includes principal; premium, if any; and interest
accrued through the last day of the month in which
the prepayment is made.
Ginnie Mae has the option of curtailing or
reamortizing the mortgage, although the latter is
more common. For this reason, documents should
instruct the trustee to notify Standard & Poor’s of a
prepayment so that the rating impact, if any, may
be determined. The financing agreement should
instruct the lender to notify the trustee as early as
possible in the month in which prepayment is to be
received by the trustee. The lender’s notification
enables the trustee to send notice of redemption so
that bonds can be redeemed at the earliest possible
date to avoid any undue reinvestment exposure.
The trustee should redeem the bonds in the shortest
notice period provided under the indenture. This
reduces the amount of time that the trustee has to
hold prepayment monies that are not earning
enough interest to cover the accruing bonds. The
cash flows should demonstrate sufficient asset cov-
erage during this time frame.
Concerning optional prepayments, the prepay-
ment penalty on the mortgage should be seasoned
91 days to avoid recapture as a preferential pay-
ment. Ginnie Mae may not cover the premium por-
tion to be paid on the bonds in the event that it
would be obligated to pass through the prepay-
ment. This seasoning problem can be eliminated
through an issue-specific letter from Ginnie Mae
stating that it will guarantee the premium portion
of the payment on the mortgage. Notice of redemp-
tion on all prepayments should not be made until
the premium is seasoned.
Additionally, prepayment terms on the bonds
need to match the prepayment terms on the mort-
gage. This avoids the mortgagor making a prepay-
ment that cannot be used immediately to call
bonds. Redemptions resulting from prepayments
should provide that the resulting decrease in debt
service on the bonds is proportional, as nearly as is
practicable, to the decrease in the payments on the
Ginnie Mae securities during such period. This
method ensures that even if a curtailment occurs
instead of a ratable reduction of future mortgage
payments, debt service will still be met, as it will be
structured around the prepaid mortgage terms. The
trust indenture must state that the Ginnie Mae MBS
is to be held by the trustee or in the trustee’s name
by the Federal Reserve and that the trustee has a
first perfected security interest in the MBS.
MBS Cash Flows
Worst-case assumptions are used when structuring
the cash flows for this program. For construction
financing programs, worst case should indicate the
least favorable time from a revenue-generating
standpoint for drawing on the acquisition fund to
acquire the MBS. For example, if the acquisition
fund investment agreement earns less than the
MBS, the acquisition scenario should assume deliv-
ery on the latest possible date provided under the
indenture. For each day that the MBS is not
acquired, more negative arbitrage is created. The
maximum amount of this shortfall should be cov-
ered in one of the following ways:
■Providing an unsecured LOC or cash;
■Selling the bonds at a premium; or
■Using another ratable credit enhancement.
The method employed should be defined clearly
in the acquisition section of the indenture and the
financing agreement.
The submitted cash flow simulations should be
run using appropriate lags and are expected to have
sufficient excess assets to cover for reinvestment
risk. All fees should be capped and paid from rev-
enues or interest income, and expensed in the cash
flows. If fees are expressed as a fixed dollar amount
and not as a percentage reduced over time,
Standard & Poor’s will request a 90% immediate
prepayment run. This is to ensure that the fixed
fees could be paid in the event of a large prepay-
ment. Alternatively, the fees specified in the legal
documents can be ratably reduced with any prepay-
ments. Expenses for MBS include Ginnie Mae,
Fannie Mae, or Freddie Mac fees and lender fees.
For a trustee to perform its duties adequately,
Standard & Poor’s assumes a minimum fee of three
basis points. A portion of the trustee fees may be
paid outside of the trust estate, however, to the
extent the trustee agrees in the bond documents to
continue to perform regardless of compensation. If
applicable, a rebate calculation fee should be
included at a level consistent with industry stan-
dards. Reinvestment exposure is determined by cal-
culating the reinvestment shortfall, if any, for the
redemption notice period on a full prepayment of
the mortgage portfolio. This calculation assumes
that the mortgage prepays and is reinvested at the
float contract rate or Standard & Poor’s reinvest-
ment assumption, and that the bonds are earning at
their stated interest rate.
Commencement of amortization of the mortgage
should be a stated date in the documents and reflect-
ed in the cash flows. Monies may be released only
after acquisition of the MBS, debt service and fees
are paid, reinvestment is covered, and revenues to
meet the next debt service payment are captured.
This release should be demonstrated through an
open flow of funds in the indenture. There should be
a minimum carry forward balance in each period of
at least $10,000. A cash flow release test may be
necessary on certain issues to ensure that the releases
will not negatively affect future payment on theGinnie Mae, Fannie Mae, And Freddie Mac Multifamily Securitieshttp://www.standardandpoors.com 261