Recycling runs include, but are not necessarily
limited to:
■Full origination based on worst-case draw/three-
year average life prepayment experience/hold pre-
payment proceeds for longest time stated in
documents/recycle all loans on worst-case deliv-
ery/then 0% prepayments on recycled loans.
■Full origination based on worst-case
draw/three-year average life prepayment experi-
ence/hold prepayment proceeds for longest time
stated in documents/then non-delivery of all
prepayment proceeds.
(Note: Recycling runs should include recycling of
surpluses if required under the program.)
Second mortgage loans
Standard & Poor’s has developed specific criteria
for second mortgage loans, which are done primari-
ly for down payment assistance. Please refer to the
criteria, “Single-Family Second Mortgage Loans.”
Legal Provisions, Reserves And Investments
In analyzing the strengths of an MRB issue’s legal
structure, Standard & Poor’s primarily, but not exclu-
sively, focuses on seven sets of legal provisions:
■The debt service schedule, including the redemp-
tion provisions;
■The level of reserve fund requirements;
■The flow of funds;
■The permitted investments;
■The provisions for additional bonds;
■Trustee and servicer responsibilities; and
■Event of default and taxability provisions.
Redemptions, reserves, flow of funds
Debt service should be structured assuming that
mortgage revenues will be received in their regularly
scheduled amount with no prepayments.
Redemption provisions must clearly state how
bonds will be called in the case of all partial
redemptions. Unless sufficient stress runs are provid-
ed during the rating process, all redemptions should
be done on a pro rata or strip-call basis unless a
detailed cash flow certificate using the original cash
flow assumptions demonstrates that future debt
service and payment of fees are not impaired under
all cash flow scenarios. In evaluating an issue’s flow
of funds, two concerns should be addressed: the
release of funds and the use of surpluses.
With some exceptions, the flow of funds should
be closed for all local issuer transactions, with all
surpluses being used to call bonds. State agencies
may use an open flow of funds if structured proper-
ly, and a cash flow certificate (requiring the same
scenarios as were originally provided at the time of
initial issuance) is provided each time funds are
released. In both cases, the 2% liquid reserve should
be replenished through the flow of funds prior to
any release of funds. In addition, legal provisions
should give first priority to the payment of debt
service, then to payment of insurance premiums,
with all other expenses subordinated and capped.
Liquid reserves
A liquid reserve of at least 2% of outstanding mort-
gages should be funded at closing and always
should equal or exceed 2% of outstanding mort-
gages during the bond term. This reserve can be
used to the extent that there are deficiencies in the
cash flow stream needed to pay debt service
between the time that the loan is delinquent and the
insurance is received.
Investments and additional bonds
Usually, MRB issuers restrict their investments to
risk-free or minimal risk investments, or to invest-
ment agreements with banks whose unsecured debt
is rated as high as the rating on the bonds. On a
case-by-case basis, other investments may be con-
sidered, depending on the desired rating and the
overall strength of the program. Please see “Public
Finance Criteria: Investment Guidelines” for a full
discussion of acceptable investments for HFA pro-
grams.
Housing agencies issuing bonds under open
indentures should notify Standard & Poor’s in a
timely manner of any intention to issue additional
parity bonds. The agencies also should provide
Standard & Poor’s with the necessary information
to assess any potential rating impact on the bonds
still outstanding.
Trustee and servicer responsibilities
The trustee and the servicer play an important role
in the success of a bond issue. Legally, they are
obligated to perform a variety of duties under the
financing documents. In some instances,
Standard & Poor’s will review the trustee and ser-
vicer capabilities to carry out these responsibilities.
Event of default and taxability provisions
The only event of default that should trigger an
acceleration of bonds on rated issues is the failure to
pay principal or interest on the bonds. Covenant
defaults should provide for remedies other than
acceleration unless bondholder approval to acceler-
ate is obtained from a majority of bondholders.
Standard & Poor’s ratings on single-and multifamily
transactions do not address the likelihood of taxa-
bility. Redemptions for a determination of taxability
are not permitted unless the trustee has enough
monies on hand to redeem the bonds in full.Single-Family Whole Loan Programshttp://www.standardandpoors.com 241