days after receipt. The servicer should invest all
monies held by it in accounts fully insured by the
FDIC. Amounts in excess of the insurable amount
should be remitted immediately to the trustee.
Under no circumstances should the servicer hold
any receipt longer than three business days. This
limits the exposure of lost interest income on the
mortgage revenues.
Because of the increased responsibilities of
FHA-insured mortgagees, Standard & Poor’s looks
for evidence from the trustee or HFA concerning
the following:
■Experience and track record with FHA-insured
mortgage loans;
■Methodology in tracking the progress of the
assignment process; and
■Consultation at the time of default with legal
counsel expert in the field of FHA-insured mort-
gage loans.
Issuer and trustee familiarity with FHA regula-
tions and procedures and understanding of the
indenture provisions relating to the trustee’s actions
in the event of a mortgage loan default are critical
to protecting bondholders’ interest in a mortgage
default scenario.
Standard & Poor’s has developed a questionnaire
for reviewing the qualifications of trustees and HFAs
participating in FHA-insured transactions. The ques-
tionnaire addresses specific areas of concern that
have arisen in actual mortgage default cases.
Fees and compensation
Ongoing ordinary fees and compensation (typically
those of the trustee and servicer) are to be capped in
the indenture and subordinated to bond debt service.
Gross monthly mortgage payments and investment
earnings on bond funds can support ongoing fees.
Sufficient coverage of documented fees should be
shown in the cash flows. All fees should be a per-
centage of outstanding mortgages or bonds, and the
adequacy of all fees should be verified. Some issuers
prefer to set fees at fixed dollar amounts. In this
case, documents should provide that fees are ratably
reduced proportionate to a reduction in the principal
amount of the mortgage note due to prepayments or
other unscheduled reductions. In addition, extraordi-
nary trustee fees should be covered at all times, par-
ticularly prior to releasing funds from the program,
except for redemptions. They also should be covered
before reduction and release of all credit supports,
except for negative arbitrage. Such fees should be
sufficient to cover for legal and administrative fees
and expenses incurred during default proceedings.
The documents should provide for the trustee’s
access to these fees in a mortgage default scenario
and cash flows should show the availability of such
fees in the carry forward balance.
Redemption provisions
Standard & Poor’s will review redemption provi-
sions in the mortgage note and trust indenture for
consistency and to ensure that the mortgage note
and bond payment schedules remain in balance.
Mandatory redemptions are needed to address cash
inflows due to mortgage prepayments and insur-
ance proceeds. Standard & Poor’s looks for
redemptions resulting from:
■Monies remaining in the construction fund, on
final endorsement, to the extent that the mort-
gage note is less than the initially endorsed
mortgage;
■Proceeds received from casualty or hazard insur-
ance or a condemnation award not used by the
mortgagor to repay or restore the mortgaged
property;
■FHA insurance proceeds received after filing a
claim on a mortgage note default, including
accrued interest paid on the claim, and the princi-
pal amount of debentures on their maturity;
■Monies in any mandatory sinking fund;
■Monies available from the ratable reduction of
the debt service reserve fund when applicable.
If optional redemptions are permitted in the
mortgage note, the trust indenture should include a
corresponding redemption. If redemptions are
included for excess monies remaining in the revenue
fund on each bond payment date, Standard &
Poor’s will look to see that bond cash flows reflect
the redemption. The trust indenture should include
coverage of all shortfalls, including any mortgage
payment lags provided in the bond cash flows. Such
redemption should also provide that at least a
$10,000 carry-forward amount ($5,000 for issues
of less than $1 million) remain in the revenue fund
subsequent to release of excess funds.
In almost all cases, a proportional reduction in
debt service (strip call) is necessary when the
bond structure provides for more than one term
bond, current interest serials, capital appreciation
serials, or mandatory sinking fund term bonds.
In all cases, the indenture should provide for a
specified redemption notice period. All redemp-
tions from prepayments and mortgage insurance
proceeds should be at the earliest date practica-
ble. A possible exception is for optional prepay-
ments, if provisions are made for coverage of
accrued interest to the date of redemption. In any
event, sufficient accrued interest to the date of
redemption should always be included in the
redemption payment.FHA Insured Multifamily Mortgageshttp://www.standardandpoors.com 255