that reduce the amount of equity a borrower has
in the property will have an impact in the assess-
ment of overall losses.
Portfolio size
Each portfolio must have sufficient size and geo-
graphical dispersion to perform in a statistically
predictable manner. Therefore, Standard & Poor’s
loss coverage model assigns higher risk factors to
pools fewer than 300 loans and pools of loans with
limited dispersion.
Economy of the lending area
The economy of a particular area provides indica-
tions of the potential severity of mortgage defaults
that could occur over the term of the bonds.
Standard & Poor’s assesses the lending area to esti-
mate the level of delinquencies, foreclosures, and
expected prepayments to determine whether the
value of the mortgaged properties is likely to be
maintained over the life of the bonds.
Anti-predatory lending legislation
Standard & Poor’s must review the potential for
financial liability due to anti-predatory lending leg-
islation on all single-family whole loan programs.
Many states have adopted legislation with assignee
liability that can result in fines levied against loan
purchasers should predatory lending practices be
identified. In some instances, housing finance agen-
cies have been specifically excluded from these
laws. If that is the case, the HFA should provide an
officer’s certificate to that effect. If not, issuers must
be able to provide appropriate representations and
warranties to cover this risk and, in some instances,
additional credit enhancement may be needed. The
need for credit enhancement may be waived if the
issuer has a long-term rating equal to the rating on
the bonds, although the risk must still be quantified
and taken into account in the issuer’s credit rating.
Insurance And Insurance Alternatives
Standard & Poor’s analyzes the level of primary
mortgage insurance (PMI), mortgage pool insur-
ance, cash advance coverage, standard hazard
insurance, special hazard insurance, title insurance,
and any other loss coverage credit enhancements
provided. Standard & Poor’s also may look for
additional insurance coverage, such as flood and/or
earthquake insurance, depending on the geographic
location of the mortgaged properties. In recent
years, many HFAs have sought alternatives to tradi-
tional mortgage pool insurance, as escalating premi-
ums and deteriorating insurance company ratings
have become prevalent.
Calculation of loss coverage
Loss coverage must be sufficient to provide credit
and liquidity protection under Standard & Poor’s
“worst-case” scenarios. In determining total loss
coverage needed, Standard & Poor’s looks for cov-
erage of credit losses and liquidity shortfalls.
The credit coverage offsets any shortfalls occur-
ring subsequent to the foreclosure sale and after
receipt of PMI. Liquidity coverage is an estimate of
shortfalls due to mortgage cash flow delinquencies
prior to foreclosure and receipt of insurance recov-
eries or credit enhancement payoff.
As a starting point, Standard & Poor’s approach
to loss coverage assumptions begins with an evalua-
tion of the portfolio’s origination area. The cate-
gories are large state, small state/large county, and
small county/city. Large states are those with popu-
lations above six million. The small state/large
county category includes states with populations
below six million, and counties that have popula-
tions above one million. Areas in the small
county/city category have a population of less than
one million. Geographic and socioeconomic issues
also affect the evaluation.
Standard & Poor’s loss coverage tables identify
the FF, FC, and MVD assumptions for each rating
category and area classification. Modification of
these assumptions may occur, depending on aspects
particular to a pool of mortgage loans. The catego-
ry distinctions are reflected primarily in the FF. The
higher the portfolio concentration, the higher the
risk of severe housing price declines in the event of
a substantial economic slowdown or housing mar-
ket disruption. Therefore, the small county/city cat-
egory also reflects higher MVD assumptions than
the other two categories.
Two important assumptions are critical to deter-
mine the level of loss coverage: The percentage of
loans in the portfolio that will go into foreclosure
over the life of the bond issue, or the foreclosure
frequency (FF); and the expected average loss for
each foreclosed loan, or the loss severity (LS). The
calculation of loss coverage is simply the multiplica-
tion of the assumed FF of a portfolio by the
assumed LS. There are many factors that influence
Standard & Poor’s FF and LS assumptions. These
include the bond rating, portfolio dispersion, cur-
rent economy, type and level of PMI, market value
decline (MVD), dwelling type, mortgage type, serv-
icing capability of the participants, foreclosure costs
(FC), and LTV ratios. The historical delinquency
and foreclosure performance of an existing portfo-
lio also will factor into the FF and LS assumptions.
Standard & Poor’s considers the following fac-
tors when calculating loss coverage:Single-Family Whole Loan Programshttp://www.standardandpoors.com 231