Certain other criteria are specific to the MBS pro-
grams. For example, all MBS should be registered in
the name of the trustee, held in its possession, and
assigned as a first perfected security lien, free and
clear of third-party claims. Selling the MBS securi-
ties at a loss should be with majority bondholder
approval, and this provision cannot be changed
without majority bondholder approval. Lastly,
lenders and servicers should be approved by Ginnie
Mae, Fannie Mae, or Freddie Mac, as applicable.■Property Improvement Loans ..........................................................................................
http://www.standardandpoors.com 247P
roperty improvement loan (PIL) revenue bonds
are tax-exempt debt instruments issued to
finance certain eligible improvements to owner-
occupied properties. Standard & Poor’s Ratings
Services rates bond programs secured primarily by
single-family property improvement loans insured
under the FHA Title I program, uninsured or guar-
anteed for full and timely payment by ‘AAA’ rated
eligible MBS.
The FHA Title I Property Improvement Loan
Program, formerly known as the FHA Title I Home
Improvement Loan Program, was established by the
National Housing Act of 1934 (as amended) and is
one of HUD’s oldest programs. The act empowers
the FHA to enter into a contract of insurance with
financial institutions that it determines to be eligible
for such insurance.
Rating criteria for PIL revenue bond programs
are similar to the criteria used for single-family
MRBs. In both types of financings, issuers use bond
proceeds to acquire eligible loans and the revenues
generated from the resulting pool of loans are used
to pay bond debt service. However, the types of
loans comprising the pool, and the type of insur-
ance protection provided are markedly different.
FHA Title I Loan Characteristics
A borrower may obtain a FHA Title I loan to
finance alterations, repairs, and improvements on
real property, or to finance existing structures that
substantially protect or improve the property,
including manufactured homes, single-family and
multifamily homes, nonresidential structures, and
the preservation of historic homes. For single-family
property improvement loans, HUD sets the maxi-
mum loan amount under the program at $25,000,
and the maximum loan maturity at 20 years, 32
days, and maximum interest rate based on market
conditions. All loans should be fully amortizing and
level pay. There is no equity requirement for loans
over $15,000 as long as the property being
improved is owner occupied and the structure on
the property has been completed for at least six
months before the date of the Title I loan applica-
tion. The borrower must have equity in the proper-
ty at least equal to the loan amount when the loan
exceeds $15,000 and the property is non-owner
occupied. Loans in excess of $7,500 are to be
secured by a recorded lien on the improved proper-
ty. FHA regulations do not require that this lien be
a first lien on the property.FHA Title I Insurance Coverage
Insurance provided by the FHA is the principal
source of credit enhancement for a Title I security.
In the Title I program, the financial institution orig-
inating the loans obtains a contract of insurance
with the FHA. This insurance takes the form of a
reserve fund established and maintained by the
FHA for the financial institution. The amount cred-
ited to each institution initially is equal to 10% of
the aggregate amount of all loans newly originated
or purchased by the financial institution. A Title I
borrower is considered in default under the regula-
tions if he or she has failed to make any payment
due under the note and the failure has continued
for at least 30 days.
Prior to acceleration of the loan, the lender must
meet with the borrower to affect a cure or enter into
a modification or repayment plan. Once these steps
have been taken, the lender must provide written
notification to the borrower that unless a cure or
modification agreement is entered into, acceleration
will occur 30 days from the notice date. Failure to
document the above actions adequately may result in
a claim denial. A claim must be filed no later than
nine months after the date of default. Claims will be
paid by the FHA from the lender’s reserve fund. The
amount of the reimbursement will equal: The sum of
90% of the net unpaid principal balance of the loan;
90% of the uncollected interest due to the date of
default; and 90% of the interest computed at 7% per
year on the outstanding principal balance from the
date of default to date of claim submission plus 15