days; as well as uncollected court costs, certain attor-
ney fees, and recording costs.
However, the total amount of claims reimbursed
to the institution is limited to the amount main-
tained for each financial institution in the FHA
reserve fund. The amount of FHA Title I insurance
coverage will decline by the amount of claims paid
or rejected by the FHA and the amount of insurance
allocable to a loan that has been sold or transferred
without recourse. Adjustments to a lender’s insur-
ance coverage reserve account cannot occur with the
first five years of contract. After the end of the five-
year (60 month) period, and on each October 1
afterward, the amount of insurance coverage in the
lender’s reserve account is adjusted by deducting
10% of the amount of the insurance coverage con-
tained in the reserve account as of that date. The
adjustment cannot reduce the amount of insurance
coverage in the account to less than $50,000.
Should claims exceed the amount available in the
institution’s reserve, there is no further recourse to
the FHA. Under this circumstance, the lending insti-
tution’s only recourse for repayment would be to
commence foreclosure proceedings if a security
instrument is in place. However, as the vast majori-
ty of Title I notes typically are second, third, or
fourth liens on the property, foreclosure does not
guarantee that the institution will recoup its losses.
Only if there are monies remaining after all prior
liens have been fully satisfied can the holder of the
Title I note seek payment. In areas where properties
are declining in value, the chances of recovery are
especially slim.Nonrecourse vs. Recourse FHA Title I Programs
Standard & Poor’s rates nonrecourse and recourse
FHA Title I programs. In the nonrecourse program,
all loans financed are insured under a single con-
tract with the FHA. The insured in this case is the
bond issuer, which may be a state or local HFA,
and must be an FHA-approved lending institution.
Claims are expected to be paid first from the insur-
ance reserve maintained for the agency by the FHA.
The second payment source is typically loan loss
reserves held under the indenture. Most issues bene-
fit from a closed flow of funds, which trap excess
cash flow to build up reserves to compensate for
the limitations on FHA reserve balances. Because
there is no recourse to the originating lender to
repurchase a defaulted mortgage loan as in the
recourse program, reserves held under the indenture
are necessary to maintain the rating.
In the recourse program, loans may be insured
under single or multiple contracts of insurance. In
either case, one or more lending institutions origi-
nate insured loans, which then are sold to the
issuer, who, in turn, pledges them to the bondtrustee. The loans remain insured under the lenders’
contracts, so that should a default occur, the loan
would be repurchased by the appropriate originat-
ing lender. The trustee has recourse to the full
amount of loans purchased from a given participat-
ing lender, regardless of the amount remaining in
the lender’s insurance reserve.
In cases where all lenders participating in the pro-
gram have long-term unsecured debt ratings or
issuer credit ratings as high as the desired rating on
the bonds, Standard & Poor’s gives full credit to the
repurchase obligation without an in-depth analysis
of the institution’s underlying FHA reserve or loan
loss reserves held under the indenture. The rating of
the provider of the repurchase agreement would be
monitored as part of Standard & Poor’s rating sur-
veillance efforts. A rating downgrade of the provider
would prompt a review of the rating on the bond
issue and possible downgrading unless loan loss
reserves held under the indenture are sufficient to
maintain the rating. In programs where participating
lenders are not rated or whose ratings fall below the
rating on the bonds, Standard & Poor’s will deter-
mine an appropriate level of loan loss reserve fund-
ing necessary to maintain the rating.Loan Loss Coverage Analysis
Loan loss coverage for both types of Title I proper-
ty improvement loan programs is usually necessary
for an investment-grade rating. In nonrecourse pro-
grams, coverage must address FHA reserve’s limited
balance, the potential for claims denial, and the fact
that the reserve may not be dedicated to the pool of
loans financed under the trust estate. Under
recourse programs, coverage may still be necessary
based on the ratings of the lenders and the timing
and amount of the repurchase obligation.
Standard & Poor’s assumes that loss severity for
Title I property improvement loans will be 100% at
all rating levels and for most issuers. There are two
reasons for this loss assumption:
■Title I property improvement loan balances are
generally small in relation to the first mortgage;
and
■Many Title I properties have a high combined
LT V.
When these two elements exist, Standard &
Poor’s investment-grade loss severity assumptions
show that there is always some loss to the first lien
holder. Consequently, there are no liquidation pro-
ceeds available for the second lien holder.
For ratings of ‘A’ to ‘AA’ on Title I bond pro-
grams, Standard & Poor’s traditionally looks for
15%—24% of original loan balance to be available
as a reserve against loan losses. These percentages
are based on a number of factors, including
Standard & Poor’s foreclosure frequency estimatesHousing248 Standard & Poor’s Public Finance Criteria 2007