicable■ Seasoning of loan/bonds■ Loan history of loan/bonds■ Three years of net operating income of property■ Trust indenture/loan agreement, mortgage, note, if applicable■ Third party reports: appraisal, property condition reports, andenvironmental studyduring the permanent phase thereafter. HFA’s typicallyservice their own mortgage loans on projectsunder construction or hire outside mortgage loanservicers to do the servicing. The agencies or outsideservicers frequently review construction drawsand make site visits to monitor constructionprogress. Procedures may vary from HFA to HFAbut frequently the HFAs have engineers on staff toreview construction progress on projects. It is veryrare that a multifamily project financed by an HFAdoes not get completed.HFA’s typically have a good history in financingprojects that achieve stabilization at targeted debtservice coverage levels. Most projects financedtoday by HFAs are usually LIHTC multifamilyprojects, which though they are typically nonrecoursefinancings have the advantage of havingdeep pocket limited partners who have tax incentivesto keep multifamily projects out of default, atleast during the life of the LIHTCs. In the eventthat projects do have financial problems or go intodefault, HFAs have resources to mitigate thesedefaults, such as parity indenture fund balances andfunds to make subordinate mortgage loans orgrants. Due to the long history of excellent performanceon projects with construction/lease uprisk and their systems in place, Standard & Poor’shas become very comfortable with the HFAs takingconstruction risk on affordable multifamily housingprojects and will rate parity bond indentures thatdo not have credit enhancements on projects underconstruction.If an HFA can demonstrate a positive experiencewith construction risk, as well as underwriting,oversight and construction procedures as outlinedabove, Standard & Poor’s will assume low constructionrisk and look to bond cash flows to modelconstruction risk. Bond cash flows should be run asin accordance with Standard & Poor’s constructioncriteria (see “Public Finance Criteria: AssessingConstruction Risk”). HFA parity indenture cashflows must demonstrate that bond debt service canbe paid assuming construction delays. If bond cashflows do not demonstrate sufficient resources tosupport the bonds during the delay period, the HFAmust identify other sources of financial support.Conduit poolsMore and more conduit programs have arisen tofund construction and permanent financing of multifamilypools. These typically take the form of,taxable debt obligations secured by pools of affordablemultifamily mortgages issued by non-taxexempt issuers using a REMIC (Real EstateMortgage Investment Conduit); or tax-exempt passthrough debt obligations secured by pools ofaffordable housing tax exempt bonds issued bywww.standardandpoors.com275