This will ensure the immediate availability of funds
upon a mortgage default. As this coverage provides
liquidity, it can be funded from bond proceeds.
Loan to value. Evidence indicates that the
amount of mortgagor equity invested has a direct
impact on the foreclosure rates. As LTV increases,
the FF and MVD increase as shown in the table,
“Loss Coverage Criteria”.
Small pool size. Standard & Poor’s applies a
small pool size factor to the credit loss coverage
percentage on pools of less than 300.
Dwelling type. For mortgage revenue bonds that
permit three-and four-family residences where the
income from the rental units is taken into account
in determining program eligibility, or include coop-
erative apartments, condominiums, or other type of
homes, Standard & Poor’s makes adjustments to
MVD and FF. The reasoning behind the MVD
adjustment is that the market for such properties is
narrower than for single-family or two-family resi-
dences. The higher FF assumption is based on the
MVD of such residences and the risks associated
with rental property vacancies.
Mortgage type. Standard & Poor’s increases FF
for interest only mortgages, 40-year mortgages and
piggyback loans, all of which reduce the amount of
equity a buyer has in the property, either at the
time of purchase or during the term of the loan.
Standard & Poor’s assumes that other loan prod-
ucts that are not as common such as graduated
payment mortgages (GPMs), graduated equity
mortgages (GEMs), or mortgages with buy-downs
will also experience a higher FF.
Foreclosure frequency cap. Standard & Poor’s rec-
ognizes that it may be excessively conservative to
assume a FF level above 75% at the ‘AAA’ rating
level and 60% at the ‘AA’ rating level for loans that
are not delinquent or are newly originated.
Therefore the FF is capped at these levels. This is
generally only applicable to local whole loan issuers,
which are very rare. In these cases the limited geo-
graphic dispersion would push FF beyond the caps,
but experience from existing local programs indi-
cates that they have never exceeded the capped FF.
Minimum loss coverage. Even with very deep
PMI, any loan portfolio will sustain additional loss-
es. Generally, a minimum loss coverage of 2% is
appropriate for investment grade ratings.
Methods of providing loss coverage
Issuers use several methods for covering
portfolio losses:
Pool insurance
Pool insurance was once a widely used vehicle for
providing loss coverage. As the cost of insurance
became prohibitive, HFAs developed many viable
alternatives. Pool insurance is still available in some
states. To be acceptable, the pool insurance
provider should have an FSR rating as high as the
rating on the bonds. Pool insurance covers losses
on foreclosures in excess of primary mortgage
insurance. However, not all pool insurance policies
will cover losses on FHA-or RD-insured and
VA-guaranteed loans. The policy must specifically
address coverage of such losses. Through advance
claims provisions, pool insurance may provide liq-
uidity protection through periods of mortgage
delinquencies. Such payments will continue if the
servicer and trustee diligently pursue foreclosure on
the mortgage. However, because of the relatively
low use of pool insurance policies in recent years
and a scarcity of cash advance riders, issuers use
liquid reserve funds more frequently to address the
liquidity needs of particular loan pools.
Self-insurance funds. Some HFAs that have found
that the cost of pool insurance exceeds the amount
of claims paid have used the self-insurance fund
(SIF) alternative. For most agencies, Standard &
Poor’s allows partial funding of the SIF under the
bond resolution, with the remainder in set asides
and available fund balances (a leveraged SIF).
Similar to pool insurance, the SIF would be drawn
down to cover losses due to foreclosures and for
advance claims payments. Provided that a housing
agency is eligible to establish and use the SIF, the
following minimum standards may apply, as con-
sidered on a case-by-case basis:
■PMI covering at least the top quarter of every
mortgage loan should be provided by a conven-
tional primary insurer with a Standard & Poor’s
FSR rating as high as the rating on the bonds.
Alternatively, the SIF could be established to
cover the reduced pool coverage requirements for
FHA-insured, RD-insured, or VA-guaranteed
loans.
■If leveraged, the SIF should be at a level of at least
20% of the anticipated total loss coverage exposure
available from excess assets in the bond program.
A net worth maintenance reserve or agency gen-
eral fund set aside in an amount equal to 25% of
the anticipated loss coverage amount is necessary,
in addition to the amount held under the inden-
ture. This reserve can be escrowed with the trustee
or an independent third party and pledged to
bondholders, or it can be segregated in the agency’s
general fund balance and designated for replenish-
ment of the SIF requirement, as necessary. The
methodology used and maintenance level should be
outlined in a board letter or officer certificate and
presented to Standard & Poor’s at the time of rat-
ing. The SIF reserve should be funded under the
indenture at bond closing or as a condition to
mortgage origination.Single-Family Whole Loan Programshttp://www.standardandpoors.com 233